2023 (4) TMI 205 - AAR - GST

Liquidated damages collected from service providers for non-performance constitute taxable supply under GST at 18% rate

In Re: M/s. AP Power Development Co. Ltd.,

AAR, AP ruled that liquidated damages collected by APPDCL from a logistics service provider for non-performance constitutes taxable supply under GST. The ... Supply or not - liquidated damages collected by the APPDCL from CHETTINAD LOGISTICS PRIVATE LIMITED for non-performing of an act - classification under GST for such liquidated damages collected by the service receiver from such service provider for non performing of an act - applicable rate of tax - HELD THAT:- In the present case the service provider CHETTINAD LOGISTICS PRIVATE LIMITED in paying certain amount to the applicant. The amount so paid is neither ad-hoc, unconditional nor at the whims of any service provider nor the appellant. There is a clear mathematical formula as to calculation of such amount and the conditions/scenarios contingent upon which the amounts are payable are clearly narrated in the agreement itself. The circular 178/10/2022 is only meant to clarify the position of law and shall be applied reasonably having regard to the facts of the case. The circular had clearly mentioned, inter alia, vide para 7.1.6 that 'Therefore, such payments, even though they may be referred to as fine or penalty, are actually payments that amount to consideration for supply, and are subject to GST, in cases where such supply is taxable. Since these supplies are ancillary to the principal supply for which the contract is signed, they shall be eligible to be assessed as the principal supply - Thus the circular had said payment towards damages are incidental to the main supply and if the main supply is taxable they shall also be taxable and if the principal supply is exempt then the incidental shall also be exempt. Thus the circular shall be understood in the proper context. In the light of section 7 read with definition of consideration u/s 2(31), liquidity damages paid by defaulting party to the non-defaulting party for tolerating the act of non performance or breach of contract have to be treated as consideration for tolerating of an act or a situation under an agreement and hence such an activity constitutes supply of service and the liquidity damages are exigible to tax under CGST and SGST @9% each under the chapter head 9997 al serial no. 35 of Notification No.11/2017- Central/State tax rate. Issues Involved:1. Whether liquidated damages collected by APPDCL from Chettinad Logistics Private Limited for non-performance of an act constitute as supply as per Section 7 of GST Act.2. Classification under GST for such liquidated damages.3. Applicable rate of tax if the liquidated damages are considered as supply.Summary:Issue 1: Whether liquidated damages constitute as supply as per Section 7 of GST Act.The applicant, APPDCL, sought a ruling on whether liquidated damages collected from Chettinad Logistics Private Limited for non-performance of an act constitute as supply under Section 7 of the GST Act. The Authority examined the provisions of the Indian Contract Act, 1872, and the definition of 'consideration' under Section 2(31) of the GST Act. It was determined that liquidated damages paid by the defaulting party to the non-defaulting party for tolerating the non-performance or breach of contract are considered as consideration for tolerating an act under an agreement. Hence, such an activity constitutes a supply of service.Issue 2: Classification under GST for such liquidated damages.The Authority classified the liquidated damages under the chapter head 9997, which pertains to 'Other Services.' This classification was based on the nature of the activity being considered as a supply of service.Issue 3: Applicable rate of tax if the liquidated damages are considered as supply.The applicable rate of tax for the activity of collecting liquidated damages was determined to be 18%, comprising 9% CGST and 9% SGST. This rate is in accordance with the tax rate specified under serial no. 35 of Notification No. 11/2017 - Central/State tax rate.Ruling:1. Liquidated damages collected by APPDCL from Chettinad Logistics Private Limited for non-performance of an act constitute as supply as per Section 7 of the GST Act.2. The classification under GST for such liquidated damages is under chapter head 9997 - 'Other Services.'3. The applicable rate of tax for the liquidated damages is 18% (9% CGST and 9% SGST).