TaxTMI 
TaxTMI 
2018 (5) TMI 1332
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....power plants or renovation of old plants Or is applicable in both cases ? 2) If GST is applicable, kindly clarify the following related aspects also,- a) Whether the GST on Liquidated Damages is covered under Schedule II entry No 5(2)(e) vide HSN code 9997-Other Services rate 18% is correct or any other entry is relevant? b) Liquidated Damages is determined and imposed upon the contractor after in-depth study. In such case, what will be construed as the time of supply. Will it be the period in which delay is occurring or it is the time when decision to impose Liquidated Damages is taken? c) If some part of delay has occurred before GST roll-out and some part of delay has occurred after GST roll but, whether GST will be applicable to the Liquidated Damages imposed for entire period of delay or to the period falling after GST roll-out? In case when GST is to be imposed for period after date of GST rollout but due to maximum capping of LD, the amount of LD is calculated at given percentage instead of being....
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.... is delay in completing the contract, the assessment regarding party responsible for delay is made. If the delay is on account of contractor, then Liquidated damages (LD) are calculated as per contract terms and levied upon the contractor. In accounting, the LD imposedis reduced from the total project cost while capitalizing the asset. Because of delay in the execution of work, the cost of project increases on account of Interest During Construction (IDC) and other administrative overheads. In such situation, LD helps in mitigating the impact of higher costs in form of IDC and administrative charges. Moreover, the contract entered into is for the purpose of construction of plant. There is no explicit agreement between the company and the contractor wherein the company is intending to supply service of tolerance of delay. The delay is neither desired by the company nor by the contractor but to impress upon the contractor to adhere to the timelines, LD clauses are inserted. However, if the delay occurs on account of vendors / contractors, LD is levied upon them Since, it was never the intention of the company to get its supplies/project delayed nor the contracto....
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....y Liquidated damages on the Contractor @12% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation per week of delay or part thereof subject to the maximum 10% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation." Similar clauses are there in supply, civil and structural work of the contract. Submission dt. 08.02.2018 I. STATEMENT OF FACTS 1. The Maharashtra State Power Generation Company Ltd (hereinafter referred to as applicants) is engaged in generation of power with object of making power available on affordable rates. 2 The applicant enters into contract with various contractors for the purpose of construction of new power plants or renovation of old plants or for operation of maintenance activities, etc. For example, the applicant has awarded the contract to M/s BHARAT HEAVY ELECTRICALS LIMITED for the purpose of erection, testing & commissioning of main plant package. 3. As per the contract, the c....
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....r shall levy Liquidated damages on the Contractor @1/2% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation per week of delay or part thereof subject to the maximum 10% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation." 7.7 For the purpose of deciding the amount of Liquidated Damages on the erection price, contract price along with the applicable price variation (excluding taxes, duties and insurances charges.) as per contact price adjustment shall be considered. Further Liquidated Damages for each unit shall be levied separately and for this purpose, price of one unit shall be half of the price of both the units. Similar clauses are there in supply of balance of plant package, erection testing and commissioning of balance of plant package, supply of main plant package, civil and structural works of balance of plant package and various another contract entered into with various parties. The applicant enters into contract with....
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....s the value of main supply: The contract entered into with the contractor gives the nature of services, the value of services and the time frame within which the services are required to be completed. The contractor undertaking the supply of service is aware of the fact that in case the services are not completed within the stipulated period, the value of contract will reduce. Since the recovery of Liquidated Damages is a part of the contract, it is submitted that the value of the main supply reduces to the extent of Liquidated Damages deducted by the applicant. The applicant relies upon the following judgments:- a) Commissioner of Chandigarh v/s. M/s. HFCL 2015(11)-TMI-893-CESTAT b) M/s. Victory Electricals Ltd. 2013-(298)-ELT-534 Reliance is placed on Australian Ruling issued under the Australian Goods & Service Tax Act, 1999: The Australian Goods & Service Tax Act, 1999 defines 'supply' u/s. 9-10(1....
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....y termination of lease of goods, it was clarified that if clause relating to early termination has been specified in the original contract of lease and early termination has been in accordance with the said contract than termination payment will be considered as change of consideration of earlier supply (i.e. re-determination of consideration). It will not be considered as separate supply, but will be considered as adjustment event in relation to that earlier supply. • The book Australian Master GST Guide written by Philip McCouat (2014) 15th Edition contains Australian GST Act and application of the same. The paragraph 4-085 deals with damage awards and out of court settlements. The said paragraph clearly provides that there is no supply when any charge is collected for termination of breach of contract. The extract of book is reproduced below: • "However, the Tax Office accepts that there is no supply where the order or settlement is wholly concerned with finalizing a claim for damages or compensation for previous properly damage, negligence causing loss of profits, breach of copyright, wrongful use of trade name, personal injury, termination or breach o....
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....a the value of service so completed. Thus, it is important to identify the service so completed. This would include not only the physical part of providing the service but also the completion of all other auxiliary activities that enable the service provider to be in a position to issue the invoice. Such auxiliary activities could include activities like measurement, quality testing, etc. which may be essential pre-requisites for identification of completion of service. The test for the determination whether a service has been completed would be the completion of all the related activities that place the service provider in a situation to be able to issue an invoice. However, such activities do not include flimsy or irrelevant grounds for delay in issuance of invoice. " Thus, the Ancillary work is required to be completed for the completion of service. In this case, the ancillary work i.e. discussion with the contractor is required to be completed before the amount is deducted. Therefore, as per the interpretation of the applicant, the time of supply is the time when both the persons agree for the purpose of deduction of Liquidated Dama....
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....p; 1. COMMR. OF C EX.. CHANDIGARH-l Versus H.F.C. L . (WIRELESS DIVISION) 2015 (11) TMI 893 - CESTAT NEW DELHI 2. VICTORY ELECTRICALS LTD 2013 (290) E.L.T. 534 (Tri. - LB) = 2013 (12) TMI 81 - CESTAT CHENNAI 3. MRS. Priyaraj Electronics Ltd Versus Commissioner of Central Excise Bangalore 2016 (6) TMI 873 - CESTAT BANGALORE 4. UNITED TELECOM LTD 2006 (204) E.L.T. 626 (Tri. - Bang.) = 2006 (9) TMI 321 - CESTAT, BANGALORE b. Under GST law section 15(1) of the CGST act, 15. (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Section 15 of the CGST Act 2017, which is similarly worded i.e. The transaction value is which actually paid or payable hence....
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....uct of the parties. In case of Dr Golak Bihari Mohanty vs. state of Orissa, [1974] 33 STC 514 (Orissa) = 1974 (1) TMI 91 - ORISSA HIGH COURT , the assessee was carrying on private practice as a radiologist and for that purpose had installed an X-ray plant He used to purchase X-ray plates and other chemicals and take X-ray photographs of patients according to requisitions from physicians as also of his own patients. After taking the X-ray, he used to give technical advice to his patients and was charging a flat rate towards his remuneration and cost of materials. Sales Tax Officer was of the view that the turnover arising from such transactions was liable to tax under the Act. The hon'ble High Court of Orissa held that; 'Mere passing of property in an article or commodity during the course of the performance of the transaction in question does not render it a transaction of sale. For, even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work and property in such article....
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....obligation to issue invoice shall be within 14 days of completion of service and not provision of service. (ii) If the amount of invoice is renegotiated due to deficient provision or in any other way changed in terms of conditions of the contract (e.g. contingent on the happening or non-happening of a future event), the tax will be payable on the revised amount provided the excess amount is either refunded or a suitable credit note is issued to the service receiver. However, concession is not available for bad debts. It is evident from the above circular, that in case the consideration for any other service is changed as per the term and conditions laid down in the contract, then service tax/GST will be payable on the renegotiated amount. Additional submission on 07.03.2018 1. We thank you very much for patient hearing on 28.02.2018 on the above application. As submitted during the hearing following additional submission/documents are submitted: - &nb....
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....t it was one single contract for supply of goods and services and not two contracts for supply of goods services and toleration of an act. The Divisible contract has been defined in Black's Law' Dictionary, Sixth Edition, Page no. 479, as follows: Divisible contract "One which is in its nature and purposes susceptible of division and apportionment, having two or more parts in respect to mailers and things contemplated and embraced by it, not necessarily dependent on each other nor intended by the parties so to be. " The term "divisible contract" whose synonym is "severable contract" is also defined in the same dictionary on page no. 1373 as under: - Severable contract: - A contract which includes two or more promises which can he acted separately such that the failure to perform one promise does not necessarily put the promisor in breach of the entire contract. A contract, the nature and purpose of which is susceptible of division and apportionment....
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.... payment by the recipient. The interest therefore cannot be considered as part of amount received for toleration of an act or delay in making payment. In view of the above, it is submitted that the liquidated damages cannot be considered as amount received for tolerating an act. 2. Liquidated damages are recovered for compensating the loss suffered by the recipient. The section 73 and section 74 of the Indian Contract Act, 1872 provides for recovery of liquidated damages in case of breach of contract. The provision of the section 73 and section 74 of the Indian Contract Act, 1872 reads as follows: - • 73. Compensation for loss or damage caused by breach of contract When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. ....
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....ch an act of toleration. The contract will not be in the form of compensation of a loss suffered by recipient of service. In this case, the amount deducted is only for compensate and not for toleration of an act. Therefore, not a separate supply liable for tax. Hence, no GST is payable. The above submission shall be considered while deciding the application. 03. CONTENTION - AS PER THE CONCERNED OFFICER The submission of the jurisdictional authority is as follows- "Comments against questions/issues on which Advance Ruling Required: 1) Whether GST is applicable to LD in case of Type 1 i.e. : Operation & Maintenance activities Type 2 i.e. : Construction of new power plants or renovation of old plants GST is applicable to liquidated Damages (LD) in both type of cases As LD is treated as consideration by Appellant which is supply under Schedule II entry no. 5(2)(e)of MGST Act. 2) If GST is applicable, kindly clarify the following related aspects also (a) Whether the GST on I.D is covered under Schedule II entry No 5(2) (c) vide HSN ....
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.... time of final hearing. Fresh application of Advance Ruling was received on dt.08.02.2018 and the applicant was called for a final hearing on dt.28.02.2018. Sh. S. S. Gupta, Sh. Karan Awtani, Ashutosh Shukla attended alongwith Sh. Vijay Chitlange and Ms. Madhuri Mundlye, (Assistant General Manager) and made revised submission which are taken on record. They orally reiterated their contention as made in the revised application submitted on dt.08.02.2018. They also submitted that they would be submitting, latest by dt.08.03.2018, copies of invoices evidencing recovery of liquidated damages. Jurisdictional Officer Sh. S.D. Page also appeared and made written submission. 05. OBERVATTONS We have gone through the facts of the case. The questions posed are in respect of 'liquidated damages'. We find that the applicant contends that these damages being towards deficiency of services and reduce the original consideration and will not be considered as separate service covered by the term 'Obligation to tolerate an act or a situation'. To understand the appropriateness of this contention, we would have to go through the facts. There is also a sample agreement provided....
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....re to the timelines, As mentioned earlier, the above is the applicant's understanding. What the applicant says needs to be supported by the agreement. We see that a Contract Agreement between Maharashtra State Power Generation Company Limited (Owner) and Bharat Heavy Electricals Limited (Contractor) for Erection & Commissioning of Main Plant Package at Chandrapur T.P.S. Expansion Project 2 x 500 MW has been provided. The agreement consists of a set of various documents such as Letter of Award, Letter of Acceptance, etc. However, the first thing that we notice is that the agreement pertains to the period before the GST Act came into force. The applicant has submitted that the agreements are usually entered on the lines similar to the agreement submitted for our perusal. The clauses as are relevant for determination of the issue at hand could be had a look at - • Agreement dt.30.03.2010 Whereas the Owner is desirous that certain ancillary services should be provided by the Contractor, viz. Erection, Testing & Commissioning of Main Plant equipments consisting of Steam Generator, Steam Turbine and Generator, C&I, Electrical equipments and other Auxiliary Equipmen....
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....ection, testing & commissioning of the unit at site are to be arranged by the Contractor within the scope. The Contractor shall also be responsible for arranging auxiliary steam required during unit commissioning within the scope. 3.0 CONTRACT PRICE 3.1 The contract price for Erection, Testing & Commissioning of Main Plant equipments is Rs. 2784280800.00 (Rupees Two Hundred Seventy Eight Crores Forty Two Lakhs Eighty Thousand Eight Hundred only) as detailed below. Amount i) Price for Erection, Testing & Commissioning including Comprehensive Insurance charges. : Rs. 2478000000/- ii) Service tax on E & C at 12.36% : Rs. 306280800/- Total Price for Erection, Testing & Commissioning of Main Plant Equipments including Comprehensive Insurance (Rupees Two Hundred Seventy eight Crores Forty two Lakhs Eighty Thousand Eight Hundred only) Rs.2784280800/- 4.0 CONTRACT PRICE ADJUSTMENT / VARIATION 4.1 The price for erection, testing & commissioning excluding insurance charges and taxes & duties, shall be subjected to price variation as per the Terms of Bid Specification under ref.1 with Base Indices as on March 08. The price variation shall be subje....
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....oration (REC), Mumbai. The Invoices along with the documents listed in the relevant clauses of terms of payment shall be submitted by the Contractor to the General Manager (Gen. Project), Maharashtra State Power Generation Co. Ltd. (MahaGenco) Chandrapur TPS. Expansion Project, Post- Urja Nagar, Chandrapur - 442 404, Dist. Chandrapur for all the payments against this IOA, except for the payment of advance and comprehensive insurance charges. 11.1.2 Service Tax shall be paid on submission of Invoices along with an undertaking from BHEL Unit that the amount of Service Tax claimed in the said Invoice shall be deposited with Government Authorities as per Service Tax Act. M/s. BHEL shall also furnish the certificate on quarterly basis from Head of Finance from the respective Unit certifying that the Service Tax claimed from MahaGenco has been deposited with the respective Tax Authorities. • Amendment No.1 dt.11.01.2009 In view of the discount offered by BHEL, para 3.1 of Erection LOA under ref.1 is amended as below. The contract price for Erection, Testing & Commissioning of Main Plant equipments is Rs. Rs. 2,75,28,20,000/- (Rupees Two Hundred Seventy Five Cr....
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....s defined in the contract with due diligence and expedition or shall refuse or neglect to comply with any reasonable orders given to him in writing by the Engineer in connection with the works or shall contravene the provisions of the contract, the Owner may give a notice in writing to the contractor to make good the failure, neglect or contravention complained off Should the contactor fail to comply with the notice within 30 (thirty ) days from the date of service thereof, then and m all such cases, the owner shall he at liberty to employ other workmen and forthwith execute such part of the works as the contractor may have neglected to do or. it the owner shall deem fit, it shall be lawful for him, without prejudice to any other right he may have under the contract, to take the works wholly or in part out of the contactor's hand and re-contract w till any other person or persons to complete the works or any part thereof. The owner shall be entitled to retain and apply any balance which may otherwise be due to the contactor or such part thereof, as may be necessary, to the payment of cost of executing the said part of the works or of completing the works. If the cost of exec....
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.... 7.5 Since the Liquidated damages are limited and the same cannot compensate the consequential loss of the Owner due to delay on the part of the Contractor, the Owner reserves the right to get the work done at the risk and cost of the Contractor. in case delay on the part of the Contractor has been established after giving notice to the Contractor. as may be deemed fit in the interest of completing the balance works. 7.6 If the contractor fails to achieve the Trial Operation of the unit within the time period specified in the Project Completion Schedule due to reasons attributable to him then the owner shall levy Liquidated damages on the Contractor @1/2% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation per week of delay or part thereof subject to the maximum 10% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation." 7.7 For the purpose of deciding the amount of Liquidated Damages on the erection price, contract price along with the applicable price variation (excluding taxes, duties a....
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....of the unit within the stipulated time period as indicated above from the zero date then the Owner shall levy Liquidated Damages on the contractor @1/2% of the contract price for Erection, Testing & Commissioning along with applicable price variation per week of delay or part thereof subject to a maximum of 10% of the price for Erection, Testing & Commissioning along with applicable price variation. For the purpose of levy of liquidated damages, the contract price for Erection, Testing & Commissioning excluding Insurance charges and taxes & duties and the same for one unit shall be half of the total price. 2. The obligations on the Contractor calling for supply of the deliverables thereunder is one event. This event consisting of a supply occurs first. After occurrence of this event, there is evaluation in terms of whether the supply of the deliverables under the agreement were supplied within the time frame as agreed upon by the Contractor. This evaluation results in either a timely or delayed or a premature performance. The finding of this evaluation when there being a delay, the contingent liability of liquidated damages translates into an actual recoverable liability. This i....
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....ing insurance charges and taxes & duties, shall be subjected to price variation as per the Terms of Bid Specification under ref.l with Base Indices as on March 08. The price variation shall be subjected to a ceiling of (+/-) 20% of the contract price for Erection, Testing & Commissioning excluding taxes & duties and insurance charges. As can be seen, the price variations to which the contract price would be subjected to makes no reference to the effect of levy of liquidated damages. c. There is also a clause about deductions from the contract price thus - 16.0 DEDUCTIONS FROM TOT AI CONTRACT PRICE 16.1 The Owner shall claim all costs, damages or expenses that the Owner may have paid, for which under the contract the Contractor is liable. The Owner to the Contractor shall bill all such claims regularly as and when they fall due. Such bills shall be supported by appropriate documents or explanations, to enable the Contractor to properly identify such claims. Such claims shall be paid by the Contractor within 15 (fifteen) days of the receipt of the corresponding bills and if not paid by the Contractor within the said period, the Owner may then deduct the amount from any....
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.... relating to payment towards advance or payment for execution, testing, commissioning also does not require invoices to be considered taking into consideration the liability towards liquidated damages. The invoices to be prepared are in terms of the contract price. And we see that the bills as submitted for our perusal also do not show a bill being raised after considering liquidated damages. The bills are for work done during a particular period and are accompanied by a Certificate which says in a pointwise manner as to how the amounts have been arrived at. On this Certificate, there are some rough workings as made by the applicant which show calculations involving subtractions, one such subtraction being for liquidated damages. However, if we minutely look at the deductions, it is seen thus - Invoice as raised by the Contractor Rough working by the Owner (applicant) 1 Boiler & Aux - Unit-9 For the work done during March'13 As per the Annex Enclosed 375, 29,811 37529810 4174816 41704626 2 Less. Advance @10% 37,52,981 3752981 Advance 3 Less Compln of P G. Test(5%) 18,76,491 1876491 Retention 4. Net Billing (4) = (1....
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....g the value of the supply. It also becomes necessary as the applicant informs that the Liquidated Damages so deducted are treated as income of the applicant. The provision reads thus- Value of taxable supply. 15. (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. In the present case, the agreement clauses as reproduced above, the invoice as prepared card the calculations, as reproduced above, as made by the applicant reveal that there are no two opinions between the contracting parties that the value of the supply as received by the applicant does not include the liquidated damages. There are measures identified in the agreement to arrive at the contract value or the invoice value. The words " price actually paid or payable" in respect of the value of the goods or services supplied do not come into play in the present set of facts of deduction of the amount towards liquidated damages. We have seen above that this deduction do....
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....ontentions as made. We have gone through these case laws and find that the facts are not in pari-materia to the case before us. In H.F.C.L (cited supra), the CESTAT, New Delhi quoted the observation of the Larger Bench in Victory Electricals (cited supra) that that wherever the assesse, as per terms of the contract between the parties and on account of delay in delivery of manufactured goods, is liable to pay a lesser amount than the generally agreed price as a result of a clause stipulating variation in the price, on account of liability to "liquidated damages" irrespective of whether the clause is titled "penalty" or "liquidated damages", the resultant price would be the "transaction value" and such value shall be alone liable to levy of excise duty, at the applicable rate. In the present case, there are no such clauses as would tantamount to reducing the contract price or the contract value of the supplies of goods or services or both as made by the Contractor. In fact in the present case, the levy of liquidated damages is specifically identified as an independent levy. We have seen that the Contract Price Variation clause in the impugned agreement, does not provide for variatio....
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....ed from time to time] reveals thus - S. No. Chapter, Section, Heading, Group Service Code (Tariff) Service Description 700 Heading 9997 Other services 716 Group 99979 Other miscellaneous services 720 999794 Agreeing to tolerate an act 722 999799 Other services nowhere else classified In view of the above, following schedule entry under the Notification no.11/2017 - Central / State Tax (Rate) [as amended from time to time] for taxable services would cover the impugned levy of liquidated damages - S. No. Chapter, Section, Heading, Group Description of Service Rate (per cent.) [CGST + MGST] 35 Heading 9997 Other services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified). 18% [9% + 9%] b) Liquidated Damages is determined and imposed upon the contractor after in-depth study. In such case, what will be construed as the time of supply. Will it be the period in which delay is occurring or it is the time when decision to impose Liquidated Damages is taken? We would ....
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.... of the Contractor, the Owner reserves the right to get the work done at the risk and cost of the Contractor. in case delay on the part of the Contractor has been established after giving notice to the Contractor. as may be deemed fit in the interest of completing the balance works. 7.6 If the contractor fails to achieve the Trial Operation of the unit within the time period specified in the Project Completion Schedule due to reasons attributable to him then the owner shall levy Liquidated damages on the Contractor @1/2% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation per week of delay or part thereof subject to the maximum 10% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation." 7.7 For the purpose of deciding the amount of Liquidated Damages on the erection price, contract price along with the applicable price variation (excluding taxes, duties and insurances charges.) as per contact price adjustment shall be considered. Further Liquidated Damages for each unit shall be levied ....
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....over him as Input Tax Credit subject to satisfying all other conditions? The above question is not answered as the proper person to ask the above question would be the contractor /Vendor and not applicant. 06. In view of the deliberations held hereinabove, we order as follows: ORDER (under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017) NO. GST-ARA-15/2017-18/B-30 Mumbai dt. 08/05/2018 For reasons as discussed in the body of the order, the questions are answered, as under, in terms of the agreement between Maharashtra State Power Generation Company Limited (Owner) and Bharat Heavy Electricals Limited (Contractor) for Erection & Commissioning of Main Plant Package at Chandrapur T.P.S. Expansion Project 2 x 500 MW - Q.1 Whether GST is applicable on Liquidated Damages in case of Type 1 i.e. Operation & Maintenance activities Type 2 i.e. Construction of new power plants or renovation of old plants Or is applicable in both cases? A.1 In terms of the aforesaid agreement, GST would be applicable on the Liquidated Damages. Q.2 If GST is applicable, kindly clarify the foll....