Service tax can be levied on penalty collected from service provider

This query is : Resolved

CA CS ARUN SINGH (Querist)
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04 November 2015 A service receiver bank can collect service tax on penalty amount charged by it on default made by service provider company?

CA Harish Suwalka

CA Harish Suwalka (Expert)
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05 November 2015 Please elaborate the query.. with an example

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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24 July 2025 Regarding service tax on **penalty collected by a bank from a service provider** for default:

* **Penalty or fines** imposed for breach of contract, delay, or default **are not considered a 'service'** under service tax law.
* Service tax is levied on **consideration for a taxable service** provided.
* A penalty or liquidated damages collected by the bank **do not represent consideration for a service** rendered by the bank.
* Therefore, **service tax is generally NOT applicable on penalty amounts collected** from a service provider by the bank.

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### Summary:

* **No service tax on penalty/late fees/ liquidated damages charged as a penalty by service receiver.**
* Service tax applies only on the value of actual services provided, not on penalties for non-performance or defaults.

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If you want, I can help draft a detailed note or reference any relevant notifications or case laws on this. Would you like that?

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