2018 (5) TMI 1332 - AAR - GST

GST Applies to Liquidated Damages in Power Plant Projects: Ruling Clarifies Tax Treatment

The ruling concluded that GST is applicable on Liquidated Damages (LD) in cases of Operation & Maintenance activities and Construction or renovation ... Liquidated damages as consideration for toleration of an act - supply of services under Schedule II(5)(e) - classification under tariff heading 9997 (other services) - time of supply - liability established on determination of delay - application of section 13 and section 14 for time of supply issuesLiquidated damages as consideration for toleration of an act - supply of services under Schedule II(5)(e) - Whether GST is applicable on liquidated damages in terms of the agreement placed before the Authority - HELD THAT: - On the specific contract between the Owner (MahaGenco) and BHEL furnished to the Authority, the contract treats levy of liquidated damages as a distinct, recoverable liability triggered when delay in achieving trial operation is established. The agreement contemplates two separate events - the supply (performance) and a subsequent evaluation which, if delay is established, converts the contingent liability into an actual liability of liquidated damages. The Authority finds that the contractual empowerment to levy liquidated damages reflects toleration of delayed performance for a price and therefore, insofar as the furnished agreement is concerned, the impugned levy constitutes a supply of service falling within clause (e) of para 5 of Schedule II. Consequently, GST is leviable on liquidated damages under the terms of the agreement placed before the Authority.In terms of the agreement placed before the Authority, GST would be applicable on the liquidated damages.Classification under tariff heading 9997 (other services) - rate 18% for other services - Whether the levy of liquidated damages (as found to be a supply) is covered by Schedule II entry and the applicable tariff and rate - HELD THAT: - Restricted to the contract before it, the Authority refers to the Scheme of Classification of Services appended to Notification No.11/2017 and notes that services described as 'agreeing to tolerate an act' fall within Heading 9997 (Other services) and the taxable services entry under that Notification covers 'Other services' at 18% (9% CGST + 9% SGST/UGST). On the facts and contract examined, the impugned levy is within the ambit of that description and would attract the rate specified for Heading 9997 under the Notification in force.In terms of the agreement placed before the Authority, the impugned levy of liquidated damages would be covered by the Notification entry for Heading 9997 (Other services) and attract the notified rate (18%).Time of supply - liability established on determination of delay - application of section 13 and section 14 for time of supply issues - When the time of supply arises for GST on liquidated damages under the examined agreement - HELD THAT: - Having regard to the contractual wording, the Authority observes that the levy of liquidated damages does not arise continuously while delay occurs but crystallises when the delay in successful completion of trial operation is established on the part of the contractor. The agreement expressly states that the liability to pay liquidated damages will be established once such delay is established; accordingly, the Authority treats that point of crystallisation as defining the time of supply for the impugned levy under the specific contract. For factual permutations (e.g., part delay before and part after GST roll out, or capping/aggregation issues), the Authority directs reference to section 13(1) (time of supply) and, where necessary, section 14 for assessment on the particular facts as those were not precisely before the Authority.In terms of the agreement placed before the Authority, the time of supply for liquidated damages is the point when liability is established on determination of delay; questions requiring precise factual application are to be determined with reference to section 13 (and, if needed, section 14) of the GST Act.Application of pre GST receipts and transitional treatment - Whether GST is payable on liquidated damages attributable to periods before GST roll out or how capping affects allocation - HELD THAT: - The Authority did not undertake a determination of receipts collected under the earlier service tax regime; it records that amounts collected under the pre GST regime would be governed by the provisions then in force and declines to offer a view on historical service tax treatment. Where part of the facts implicate allocation between pre and post GST periods or capping that affects period wise computation, the Authority indicates that section 13 (time of supply) and section 14 may require reference on the precise facts and therefore such questions cannot be finally answered on the record before the Authority.No definitive answer is given on allocation between pre and post GST periods or on capping effects; those matters require application of section 13 and section 14 to the precise facts and are not decided here.Input tax credit entitlement - Whether the contractor/vendor can claim input tax credit on the amount of liquidated damages deducted by the owner - HELD THAT: - The Authority declined to decide this question in the applicant's advance ruling as the point is concerned with the contractor/vendor's entitlement. The Authority notes that the correct forum for such a question is the person who would seek input tax credit (i.e., the contractor/vendor) and therefore did not adjudicate entitlement to ITC on the facts before it.The question of whether the contractor/vendor may claim input tax credit on liquidated damages is not answered and is left to be raised by the contractor/vendor in appropriate proceedings.Final Conclusion: On the contract produced (MahaGenco v. BHEL for Chandrapur TPS expansion), liquidated damages are a distinct recoverable liability which, when crystallised, constitute a supply of service under Schedule II(5)(e) and - insofar as the submitted contract is concerned - fall under Heading 9997 (Other services) attracting the notified rate (18%); the time of supply is the point when liability is established on determination of delay; allocation or transitional questions involving pre GST periods, capping and the contractor's entitlement to input tax credit were not decided and require factual application of section 13/14 or must be raised by the contractor/vendor as appropriate. Issues Involved:1. Applicability of GST on Liquidated Damages.2. Classification and rate of GST on Liquidated Damages.3. Determination of the time of supply for Liquidated Damages.4. Applicability of GST on delays occurring before and after GST roll-out.5. Eligibility for Input Tax Credit on Liquidated Damages.Detailed Analysis:1. Applicability of GST on Liquidated Damages:The primary issue is whether GST is applicable on Liquidated Damages (LD) in cases of Operation & Maintenance activities and Construction or renovation of power plants. The ruling concludes that GST is applicable on LD in both cases. The contract between the parties explicitly mentions the levy of LD for delays, which is considered a supply of service under Schedule II, entry 5(2)(e) of the GST Act.2. Classification and Rate of GST on Liquidated Damages:The ruling clarifies that GST on LD falls under Schedule II, entry 5(2)(e) with HSN code 9997 - Other Services, attracting a rate of 18%. The classification is based on the service of tolerating an act or situation, which is covered under the specified entry.3. Determination of Time of Supply for Liquidated Damages:The time of supply for LD is when the liability for payment is established, not when the delay occurs. The contract specifies that the liability is established once the delay in successful completion of the project is confirmed. Therefore, the time of supply is the point at which the decision to impose LD is made.4. Applicability of GST on Delays Before and After GST Roll-out:GST is applicable only for the period falling after the GST roll-out. For delays spanning both pre- and post-GST periods, GST applies to the LD imposed for the period after GST implementation. Section 14 of the GST Act would guide the exact determination of tax liability for such transitional periods.5. Eligibility for Input Tax Credit on Liquidated Damages:The ruling does not answer whether the contractor/vendor can utilize the LD amount as Input Tax Credit (ITC), stating that the proper person to raise this question would be the contractor/vendor, not the applicant.Conclusion:The ruling provides a comprehensive analysis of the applicability and implications of GST on Liquidated Damages, covering classification, rate, time of supply, and transitional provisions. It emphasizes the contractual terms and the specific provisions of the GST Act to determine the tax liability.