Liquidated Damages for Project Delays Qualify as "Forbearance" Under GST Law, Subject to 18% Tax

AAR ruled that liquidated damages recoverable for project commissioning delays constitute a 'supply' under GST law, specifically as forbearance (tolerating an act) under Schedule II to the CGST Act. The damages represent consideration for the applicant tolerating delays, making them subject to GST at 9% each under CGST and SGST. The time of supply is the date when damages are determined according to the contractual formula, which occurs within three days after actual commissioning.

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Issues:
1. Whether liquidated damages qualify as a 'supply' under GST law, attracting GST levyRs.
2. What is the time of supply triggering the liability to pay GST for liquidated damagesRs.

Analysis:

Issue 1:
The applicant sought clarification on whether liquidated damages recoverable for delay in commissioning qualify as a 'supply' under GST law. The Authority for Advance Ruling (AAR) examined the contractual scenario where liquidated damages were imposed due to delays in project completion. Referring to Section 55 of the Indian Contract Act, 1872, the AAR highlighted that failure to perform a contract at the agreed time renders it voidable at the option of the opposite party, allowing for compensation for losses incurred. In this case, the liquidated damages were claimed by the applicant for tolerating delays in project completion, falling under the category of forbearance as per Schedule II to the CGST Act. The AAR concluded that such forbearance constitutes a supply of service, and the consideration for toleration is subject to GST.

Issue 2:
Regarding the time of supply triggering the liability to pay GST for liquidated damages, the AAR referred to the coordination agreement filed by the applicant. The agreement specified different liquidated damages for varying periods of delay in commissioning, with a prescribed formula for determining and paying the damages within three days after the actual commissioning date. The AAR determined that the date on which the liquidated damages are determined as per the formula in the contract (clause 6) represents the time of supply of service as per entry 5(e) of Schedule II. Consequently, the consideration received for such forbearance is taxable under CGST and SGST at 9% each under the relevant tax notification.

Conclusion:
The AAR clarified that liquidated damages recoverable for delays in commissioning constitute a 'supply' under GST law, attracting GST levy. Additionally, the time of supply triggering the liability to pay GST for such damages is the date when the damages are determined as per the contract's formula. The ruling provided by the AAR addressed the applicant's queries comprehensively, offering clarity on the GST implications of liquidated damages in the context of project delays.

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