Non monetary consideration

[Anish Sonak]

Hi,

Loss was incurred by one of customers say Y due to delay in supply of machine by X (the supplier). Y intended to claim damages of 30 Cr.

Instead of paying in cash, X supplies two machines on lease free of charge to Y for a period of 2.5 yrs. Would it be said the supply of machines by X is for a consideration. Is there any kind of non monetary consideration Y has provided to X. Whether X should pay GST on notional value of lease rentals. I believe Y would not have any complication in light of circular on liquidated damages.

Regards.

[Sadanand Bulbule]

Dear Sir 

Plz refer CBIC Circular No.178/10/2022 dated 03/08/2022 read with Section 2 [31][b] governing the issue of "Liquidated Damages". 

[Shilpi Jain]

Yes. there is a supply of service by X in return for non-monetary consideration. GST will have to be paid on the market value of such rentals by X

Rightly mentioned regarding no liability in hands of Y.

[Anish Sonak]

Since Y accepted free supply as full and final settlement it incidates they have not tolderated the act of delay by X. 

Forbearance to sue is not helping X because Y have recovered the damages out of court itself. The free supply as a settlement was for the underlying loss and not for forbearance.

What else can be called to be non monetary consideration.

[Sadanand Bulbule]

 Shilpi mam

Plz refer your article dated 23/06/2020 on the issue of write off and reversal of ITC thereon. Can you enlarge the position?

[VENU K]

Circular 178/10/2022 says

7.1.4 In this background a reasonable view that can be taken with regard to taxability of liquidated damages is that where the amount paid as ‘liquidated damages’ is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable.

Now when liquidated damages are paid in the form of a service  as per the mutual consent of parties does the equation change to make this a supply ?

I dont think so. So in my humble opinion there cannot be a supply that makes anything liable to taxation.

[Sadanand Bulbule]

Dear querist

"As long as you are on the side of law, you are on the side of the angels. You can't lose". You are safe.

[KASTURI SETHI]

Sh.Sonak Ji,

 You have got compensation. It is not disputed. Cannot be denied but this activity/transaction is not-taxable on the following grounds :-

(i) Compensation is not income. Hence no consideration is present.

(ii) The activity/transaction does not fall under the scope and meaning of the phrase, 'tolerating an act' but it falls under the phrase , 'not tolerating an act'. Hence cannot be treated as supply as per Section 7 of CGST Act read with the above circular.

(iii) Also not covered under Clause No.5 (2) (e) of Schedule-II. Out of scope.

(iv) In view of above (i) (ii) & (iii) no GST is leviable.

(v) My reply is in consonance with the replies of Sh. Sadanand Bulbule, Sir.Dive deep in his replies in this scenario.

AI Summary

Non-monetary consideration: free supply as settlement may or may not trigger GST on notional lease value. Whether a free-of-charge lease of machines furnished as settlement for loss constitutes consideration under GST and triggers taxability on notional lease rentals. One view treats such free supply as non-monetary consideration taxable at market value; an alternate view, drawing on CBIC Circular No.178/10/2022 and provisions on scope of supply, treats compensatory transfers made without any obligation by the recipient as not constituting consideration and therefore not taxable.