Payment of Service on Liquidated Damages (LD)

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This query is : Resolved

Arun Kumar Jain (Querist)

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)

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)

03 February 2009 Please read the query again and then reply