TaxTMI 
TaxTMI 
2022 (11) TMI 209
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....ng pronounced by the Appellate Authority under Chapter XVII of the Act shall be binding only (a) On the applicant who had sought it in respect of any matter referred to in sub-Section (2) of Section 97 for advance ruling; (b) On the concerned officer or the jurisdictional officer in respect of the applicant. 3. Under Section 103 (2) of the Act, this advance ruling shall be binding unless the law, facts or circumstances supporting the original advance ruling have changed. 4. Under Section 104 (1) of the Act, where the Appellate Authority finds that advance ruling pronounced by it under sub-Section (1) of Section 101 has been obtained by the appellant by fraud or suppression of material facts or misrepresentation of facts, it may, by order, declare such ruling to be void ab-initio and thereupon all the provisions of this Act or the rules made thereunder shall apply to the appellant as if such advance ruling has never been made. * * * * * Subject: GST - Appeal filed by M/s. Achampet Solar Private Limited, Hyderabad 8-2-610/68/1,2,3, 5th Floor, Accord Blu, Road No 10, Banjara Hills, Hyderabad, Telangana - 500034. Telangana State under Section 100 (1) of TG....
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....he contract. This scenario is answered by Section 55 of the Indian Contract Act, 1872, which is extracted below: "Effect of failure to perform at fixed time, in contract in which time is essential-When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee if the intention of the parties was that time should be of the essence of the contract. Effect of such failure when time is not essential.-If it was not the intension of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure. Effect of acceptance of performance at time other than that agreed upon-If, in case of a contract voidable on account of the promisor's failure to perform his promise at the time agreed, the promisee accepts performanc....
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....of Schedule II by the applicant. The Consideration received for such forbearance is taxable under CGST and SGST @9% each under the chapter head 9997 at serial no. 35 of Notification No.11/2017- Central/State tax rate. 7. Lower authority, examined the submissions made by the Appellant and vide the impugned order, the Advance Ruling Authority had given the following Advance Rulings: Questions Ruling by AAR 1. Whether liquidated damages recoverable by the applicant from Belectric India on account of delay in commissioning, qualify as a 'supply' under the GST law, thereby attracting the levy of GST? Yes. 2. If the answer to Question No. 1 is in the affirmative, what should be the time of supply when liability to pay GST is triggered? The date on which the liquidated damage is determined as per the formula prescribed in the clause 6 of the contract is the time of supply of service entry in 5(e) of Schedule II by the applicant. 8. Aggrieved by the above ruling, the present appeal has been file by the appellant on the following grounds: 1. The impugned order is a non-speaking order and is liable to be set aside 1.1. At the outset, the Appellant submits tha....
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....adjudicating authority with a direction to consider the assessee's pleas and pass a reasoned order. Needless to say that the adjudicating authority will follow the principles of Natural Justice before coming to a conclusion. 1.4. Based on the above, the Appellant wish to submit that the Ld. Authority did not take into cognizance the facts of the case and submissions made by and, therefore, the order passed by the Ld. Authority is bad in law. 2. Statement containing the Appellant's interpretation of law and/or facts, as the case may be, in respect of the aforesaid question(s) The position of law and our understanding of the same 2.1. It is important to note various statutory provisions which have a bearing on the questions raised in the present Appeal. The relevant statutory provisions are extracted hereunder for the ready reference of your goodself: Relevant Provisions of the Central Goods and Services Tax Act, 2017 ('CGST Act') and the Appellant's interpretation of the same 2.2. Under the GST law, all supplies of goods and services should attract GST (unless specifically exempted). Section 9 of the CGST Act is the charging Section which provides that there shall ....
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.... to an act shall be treated as a supply of services. The relevant portion of the Schedule II is extracted hereunder for your ready reference: SCHEDULE II (Section 7) '5. Supply of services The following shall be treated as supply of services, namely: - (a).......... ........................ (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and....' 2.7. Further, the term 'service' and 'consideration' is defined as follows under Section 2(102) and 2(31) of the CGST Act: 'services means anything other than goods, money and securities but includes activities relating to the use of money or conversion by cash or by any other mode, from one form, currency or denomination, to another form currency or denomination for which a separate consideration is charged.' 'consideration in relation to the supply of goods or services or both includes- (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other....
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....a WD/O. Sadhu KoragaShetty reported as [2019-VIL-454-BOM], wherein it has been held that payment of royalty as compensation for unauthorized occupation of premises is to remedy the violation of a legal right, and not as payment of consideration for a supply. In absence of reciprocal enforceable obligations, it is incorrect to characterise the payment of royalty as damages to be treated as a 'supply' for 'consideration' on which GST is payable. Relevant extracts from the judgment have been reproduced below: ".. 57. However, where no reciprocal relationship exists, and the plaintiff alleges violation of a legal right and seeks damages or compensation from a Court to make good the said violation (in closest possible monetary terms) it cannot be said that a 'supply' has taken place. 58. The Learned Amicus Curiae correctly submits that enforceable reciprocal obligations are essential to a supply. The supply doctrine does not contemplate or encompass a wrongful unilateral act or any resulting payment of damages. For example, in a money suit where the plaintiff seeks a money decree for unpaid consideration for letting out the premises to the defendant, t....
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....es not acquire the character of consideration so as to make the transaction a supply. ...75..... As I have already held above, the payment of royalty as compensation for unauthorized occupation of the Suit Premises is to remedy the violation of a legal right, and not as payment of consideration for a supply. The Court Receiver is merely the officer of the court to whom the payment is made. 76. Therefore, in the present case, where the plaintiff has made out a strong prima facie case and the Defendant has not been able to demonstrate any semblance of right to occupy the Suit Premises, it cannot be said that the Defendant's occupation pursuant to an Order of the Court is a contract involving a 'supply' for consideration. In the absence of reciprocal enforceable obligations, it would not be correct to characterise the Defendant's occupation of the Suit Premises against payment of royalty as a 'supply' for 'consideration' on which GST is payable by the Court Receiver. .." 2.12. Despite the term 'supply' and 'business' defined in the GST law are inclusive and wide terms, the aforesaid decision emphasises the presence....
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....reement does not involve a service provider and a service recipient to qualify as supply under GST 2.15. Further, the Appellant submits that one of the important aspects of a supply is that there is an underlying 'activity' performed by one person for another for consideration i.e. there must be two different persons viz. (i) recipient of supply and (ii) provider of supply. 2.16. In the present case, it is clear that the Appellant is exercising its statutory right of claiming compensatory damages provided under the Indian Contract Act, 1872 which is to protect interests of its own. It is further submitted that a right belonging to self cannot be executed for another person. In so far as exercising of rights is correctly comprehended, it will not be wrong to state that a person can exercise rights for himself only and not for another person. 2.17. Therefore, the claim for compensatory damages (in the form of penalties) being a right of the Appellant which has been exercised by the Appellant at its option and to its own benefits. In the absence of any recipient of supply, it is submitted that there can be no supply and hence, there can be no levy of GST. The present arran....
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....companies to solely sell the products under the company's brand name and receive some consideration in return. In such scenarios, the retailers agree to act in a particular manner under the contract. 2.20. In the aforesaid situations, it is observed that there is a specific agreement by the service provider to agree to an obligation specified in the contract. However, in the present case, the Appellant does not enter into an agreement with the Contractor specifically to tolerate any situation or act against which a consideration is received. The Appellant recovers liquidated damages from the Contractor on account of delay by the Contractor in delivering the project within the prescribed timelines. 2.21. In striking contrast to the examples cited above, in the present matter, the Appellant's right to recover compensatory damages becomes contingent upon the service provider/suppliers' delay/default. Thus, the impugned recovery arises on the event of failure on part of the service providers/suppliers not meeting the delivery time and does not emanate from an obligation on the part of the Appellant to tolerate an act or situation. The Appellant has suffered damage or loss, which ....
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....r the contracts, the Appellant is not under an 'obligation' to tolerate the act of delay or non-compliance by the Contractor and can invoke the provision of termination of the contract or encashment of the bank guarantee, as the case may be. Therefore, the Appellant has a recourse available under the contract, and is under no obligation to tolerate the act of default by the contractor. Further, the claim of LDs is made towards making good the genuine damages, losses or injuries arising from unintended events and does not emanate from tolerating an act or a situation. Imposing the liquidated damages was never the primary purpose for entering into a contract, rather it is just a consequential effect of transactions already undertaken. There is nothing in the contracts that indicates that the intention of the Appellant or the Contractor is to effect a breach of the contract or to earn LDs by virtue of breach of commitment, which is to be tolerated by either of them. On the contrary, LD clauses are incorporated in the contract in order to avoid/ discourage such acts of default and there is no additional benefit given under the main contract of supply of goods/ services, in return for t....
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....e of provision of a service can be established, the question of taxing an attendant monetary transaction will not arise. • In the case of Mormugao Port Trust vs Commissioner of Customs, Central Excise and Service Tax, Goa reported as [2016 TIOL 2843 CESTAT Mum], it was observed that unless, it can be established that a specific amount has been agreed upon as a quid pro quo for undertaking any particular activity by a partner, it cannot be assumed that there was a consideration agreed upon for any specific activity so as to constitute a service. • In the case of Jaipur Jewellery Show vs CCE & ST, Jaipur-I, 2017 reported as [(49) STR 313 (TRI)], while dealing with service tax liability on cancellation charges in case of booking and subsequently cancelling a booth, it was observed that such cancellation charges are for putting the appellant into inconvenience by initially booking the booths and subsequently cancelled. In such case as no service stand provided by the appellant to their customers and for which purpose no consideration was ever received by them, it was held that the cancellation charges recovered by the appellant cannot be held to be the conside....
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....a consideration for the activity of breaking the law making such activity a 'service'? No. To be a service an activity has to be carried out for a consideration. Therefore, fines and penalties which are legal consequences of a person's actions are not in the nature of consideration for an activity. 2.3.2 Would the payment in the nature as explained in column A of the table below constitute a consideration for provision of service? S.No A B Nature of payment Whether consideration for service? 1. Amount received in settlement of dispute Would depend on the nature of dispute. Per se such amounts are not consideration unless it represents a portion of the consideration for an activity that has been carried out. If the dispute itself pertains to consideration relating to service then it would be a part of consideration.'' 2.35. As per the guidance provided in the Education Guide, with the concurrent existence of Section 66E(e), amount received on account of settlement of dispute was held to not be termed as consideration. 2.36. Thus, in absence of any agreement to provide services between the Appellant and the Contractor under th....
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....(Tri- Del)] the Delhi Tribunal observed that cancellation charges collected on cancellation of air ticket were not received by appellant from its clients (i.e., airlines) and hence service tax should not be payable on such charges. 2.38. Further, the Appellant would like to point out that similar provisions of law are prevalent in the statutes governing in other countries like Australia or EU, and therefore, reliance is placed on the following foreign case laws dealing with similar issues: • Section 9-5 of the Australian GST Act sets out the criteria for making a taxable supply. One of the criteria for making such a supply is that "the supply is made for consideration". Further, subsection 9-10(2) provides a non-exhaustive list of activities or occurrences that are included within the meaning of supply. This, inter alia, under clause (g) includes: "an entry into, or release from an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation;" The Australian Government regularly issues rulings or GSTR (Goods and Services Tax Rulings) clarifying the position of law on various con....
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....nd, the retention of that deposit, following the client's cancellation, is intended to offset the consequences of the non-performance of the contract, it must be held that neither the payment of the deposit, nor the retention of that deposit is taxable for VAT purposes. • Similarly, the Court of Appeal (UK) in case of Vehicle Control Services Limited (2013) EWCA Civ186, has said that payment in the form of damages/penalty for parking in wrong places/wrong manner is not a consideration for service as the same arises out of breach of contract with the parking manager. • In GSTR 2003-2011, the Australian Taxation Office had to consider the applicability of GST on payments made on an early termination of a lease of goods by a lessor on account of a lessee's default. It is imperative to note that the Australia GST Laws covers 'an obligation to refrain from an act and to tolerate an act or situation' as supply. Further, much like under the Indian law, the Australian GST law required that a supply should be made for consideration and for this requirement to be met, there i) had to be payment/any act or forbearance for consideration and ii) the said payment/an....
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....ant exactly the same as the expression used under the GST law. 2.41. As per the above, it can be inferred that there is no underlying supply against the revoking of LD and hence GST should not be payable. Mere inclusion of specific clause for payment of damages should not change the nature of transaction to transform a lawful right of termination into an 'obligation to tolerate' 2.42. In Page 2 of the impugned order, Ld. Authority has relied on the provisions of the Indian Contract Act, 1872, to hold that damages are consideration for tolerating an act or situation arising out of a contractual obligation and therefore shall be subject to the levy of GST. 2.43. In this regard, the Appellant submits that while from the provisions of the Indian Contract Act, 1872, it is evident that entitlement to receive compensation for delay in supply of material is a statutory right, it is also important to note that exercising statutory right granted under a statute cannot be termed as a supply under GST. 2.44. It is a business prudence that contracting parties foresee an act of breach by the other party and take measures to safeguard themselves against any consequent loss/ injury ....
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....s so issued, the transaction value of a transaction is reduced. Therefore, the obligation is on the part of the supplier/service provider to issue a credit note in terms of Section 34(1) of the CGST Act and not on the recipient to pay service tax for penalties recovered. 2.49. In view of the same, the Appellant submits the recovery of liquidated damages by the recipient of the supply can be inferred as a renegotiation of the price of the original contract on account of deficiency in supply undertaken by the supplier and shall not be regarded as a separate supply or transaction attracting GST. There is a difference between the term 'Condition to a contract' and 'Consideration for a contract' 2.50. The Appellant wishes to submit that 'conditions' attached to a contract cannot be seen in the light of 'consideration' for the contract as merely because the service recipient has to fulfil such conditions would not mean that this value would form part of the value of the taxable services that are provided. 2.51. In this regard, the Appellant draws reference to a recent ruling by CESTAT New Delhi in the case of South Eastern Coalfields Ltd. vs Commissioner of Ce....
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....idated damages is in the nature of 'actionable claim', outside the ambit of GST 2.54. Schedule III of the GST Act which deals with activities or transactions that shall be treated as neither supply of goods or services, inter alia, includes '6. Actionable claim, other than lottery, betting or gambling' 2.55. Further, the provisions of CGST Act borrows the definition of 'actionable claim' from Section 3 of the Transfer of Property Act, 1881 which provides as under: 'actionable claim means, a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of moveable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent' 2.56. Thus, basis conjoint reading of the definition and provisions provided with respect to taxability of actionable claim, it can be said that any claim to any debt whether such debt or beneficial interest is existent, accruing, conditional or contingent shall be termed a....
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....ent agreements have resulted in creation of a debt in favour of the Appellant. Under the said circumstances a debt is clearly created and the said amount would fall within the scope and ambit of an actionable claim within the meaning of Section 3 of the Transfer of Property Act, 1882 and hence excluded from the definition of ' service' as per Section 65B(44). 14. It is submitted that the amount in question is an 'actionable claim' which is not liable for any service tax under the provisions of the 1994 Act. The meaning, nature and scope of actionable claim has been dealt with in detail by the Constitution Bench of the Hon'ble Supreme Court of India in case of Sunrise Association vs. Govt. of NCT of Delhi reported in (2006) 5 SCC 603. 26. Thus, we held that the entire sum of money would be classified as Actionable Claim which otherwise is beyond the scope of service tax under Section 66B(44) (iii) of the Finance Act. If the transaction of Development Agreement, Settlement Agreement and compensation not fall under 'Service' under the Finance Act there is no application of Section 66 E(e) of the Act ibid.' 2.60. Basis the above, it can be said that the claim of li....
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....t. Personal Hearing: 10. In terms of Section 101(1) of the Act, the appellant was given personal hearing, in virtual mode on 29.04.2022. Shri NirenShetia Chartered Accountant and Authorised Representative appeared for the Appellants. The appellants reiterated their written submissions made along with the application and no additional submissions were made at the time of personal hearing. They requested to set aside the advance ruling in respect of said issue that are being contested and consider their appeal favourably. Discussions and Findings : 11. The contentions of the Applicant are examined and the observations are made as under: 12. The applicant contended that liquidated damages received towards breach and non compliance cannot be construed as 'consideration' for 'refraining or tolerating an act'. The applicant further contends that claim of liquidated damages by them from contractor does not qualify as a supply of service under GST on following grounds: • There is no contractual reciprocity or concurrence to assume an obligation to refrain from an act or tolerate an act between the applicant and the contractor, which are indispensible and essenti....