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No service tax on liquidated damages

The CESTAT decided on the issue of whether amount paid for non maintenance of minimum machine availability under a contract amounts to “agreeing to the obligation to tolerate the Act” and subject to service tax.

The Tribunal held that the words “for such service provided” makes it clear that the there should be nexus between the amount charged and the taxable service.

Any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable.

The Tribunal also noted the difference b/w condition to contract and consideration to contract. Amount paid for breach of condition to contract amounts to liquidated damages and no Service Tax is payable on the same.

Ruchi Soya Industries- Mad HC

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