Issue of leviability of tax on liquidated damages to be decided as per circular no. 178/10/2022-GST

Linde Engineering India Private Limited Vs C.C.E. & S.T. (CESTAT Ahmedabad)

CESTAT Ahmedabad held that issue of leviability of tax on liquidated damages is to be decided as per clarification provided by CBIC vide circular no. 178/10/2022-GST. The circular mainly clarifies that liquidated damages are mere flow of money from party who causes a breach of contract to party who suffers loss due to such breach, then such payments do not constitute consideration for supply and are not taxable.

Facts- This appeal has been filed by M/s. Linde Engineering India Private Limited against confirmation of demand of service tax on amount claimed by the appellant to the liquidated damages.

Conclusion- At the time of adjudication by the commissioner and hearing before the tribunal, this circular was not available on record and therefore, the adjudicating authority could not take benefit of the same. While the issue of leviability of service tax on liquidated damages is a debatable issue, the CBIC has vide circular no. 178/10/2022-GST clarified its stand on the subject in respect of GST.

Said circular clarifies that in such cases liquidated damages are mere a flow of money from the party who causes a breach of the contract to the party who suffers loss or damage due to such breach, then such payments do not constitute consideration for a supply and are not taxable.

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