Liquidated damages

Hi

Our company takes orders for servicing of computers of government department.We in turn subcontract the service.Due to non compliance our company had to pay liquidated damages to the government department.We in turn collected liquidated damages from our subcontractors.

This fact came to light during the course of Service tax audit, and the Department is proposing to levy service tax on the liquidated damages received by us along with interest and penalty.

Could you clarify whether we are liable to pay service tax on the LD received.The point of argument is that whatever LD we have received , we have paid to the government department.