2018 (10) TMI 1339 - AAR - GST

Analysis: Liquidated Damages as 'Supply' under GST Law

The case involved determining whether liquidated damages awarded by the International Chamber of Commerce (ICC) qualify as a 'supply' under GST law. The ... Supply - Agreeing to the obligation to refrain from an act or to tolerate an act or a situation - Consideration (nexus with supply) - Time of supply (Section 13) - Valuation - transaction value/actual amount received - Schedule II clause 5(e)Supply - Agreeing to the obligation to refrain from an act or to tolerate an act or a situation - Consideration (nexus with supply) - Schedule II clause 5(e) - Whether liquidated damages that may be awarded by ICC to the applicant constitute a supply liable to GST - HELD THAT: - The Authority examined the Association Agreement and concluded that the contractual framework included an agreement between the parties which envisaged monetary compensation in the event of default/termination. Clause 5(e) of Schedule II treats 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' as a supply of services. The Authority found that the amounts recoverable on termination/arbitration function as monetary consideration linked to that agreed contractual arrangement and are not mere ex post tortious damages immune from GST. The arbitral mechanism and the contractual stipulation of compensation (subject to arbitrators not awarding punitive/consequential damages) indicate that any monetary award is the consequence of an agreed contractual regime and therefore satisfies the requirement of consideration with nexus to an activity treated as supply under Schedule II. The Authority rejected the applicant's contention that the amounts are solely compensatory damages devoid of any nexus to a supply and that mere inclusion of a liquidated damages clause cannot convert a non supply into a supply; it held that, on the facts and contract before it, the compensation payable under the contract/award falls within the scope of taxable supply under clause 5(e).Liquidated damages which may be awarded by the ICC qualify as a supply of service and are liable to GST.Time of supply (Section 13) - Point of time when the applicant's liability to pay GST on such liquidated damages arises - HELD THAT: - Having held that the amounts are taxable supplies, the Authority directed that the time of supply for the services so rendered is to be determined under the statutory rule book, namely Section 13 of the CGST Act. The Authority observed that the liability will arise in accordance with the earliest applicable event under Section 13 (invoice issuance/receipt of payment/other contingencies) and, in the subject facts, would be determined after the arbitral award is pronounced by the ICC and in accordance with Section 13's provisions.Time of supply will be determined as per Section 13 of the CGST Act, after the arbitration award is given by the ICC in the present proceedings.Valuation - transaction value/actual amount received - Consideration (nexus with supply) - Whether GST is payable on the amount claimed/awarded or on the amount actually received - HELD THAT: - The Authority held that valuation of the taxable supply arising from the award shall follow the general valuation principles under the Act and rules. On the facts before it the Authority answered that the value of the supply will be the actual amount of compensation/damages received by the applicant pursuant to the ICC award. The Authority therefore adopted an outcome linked approach: the taxable value is the quantum actually awarded and received under the arbitral award (subject to the valuation provisions of the Act).Value of supply will be the actual amount of damages received by the applicant pursuant to the ICC award.Final Conclusion: The Authority ruled that amounts awarded by the ICC under the Association Agreement constitute a taxable supply of services under Schedule II clause 5(e); the time of supply is to be determined under Section 13 of the CGST Act in relation to the arbitral award, and the value of the taxable supply is the actual amount of damages/compensation received pursuant to the award. Issues Involved:1. Whether liquidated damages awarded by the International Chamber of Commerce (ICC) qualify as a 'supply' under the GST law, thereby attracting GST.2. If affirmative, what should be the time of supply for GST liabilityRs.3. If affirmative, what should be the value of supply for GST purposesRs.Issue-wise Detailed Analysis:1. Qualification of Liquidated Damages as 'Supply' under GST Law:The applicant, North American Coal Corporation India Private Limited (NACC India), contended that liquidated damages do not qualify as a 'service' under GST law because they lack the element of reciprocity. They argued that liquidated damages are compensation for loss due to breach of contract and not in the course or furtherance of business. They further argued that there was no obligation in the Association Agreement to tolerate an act or situation, which is a prerequisite for GST under Clause 5(e) of Schedule II of the CGST Act.However, the Authority for Advance Ruling (AAR) found that the Association Agreement between NACC India and Sasan Power Limited (SPL) included clauses that foresee and tolerate an act or situation of default. The agreement stipulated compensation for such defaults, which the AAR interpreted as a monetary consideration for tolerating an act or situation. The AAR concluded that such compensation qualifies as a 'supply' under Sr. No. 5(e) of Schedule II of the CGST Act, which includes agreeing to the obligation to refrain from an act, to tolerate an act or a situation, or to do an act.2. Time of Supply for GST Liability:The time of supply for the liquidated damages would be determined as per Section 13 of the CGST Act. The liability to pay GST arises when the arbitration award is given by the ICC. The relevant date would be when the liquidated damages are credited to NACC India's bank account or recorded in their books of account, whichever is earlier.3. Value of Supply for GST Purposes:The value of the supply for GST purposes would be the actual amount of liquidated damages received by NACC India from SPL after the arbitration award by the ICC. The AAR clarified that the value of supply would be determined based on the actual receipt of liquidated damages, not the claimed amount.Conclusion:- Liquidated damages awarded by the ICC qualify as a 'supply' under GST law.- The time of supply is determined as per Section 13 of the CGST Act, based on the arbitration award.- The value of supply is the actual amount of liquidated damages received after the arbitration award.Order:1. Liquidated damages qualify as a 'supply' under GST law.2. The time of supply is determined post-arbitration award by the ICC.3. The value of supply is the actual amount of liquidated damages received.