APPLICABILITY OF GST ON CANCELLATION OF CONTRACT

[Mehul Pandya]

DEAR EXPERTS,

WE ARE ENTERED INTO AN AGREEMENT WITH OUR DEBTOR TO SELL HIM SOYA PRODUCT. THEREFORE WE HAVE IMPORTED THE SAME PRODUCT TO FULFILL HIS REQUIREMENT AND PAID 5% IGST ON IT. NOW HE DENIED TO PURCHASE THE SAME. THEREFORE WE HAVE FILLED CASE AGAINST HIM IN RELATION TO BREACH OF THE CONTRACT AND RAISED DEBIT NOTE DEMANDING 30 LAKS FOR THE SAME (LIQUIDATED DAMAGES). WE DO NOT KNOW WHETHER HE WILL PAY OR NOT, ITS DEPEND UPON JUDGEMENT/LITIGATION.

NOW, MY QUERY IS WHETHER GST WILL BE APPLICABLE ON THIS DEBIT NOTE ?

IF YES, WHAT WILL BE THE GST RATE ?? AND

IF HE WILL NOT PAY TO US THEN WHAT ABOUT GST PAID TO THE GOVERNMENT ?

[KASTURI SETHI]

When the matter issub judice, liability will arise only as and when the case is decided in your favour and you receive the consideration.

[Shilpi Jain]

The department in this case is of the view that it would be taxable at18%. So in case u are able to collect from your customer u can pay the same in order to avoid any disputes which your customer can also take credit subject to other conditions in the law.

However, another view which exists is that there is no service provided in respect of the LD collected and thereby no GST. So in case your customer does not pay and you wish to take this view note that dispute from department is a possibility.

[KASTURI SETHI]

2019 (3) TMI 1378 - CESTAT CHENNAI - AMBIKA COTTON MILLS LTD. Versus COMMISSIONER OF C. EX. & S.T., MADURAI

 

[ABHISHEK TRIPATHI]

Agree with Shilpi Ma’am. Possible interpretation from department side, querist has agreed to tolerate an act (act being rejection of supply by the recipient) by taking INR 30 lakhs. And, the liability to pay tax will be in accordance with Section 13 of the CGST Act. So, department may ask you to pay as per this view.

I believe that such situations [liquidated damages] don’t come under the purview of Sl. No. 5(e) of Schedule II.

[YAGAY andSUN]

The Bombay High Court, in the case of Bai Mamubai Trust, Vithaldas Laxmidas Bhatia, Smt. Indu Vithaldas Bhatia vs. Suchitra (2019 (9) TMI 929 - BOMBAY HIGH COURT), has held that GST is not payable on damages/compensation paid for a legal injury. The principle laid down by the Court is that such payment does not have the necessary quality of reciprocity to make it a 'supply' and, therefore, GST is not payable on such amount.the Bombay High Court, in the case of Bai Mamubai Trust, Vithaldas Laxmidas Bhatia, Smt. Indu Vithaldas Bhatia vs. Suchitra (2019 (9) TMI 929 - BOMBAY HIGH COURT), has held that GST is not payable on damages/compensation paid for a legal injury. The principle laid down by the Court is that such payment does not have the necessary quality of reciprocity to make it a 'supply' and, therefore, GST is not payable on such amount.

AI Summary

GST on Liquidated Damages: taxability hinges on characterization as supply; alternate views and case law affect liability. Applicability of GST on a debit note for liquidated damages turns on whether the payment is consideration for a supply; administrative practice may treat recoveries as taxable when realised, while judicial authority has held that compensation for legal injury lacks the reciprocity required to be a supply and thus is not subject to GST.