2019 (8) TMI 1217 - AAR - GST

Ruling: Dholera Project qualifies as Government Entity for GST benefits. Criteria for claiming Input Tax Credit clarified.

The ruling determined that the applicant, Dholera Industrial City Development Project Ltd., qualifies as a 'Government Entity' and can claim benefits ... Government Entity - eligibility for Input Tax Credit - blocked credit under Section 17(5) of the CGST Act, 2017 - works contract services as input service for further supply of works contract service - definition of supply and consideration - Schedule II, Para 5(e) - agreeing to obligation to refrain from an act, or to tolerate an act or a situation, or to do an act - liquidated damages and interest as part of consideration/value - transaction value under Section 15 of the CGST Act, 2017Government Entity - Whether the applicant is covered within the definition of Government Entity for the purpose of rate/benefits applicable to Government Entity - HELD THAT: - The Authority examined the composition and constitution of the applicant and the definition of 'Government Entity' as given in the relevant notification. The applicant was constituted by State and Central Government participation (51% and 49% respectively) and was formed to carry out functions entrusted by government for development of the Dholera Special Investment Region. On that basis the Authority concluded that the applicant falls within the definition of a Government Entity and is therefore eligible for benefits applicable to such entities under the notification.Applicant is covered within the definition of Government Entity; benefits available to Government Entity are available to the applicant.Eligibility for Input Tax Credit - blocked credit under Section 17(5) of the CGST Act, 2017 - works contract services as input service for further supply of works contract service - Whether the applicant is eligible to claim input tax credit of GST charged by contractors - HELD THAT: - The Authority noted that Section 17(5)(c) excludes credit of works contract services except where such services are inputs for the further supply of works contract service. Given the applicant's varied construction and development activities, the Authority held that entitlement to ITC on tax paid to contractors depends on whether the services received are used for making a further supply of works contract services. That determination requires examination on a case to case basis with reference to the nature of the subsequent supply.Eligibility to claim ITC on GST charged by contractors is not universally granted; it must be decided case by case by verifying whether the works contract service is an input for further supply of works contract service.Definition of supply and consideration - Schedule II, Para 5(e) - agreeing to obligation to refrain from an act, or to tolerate an act or a situation, or to do an act - liquidated damages and interest as part of consideration/value - transaction value under Section 15 of the CGST Act, 2017 - Whether amounts recovered from contractors on account of breach of contract conditions (violation/safety charges) are liable to GST - HELD THAT: - Applying the statutory definition of supply and the activities listed in Schedule II, Para 5(e), the Authority treated recovery of charges for breach of contractual obligations (including safety/violation charges) as payment made in respect of an obligation to refrain from or tolerate an act or situation. Such recoveries were therefore held to be consideration for a supply of services and taxable under GST.Amounts recovered from contractors on account of breach of contract conditions (violation/safety charges) are liable to GST as consideration for a supply of services.Schedule II, Para 5(e) - agreeing to obligation to refrain from an act, or to tolerate an act or a situation, or to do an act - definition of supply and consideration - liquidated damages and interest as part of consideration/value - Whether liquidated damages recovered from contractors for not achieving milestones are liable to GST - HELD THAT: - The Authority found that liquidated damages stipulated for failure to achieve contractual milestones fall within the activity described in Schedule II, Para 5(e) and constitute consideration payable by the contractor. Consequently, such recoveries are supplies of services and subject to GST. The Authority observed that the Maharashtra AAR decision on liquidated damages is in consonance with this conclusion.Liquidated damages recovered from contractors for not achieving milestones are taxable under GST.Liquidated damages and interest as part of consideration/value - transaction value under Section 15 of the CGST Act, 2017 - Whether interest received for deferring liquidated damages is liable to GST - HELD THAT: - Having concluded that liquidated damages are consideration for a taxable supply, the Authority held that interest charged in relation to those liquidated damages is part of the consideration/value of that supply. Therefore interest on deferred recovery of liquidated damages also attracts GST.Interest received for deferring liquidated damages is liable to GST as part of the consideration for the taxable supply.Final Conclusion: The Authority ruled that the applicant qualifies as a Government Entity; entitlement to input tax credit on works contract services depends on whether such services are inputs for further supply of works contract services and must be decided case by case; amounts recovered from contractors for breach of contract (violation charges) and liquidated damages for not meeting milestones are supplies of services and taxable under GST; interest charged on deferred liquidated damages is also taxable as part of the consideration. Issues Involved:1. Whether the applicant can claim benefits available to a Government Entity.2. Whether the applicant is eligible to claim ITC of GST charged by contractors.3. Whether the applicant is liable to collect GST on the amount recovered from contractors on account of breach of conditions specified in the contract.4. Whether the applicant is liable to collect GST on the amount recovered from contractors on account of not achieving milestones.5. Whether the applicant is liable to collect GST on the interest amount received for deferring the liquidated damages recovered from contractors.Analysis of the Judgment:1. Claiming Benefits as a Government Entity:The applicant, Dholera Industrial City Development Project Ltd., sought to determine if it qualifies as a 'Government Entity' under Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017. The definition includes any authority or body established by the government with 90% or more participation by way of equity or control. Since the applicant is constituted with 51% equity by the State Government and 49% by the Central Government, it qualifies as a 'Government Entity.' Therefore, the applicant can claim benefits available to Government Entities under the relevant GST notifications.2. Eligibility to Claim ITC of GST Charged by Contractors:The applicant contended that it should be eligible to claim Input Tax Credit (ITC) on GST paid for works contract services availed from various contractors. Under Section 17(5) of the CGST Act, 2017, ITC is available on works contract services if used for further supply of works contract services. Given the applicant's extensive involvement in construction, erection, maintenance, and repair, the eligibility for ITC can be determined on a case-by-case basis, ensuring that the services are used for further supply of works contract services.3. GST on Amount Recovered for Breach of Contract:The applicant sought clarity on whether GST is applicable on amounts recovered from contractors for breach of contract conditions. As per Clause (e) of Para 5 of Schedule II of the CGST Act, 2017, agreeing to the obligation to refrain from an act, tolerate an act, or do an act is treated as a supply of services. Therefore, violation charges collected from contractors are considered a supply of services and are liable to GST.4. GST on Amount Recovered for Not Achieving Milestones:Similar to the breach of contract conditions, the applicant questioned the applicability of GST on amounts recovered for not achieving project milestones. According to Clause (e) of Para 5 of Schedule II of the CGST Act, 2017, such transactions are treated as a supply of services. Liquidated damages payable by contractors for not meeting milestones are considered consideration for the supply of services and are therefore subject to GST.5. GST on Interest for Deferring Liquidated Damages:The applicant inquired whether GST is applicable on interest amounts received for deferring liquidated damages. Since liquidated damages are liable to GST, the interest on such damages is also considered part of the liquidated damages and is subject to GST. The ruling aligns with the Maharashtra Authority for Advance Ruling in the case of Maharashtra State Power Generation Co. Ltd., which held that GST is applicable on liquidated damages.Ruling:1. The applicant can claim benefits available to a Government Entity.2. The eligibility to claim ITC of GST charged by contractors is subject to the condition that the services are used for further supply of works contract services, decided on a case-by-case basis.3. The applicant is liable to collect GST on amounts recovered from contractors for breach of contract conditions.4. The applicant is liable to collect GST on amounts recovered from contractors for not achieving milestones.5. The applicant is liable to collect GST on interest amounts received for deferring liquidated damages.