GST ITC on Liquidated damages

This query is : Resolved

Deepak (Querist)
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05 March 2026 Dear Experts,

Our company is in manufacturing sector. In FY 2017-18, due to short supply & defective goods our customer charged us Liquidated damages as per agreement. Customer charges us IGST on invoice. So we booked expenditure and claim GST ITC on it. Now finally we have received GST order to reverse ITC, pay penalty and interest. As per them we claimed wrong ITC. we filed appeal by depositing 10% of disputed demand. please guide me. How to approach this case now. WIll it be in our favor? if not what further actions to be taken by us? please guide.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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06 March 2026 Your case is strong based on CBIC Circular 178/10/2022, which clarifies that liquidated damages are not taxable. Focus your appeal on the fact that no "supply" occurred and the tax was paid under a mutual misunderstanding of the law in the early GST years.

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