Treatment of Liquidated damages collected on Capital contract

[ROHIT GOEL]

Sirs,

Our client had entered into a contract for commissioning of a capital asset and as per contract, delay in commissioning attracted liquidated damages @10%.

The supplier executed the work with considerable delay and now raised invoice for entire contracted price. The client now intends to deduct LD of 10% and make balance payment. As per our opinion, the LD deducted by the client would be taxable@18% under Schedule II.

We had following queries on which discussion is welcomed:

a) Whether the client has to raise separate invoice for the same?

b) Whether ITC can be claimed on entire invoice amount raised by vendor as LD will become a separate transaction?

c) Since client will be making payment after deducting LD+GST, whether it would mean a violation of condition of payment within 180 days or whether since that balance amount will be reduced from LD income, no ITC disallowance would be required?

d) Whether LD amount should be reduced from value of asset (like a capital receipt) or considered as separate income liable to tax?

AI Summary

Exploring Liquidated Damages in Capital Contracts: Separate Invoicing, ITC Impact, and GST Tax Classification Debate. A discussion on the treatment of liquidated damages (LD) in capital contracts under GST regulations explores whether LD should be invoiced separately, its impact on Input Tax Credit (ITC), and its classification as income. One view suggests LD indicates a deficiency in service, which could be adjusted via a credit note, while another considers it as tolerating an act, making it taxable income. Legal precedents and international rulings indicate that LD may not be considered a supply under GST, thus not subject to tax. Participants agree on the complexity and suggest consulting tax auditors for clarity.