2018 (9) TMI 1185 - AAAR - GST

GST Applicable on Liquidated Damages under HSN Code 9997: 18% Tax Rate

The appellate authority affirmed that GST is applicable on liquidated damages, classifying them under HSN code 9997 with an 18% tax rate. The time of ... Liquidated damages - agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act - Schedule II entry 5(e) - taxable supply under GST - time of supply - input tax credit admissibility - transaction value / value of supply - ejusdem generisLiquidated damages - agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act - Schedule II entry 5(e) - taxable supply under GST - Whether liquidated damages recovered by the appellant from contractors are taxable as a supply under Schedule II entry 5(e) of the CGST/MGST Acts. - HELD THAT: - The Appellate Authority affirms the AAR's conclusion that the contract contains a specific and separate provision for levy of liquidated damages and that, by voluntarily agreeing that delay will attract a stipulated payment instead of termination or other remedies, the owner accepts and tolerates the situation in return for consideration. Entry 5(e) of Schedule II requires an agreement, an obligation and an obligation to refrain/tolerate/do an act; those ingredients are present in the specimen contract clauses reproduced in the record. The method of recovery (deduction from running bills) does not alter the contractual existence of a separate obligation for liquidated damages. Accordingly, the impugned levy falls within entry 5(e) and constitutes a taxable supply under the GST law. [Paras 45, 46, 47, 48, 49]Liquidated damages are taxable as a supply under Schedule II entry 5(e).Transaction value / value of supply - liquidated damages - Whether the liquidated damages operate merely as a re-determination/reduction of the contract value (transaction value) or constitute a separate element of consideration. - HELD THAT: - The Authority rejects the appellant's submission that liquidated damages simply reduce the transaction value of the main supply. It reasons that the contract separately stipulates liquidated damages and defines contract price independently; therefore the value of the work done remains unchanged and the liquidated damages provision is a distinct contractual element. The AAR's reliance on excise-era authorities concerning transaction value does not bind this determination because the present contract expressly contemplates a separate levy for liquidated damages. [Paras 49, 50]Liquidated damages do not automatically operate as a mere reduction of the main supply's transaction value; they are a separate contractual levy for the purposes of GST classification.Time of supply - When the time of supply arises for levy of GST on liquidated damages. - HELD THAT: - The Authority confirms the AAR's observation that the agreement itself fixes the liability: the liability to pay liquidated damages arises once the delay in trial operation is established on the part of the contractor. Accordingly, the contractual event establishing liability defines the time of supply for the impugned levy. [Paras 47]Time of supply for liquidated damages is the moment the contractually specified liability (establishment of delay) crystallises.Classification - HSN 9997 - rate 18% - Whether the impugned levy is classifiable under Heading 9997 (other services) and taxable at the notified rate (18%). - HELD THAT: - The Authority concurs with the AAR that the service falls within the description of miscellaneous other services and that the impugned levy is accordingly covered by the notification entry for Heading 9997; the AAR's applicable rate determination is thus confirmed. [Paras 49]The levy is classifiable under Heading 9997 (other services) and the notified rate of 18% applies.Input tax credit admissibility - Whether the contractor/vendor may claim input tax credit on GST charged in respect of liquidated damages. - HELD THAT: - The Authority endorses the AAR's position that input tax credit on GST paid in respect of liquidated damages is available subject to the general conditions and restrictions contained in the GST law and rules; no categorical disallowance or special concession is indicated. [Paras 49]Input tax credit is admissible subject to the conditions and restrictions of the GST Act and rules.Apportionment pre- and post-GST rollout - Section 14 (time of supply / transitional provisions) - Treatment of delays spanning pre- and post-GST rollout periods and whether GST applies for the entire period or only for the post-rollout period. - HELD THAT: - The Authority notes that no precise facts were placed before it to determine apportionment. It concurs with the AAR that the appellant must refer to the statutory provisions (section 14 and relevant transitional/time-of-supply rules) to ascertain liability in cases where delay spans pre- and post-GST rollout. The matter requires application of those provisions to factual details which are not adjudicated in this appeal. [Paras 47]Left to be determined by applying the statutory provisions (including section 14) to the specific facts; not finally decided on merits here.Final Conclusion: The Appellate Authority upholds the AAR: liquidated damages stipulated in the specimen contracts constitute a taxable supply under Schedule II entry 5(e) and are classifiable as other services (Heading 9997) taxable at the notified rate; time of supply is when the contractually specified liability for delay is established; input tax credit may be claimed subject to statutory conditions; issues of apportionment between pre- and post-GST periods must be resolved by applying the relevant statutory/time-of-supply/transitional provisions to the specific facts. The appeal is dismissed. Issues Involved:1. Applicability of GST on Liquidated Damages.2. Classification of Liquidated Damages under GST.3. Determination of Time of Supply for Liquidated Damages.4. Applicability of GST on Liquidated Damages for periods before and after GST rollout.5. Eligibility of Input Tax Credit on Liquidated Damages for the contractor/vendor.Detailed Analysis:1. Applicability of GST on Liquidated Damages:The appellate authority upheld the ruling that GST is applicable on liquidated damages. The key reasoning was that the payment for liquidated damages falls under the category of 'agreeing to the obligation to tolerate an act or a situation' as per entry 5(e) of Schedule II of the CGST Act. The authority emphasized that the appellant had a contractual agreement to impose and accept liquidated damages in case of project delays, which qualifies as tolerating an act or situation.2. Classification of Liquidated Damages under GST:The authority confirmed that liquidated damages are covered under Schedule II entry 5(e) and classified under HSN code 9997 as 'Other Services' with a GST rate of 18% (9% CGST + 9% MGST). This classification aligns with the nature of liquidated damages being a service of tolerating an act or situation.3. Determination of Time of Supply for Liquidated Damages:The time of supply for liquidated damages is established when the delay in the successful completion of the project is determined. The contractual agreement explicitly states that the liability for liquidated damages arises once the delay is established, which defines the time of supply for GST purposes.4. Applicability of GST on Liquidated Damages for Periods Before and After GST Rollout:For delays occurring both before and after the GST rollout, the authority referred to Section 14 of the GST Act for determining the applicability of GST. The section provides guidance on the treatment of supplies spanning the transition period from the pre-GST to the GST regime.5. Eligibility of Input Tax Credit on Liquidated Damages for the Contractor/Vendor:The authority confirmed that the contractor/vendor can utilize the input tax credit for the GST paid on liquidated damages, subject to satisfying all other conditions and restrictions specified in the GST Act and the related Rules.Conclusion:The appellate authority upheld the advance ruling that GST is applicable on liquidated damages, classifying them under HSN code 9997 with an 18% tax rate. The time of supply is determined when the delay is established. For delays spanning the GST rollout, Section 14 of the GST Act applies. Contractors/vendors are eligible for input tax credit on liquidated damages, subject to compliance with GST laws. The appeal was disposed of, affirming the original ruling.