Liquidated damages and arbitral awards for pre-GST contract breaches not taxable under GST Act Section 142

The AAR, Telangana held that liquidated damages and arbitral awards for breach of contract completed during pre-GST period are not taxable under GST Act, 2017. Following Circular No. 178/10/2022-GST, compensation payments without supply of goods or services do not constitute taxable supply under Entry 5(e) of Schedule-II CGST Act. Since no supply occurred during GST regime per Section 142(10), no GST liability arises. Additional compensation received through arbitral award also remains non-taxable as it falls outside Section 142(2)(a) scope.

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Issues Involved:
1. Taxability of contract completed during the Pre-GST period under GST Act, 2017.
2. Assessment of liquidated damages without any supply of materials and labor under GST Act, 2017.
3. Tax liability on mutually agreed and settled amount based on arbitral award as compensation for delay in contract completion.
4. Eligibility of DGAL to claim ITC on GST amount, if any, levied on the arbitral award amount.
5. Taxability under GST on interest payable on liquidated damages.

Summary:

Issue 1: Taxability of Pre-GST Contract
The contract completed during the Pre-GST period cannot be brought to assessment under GST Act, 2017. Section 13 of CGST Act, 2017, determines the taxability based on the time of supply, and since no supply occurred during the GST regime, no GST is applicable.

Issue 2: Liquidated Damages without Supply
Liquidated damages, without any supply of materials and labor, are not assessed to GST under GST Act, 2017. The damages are considered compensation for breach of contract and not for tolerating an act or situation, thus not constituting a supply under entry 5(e) of Schedule-II of the CGST Act, 2017.

Issue 3: Mutually Agreed Compensation
The mutually agreed and settled amount based on the arbitral award, payable as compensation for delay in contract completion without any supply of goods or services, is not liable to be taxed under GST. The compensation is considered a flow of money due to breach of contract and does not fall under the definition of supply.

Issue 4: ITC Eligibility for DGAL
The question of DGAL's eligibility to claim ITC on the GST amount, if any, levied on the mutually agreed arbitral award amount does not arise, as no GST is applicable on the compensation.

Issue 5: Taxability on Interest Payable
There is no GST on the interest of 13% p.a. awarded by the Tribunal for Arbitration, as the principal supply itself is not taxable. Interest is assessed at the same rate as the principal supply, which in this case, is not subject to GST.

Conclusion:
The Authority for Advance Ruling concluded that the compensation and interest awarded are not subject to GST, as they do not constitute a supply under the CGST Act, 2017. The ruling aligns with Circular No. 178/10/2022, which clarifies the non-taxability of liquidated damages and related compensation.

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