Payment of Service on Liquidated Damages (LD)

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Arun Kumar Jain (Querist)
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02 February 2009 Dear All,

The matter is very urgent. Please advise , in case of construction contracts, whether service tax is payable on Liquidated Damages (LD) also. LD refers to a contractual penalty which the contractor has to pay for delay in executing a specific part of the project.

Let us take an example. Mr. X, a contractor, is executing a housing project. As per the contract agreement, the first floor of the building should be completed within 3 months of the contract, otherwise, Mr. X will have to pay LD of 10% of the contract price. Mr. X could construct 1st floor only within 5 months. In this case, the Running Bill of Mr. X for construction upto Ist floor of Rs. 10 lacs was raised to Contractee and the contractee deducted 10% from the contract price i.e. Rs. 1 lac (being 10% of contract price) and paid Rs. 9 lacs to Mr. X. Now, should Mr. X pay Service tax on Rs. 10 lacs or on Rs. 9 lacs.

Please answer this query on priority basis quoting the relevant rule or regulation or court judgment.

Arbind Aggarwal

Arbind Aggarwal (Expert)
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03 February 2009 No tax on liquidity damages.

Tax is on the services provided, not on the contractual obligations.

Further this is not a consideration for providing any services but a penalty for not providing the required services.

Arun Kumar Jain

Arun Kumar Jain (Querist)
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03 February 2009 Please read the query again and then reply