Liquidated damages arising from breach of contract or forfeiture ...

Forfeited amounts from contract breach/cancellation lack nexus with taxable service, hence can't be taxed as consideration for services.

Case Laws     Service Tax

August 6, 2024

Liquidated damages arising from breach of contract or forfeiture of amounts like salary or bond money do not constitute consideration for a declared service u/s 66E(e). A service under this section requires an agreement specifically referring to activities like refraining from, tolerating, or doing an act, with consideration flowing for such activity. Any amount charged without nexus to the taxable service cannot be part of the taxable value. Compensation received for financial damages lacks consideration and nexus with any taxable service. The appellant forfeited amounts from the buyer for cancelling a purchase order, treated as breach of contract. Such forfeited amounts do not qualify as consideration for a declared service. Cancellation of contract itself is not a service. Hence, forfeited amounts cannot be taxed as consideration for services.

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