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

Treatment of liquidated damages: may not attract GST, but alternative view treats them as taxable separate supply.
Two principal characterisations govern GST on liquidated damages: LD as non-supply compensation-adjusted by credit note and reducing the capital asset value-or LD as separate income/consideration for tolerating deficient performance that may constitute a taxable supply. If tax is paid on the invoice ITC should be available; book adjustments count as payment for purposes of payment-period compliance. The treatment affects whether GST is chargeable and whether LD is reflected against the asset or recognised as income; coordination with the taxpayer's auditor is required.