Associate in the Tax Practice at the Delhi office of Cyril Amarchand Mangaldas. Shivam specialises in indirect tax advisory as well as litigation, and is also actively involved in analysing the impact of the Goods and Service Tax in India. He can be reached at shivam.garg@cyrilshroff.com

Parties entering into contractual arrangements usually insist on including a clause for liquidated damages to pre-emptively agree upon the amount of reparation that would be payable by either Party on failure to meet its commitment. Generally, such commitments are in the nature of adhering to timelines, fulfillment of conditions, quality of products, etc.

The levy of an indirect tax on the amount of liquidated damages, has faced a series of challenges under the erstwhile service tax regime. Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act was deemed to be service under the service tax regime[1] . Where liquidated damages were in the nature of accidental damages caused due to unforeseen actions and not relatable to the provision of service, these were not included in the value of the service, and hence not to be taxed[2] .

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