TDS related Query_Liquidated Damages

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This query is : Resolved

Rajendra Kumar Das (Querist)
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26 June 2026 The taxable value of the assets is ₹10,00,000, with GST amounting to ₹1,80,000, making the total invoice value raised by the supplier ₹11,80,000.

During payment processing, it has been observed that the department has proposed to deduct Liquidated Damages (LD) of ₹50,000 on account of delay in the supply and installation of the assets.

As per my understanding, TDS under the Income Tax Act @2% and TDS on GST @2% should be deducted on the original taxable value of ₹10,00,000.

However, my reporting officer is of the view that TDS and TDS on GST should be deducted on the taxable value after adjusting the LD amount, i.e., ₹9,50,000.

In my opinion, Liquidated Damages are in the nature of compensation for delay and should not result in a reduction of the taxable value of the asset for the purpose of TDS deduction. Please suggest.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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26 June 2026 Your view is generally the stronger one, provided the contract/invoice has not been revised by issuing a GST credit note reducing the taxable value.
TDS base should normally be the amount payable for the supply after excluding GST, but a liquidated damages adjustment is not the same thing as reducing the taxable value of the original supply. In practice, if the department is deducting ₹50,000 as LD from the vendor’s bill, that deduction is a separate contractual adjustment/compensation and should not be treated as a reduction in the invoice value for computing TDS on the original supply.
If the vendor supplied assets worth ₹10,00,000 and the department later recovers ₹50,000 as compensation for delay, that recovery is a post-supply adjustment, not a downward revision of the price of goods/services supplied. Unless the invoice itself is revised through a valid credit note or contractual price reduction tied to the supply value, the original taxable value remains ₹10,00,000.

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