TaxTMI 
TaxTMI 
2023 (6) TMI 1229
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.... reference to both CGST Act and TGST Act. 3. It is observed that the queries raised by the applicant fall within the ambit of Section 97 of the GST ACT. The Applicant enclosed copies of challans as proof of payment of Rs. 5,000/- under SGST and Rs. 5,000/- under CGST towards the fee for Advance Ruling. The Applicant has declared that the questions raised in the application have neither been decided nor are pending before any authority under any provisions of the CGST/TGST Act' 2017. The application is, therefore, admitted after examining it and the records called for and after hearing the applicant as per section 98(2) of TGST Act' 2017. 4. BRIEF FACTS OF THE CASE: 4.1 Statement of relevant facts as per the applicant having a bearing on the question(s) on which Advance Ruling is required is reproduced below- The applicant M/s. TPSC (India) Private Limited is engaged in taking up Thermal Projects in various cities in India and during the financial year 2013-2014, the applicant company was allotted an Erection and Pre-Commissioning works related to Steam Turbine Generator and Auxiliaries, project of NTPC, Kudgi, Karnataka and duration of completion of the project was for ....
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....plicant had been constrained to descope certain quantum work awarded to DGAL under Unit 1 and Unit 2. Due to descoping of work, DGAL lodged a claim against the Applicant and such claim was refuted and stoutly objected by the Applicant. The Applicant had engaged 4 other sub-contractors, namely Shilpa Engineering Erectors, Fortuna Engi Tech and Structurals (India) Private Limited (Fortuna), Associated Engineering Services (AES) and Axis Inspection Solutions, to complete the work that had been unattended and descoped from the DGAL. Having not satisfied with the process and duration of the contract, DGAL issued a notice to proceed for Arbitration for compensation. Claim No. Description Amount 1 Fabrication Unit 1,2,3 And Erection Unit-1- Additional Indirect Man Months due to Extended Stay 5,26,03,795.00 2 Fabrication Unit 1,2,3 And Erection Unit-1- Additional Direct Man Months due to Extended Stay 2,40,64,800.00 3 Fabrication Unit 1,2,3 And Erection Unit-1- Additional Machinery Months due to Extended Stay 57,49,963.00 4 Fabrication Unit 1,2,3 And Erection Unit-1 - Cost Impact of Price Variation(PVC) due To Extended Stay 85,51,143.00 5 ....
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....evidences, Arbitration Award was passed on 27th May, 2022 by quantifying the damages payable to DGAL due to delay on the part of the Applicant. The Applicant justified the delay on their part due to various unavoidable circumstances. DGAL submitted the following claims before the Arbitral Tribunal: The above claim by DGAL is totally in the nature of damages and compensation for various indirect losses claimed to have been suffered by them due to delay in the completion of the project. In none of the instances, DGAL has claimed any amount towards the supply of materials or labor and the entire claim pertains to the pre-GST period. It is to be noted that all the work allocated was completed in the Pre-GST Period and the payments were also settled to DGAL in the Pre-GST period itself. The Applicant had given a sub-contract to DGAL during the pre-GST period and the contract was also completed before the implementation of GST in India. The Applicant and the Sub-Contractor have duly remitted VAT and Service Tax on the entire contract value and therefore, the damages claimed by the sub-contractor, DGAL cannot be assessed under GST net by holding the arbitral award shall be exigible to ....
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....by the applicant does not fall within the scope of Entry 5(e) of Schedule II to CGST Act, as no consideration passed on for any of the act mentioned therein. Further the liquidated damages in the case on hand are not towards agreeing to the obligations to refrain DGAL from an act, or to tolerate an act or situation of DGAL, or to do an act by DGAL, but solely in due compliance with the arbitral award. In other words, the applicant has not sought any obligation or refrained DGAL from doing any act. The Amount payable as the Arbitral Award is purely in the form of Compensation payable for the delay in the completion of the contract and does not involve any additional supply or labor. It is relevant to point out that Circular No.178/10/2022, dt-3.8.2022 considered similar facts and held that liquidated damages awarded in arbitration are not liable to be taxed under GST. The said Circular is squarely applicable to the facts herein and in view of the said circular the amount of Rs. 38,56,91,204/- representing liquidated damages. In short, the settlement amount of Rs. 38,56,91,204/- is not a consideration for abstaining/refraining, DGAL from implementing the arbitral award but due to ....
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....ution beyond the time limit provided to them. b. That M/s DGAL have alleged that the delay in execution of the project due to non-finalization of its drawings or supply of raw materials by the applicant and claimed compensation regarding the same. c. That M/s DGAL applied for arbitration and received an award for Rs. 42 Crs. For the compensation. d. That in view of Circular No. 178/10/2022, dt. 03.08.2022 issued by Govt. of India, Ministry of Finance such compensation including the liquidated damages claimed for breach or non-performance of the contracts by one of the parties shall be exempted. Opinion expressed by Sri S.V. Kasi Visweswara Rao, Additional Commissioner (State Member), on the issues raised by the applicant. 7. DISCUSSION & FINDINGS: The applicant is a works contractor for construction of thermal power projects. The applicant awarded a sub-contract to M/s. Delta Global Allied Limited (DGAL) for the purpose of executing one such contract. The contract was completed prior to 01-07-2017 but was handed over in December' 2018. The applicant de-scoped certain quantum of work awarded to DGAL due to the inability of the DGAL to handle highe....
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....way of "agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act" were deliberated in detail. It was felt that the entry is being very widely and at times erroneously interpreted which is leading to a lot of disputes and litigations. It was generally felt that a circular clearly explaining the situations in which an activity shall amount to a supply of service by way of agreeing to refrain from an act or to tolerate an act or a situation etc. may be issued. After detailed deliberations over course of two meetings, the Fitment Committee recommended that the issues involved may be clarified by way of the enclosed draft circular placed at Annexure B. The draft circular incorporates the basic principles of GST law, Indian and international jurisprudence and international VAT/GST guidelines and practices and elucidates guiding principles with the help of suitable examples/ illustrations. Issuance of the guidance note/ circular is expected to resolve/ reduce litigation. The draft circular prepared by the fitment committee was also put on agenda as Annexure-B at page No. 109 to 117 and the same was discussed and recorded in minutes at p....
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....lustrated in the circular in the following example: An industrial unit agrees to install equipment for zero emission / discharge at the behest of the RWA of a neighboring residential complex against a consideration paid by such RWA, even though the emission/discharge from the industrial unit was within permissible limit and there was no legal obligation upon the individual unit to do so. It is observed in the circular that doubts have persisted regarding the description "Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act" and tax authorities have initiated investigation and advance ruling authorities have upheld taxability under GST on the following items: i. Liquidated damages paid for breach of contract; ii. Compensation given to previous allottees of coal blocks for cancellation of their licenses pursuant to Supreme Court Order; iii. Cheque dishonor fine/penalty charged by a power distribution company from the customers; iv. Penalty paid by a mining company to State Government for unaccounted stock of river bed material; v. Bond amount recovered from an employee leaving ....
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....s and damage that the parties agree would arise due to breach of contract. They do not act as a remedy for the breach of contract. They do not restitute the aggrieved person. It is further argued that a contract is entered into for execution and not for its breach. The liquidated damages or penalty are not the desired outcome of the contract. By accepting the liquidated damages, the party aggrieved by breach of contract cannot be said to have permitted or tolerated the deviation or non-fulfillment of the promise by the other party. Para-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 su....
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....or transport of passengers may stipulate that the ticket amount shall be partly or wholly forfeited if the passenger does not show up. A contract for package tour may stipulate forfeiture of security deposit in the event of cancellation of tour by the customer. Similarly, a contract for lease of movable or immovable property may stipulate that the lessee shall not terminate the lease before a certain period and if he does so he will have to pay certain amount as early termination fee or penalty. Some banks similarly charge pre- payment penalty if the borrower wishes to repay the loan before the maturity of the loan period. Such amounts paid for acceptance of late payment, early termination of lease or for pre-payment of loan or the amounts forfeited on cancellation of service by the customer as contemplated by the contract as part of commercial terms agreed to by the parties, constitute consideration for the supply of a facility, namely, of acceptance of late payment, early termination of a lease agreement, of prepayment of loan and of making arrangements for the intended supply by the tour operator respectively. Therefore, such payments, even though they may be referred to as fine....
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....plicant on which he has paid liquidated damages by way of out of court settlement. 3. By accepting the liquidated damages the sub-contractor cannot be said to have permitted or tolerated the deviation on non-fulfillment of the promise. 4. Thus the liquidated damages are paid only to compensate injury or loss of damage suffered by the aggrieved party due to breach of the contract. Hence, the above conditions of flow of consideration fall under para-7.1.3 and para-7.1.4 of circular No. 178/10/2022, dated: 03-08-2022, therefore such consideration as stipulated in the said circular are not taxable as there is no supply of service under entry-5(e) of Schedule-II of the CGST Act, 2017. 8. In view of the foregoing, the ruling is given by State Member as under: In view of the above discussion, the questions raised by the applicant are clarified as below: Questions Ruling 1. Whether the contract completed during the Pre-GST period and the consequential demand based on the completed contract can be brought to assessment under GST Act, 2017? No. Under Section 13 of CGST Act, 2017, the time of supply will determine taxability of a service under CGST 2.....
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....laborately discussed in the GST Council and based on the discussion a circular has also been issued to clarify the types of transactions which fall under this entry. 9.5 In the agenda for discussion in the 47th GST Council Meeting the Fitment Committee made recommendation for issuing clarification in relation to services of liquidated damages, breach of contract, etc., at Sl.No. 20 in page No. 92 of 279 in Annexure-IV to the Agenda for GST Council Meeting (Volume-II). The same is extracted here under: Proposal Details of Request Discussion in Fit.Com & its recommendation To clarify applicability of GST on payments in the nature of liquidated damages, compensation, penalty, cancellation charges, late payment surcharge etc. arising out of breach of contract or otherwise. A number of cases have been brought to the notice of the Board where question has been raised regarding taxability of an activity or transaction as the supply of service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act. Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act" has been declare....
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....owing examples: i. Non-compete agreements, where one party agrees not to compete with the other party in a product, service or geographical area against a consideration paid by the other party. ii. A builder refraining from constructing more than a certain number of floors, even though permitted to do so by the municipal authorities, against a compensation paid by the neighboring housing project, which wants to protect its sun light. iii. An industrial unit refraining from manufacturing activity during certain hours against an agreed compensation paid by a neighboring school which wants to avoid noise during those hours. b) The phrase "Agreeing to the obligation to tolerate an act or a situation" is illustrated in the circular in the following examples: i. A shop keeper allowing a hawker to operate from the common pavement in front of his shop against a monthly payment by the hawker. ii. An RWA tolerating the use of loud speakers for early morning prayer by a school located in the colony subject to the school paying an agreed sum to the RWA as compensation. c) The phrase "Agreeing to the obligation to do an act" is illu....
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.... of the contract. Such compensation specified in a written contract for breach of non-performance of the contract or parties of the Circular No. 178/10/2022-GST contract is referred to as liquidated damages. Black's Law Dictionary defines 'Liquidated Damages' as cash compensation agreed to by a signed, written contract for breach of contract, payable to the aggrieved party. Para-7.1.2: Section 74 of the Contract Act, 1972 provides that when a contract is broken, if a sum has been named or a penalty stipulated in the contract as the amount or penalty to be paid in case of breach, the aggrieved party shall be entitled to receive reasonable compensation not exceeding the amount so named or the penalty so stipulated. Para-7.1.3: It is argued that performance is the essence of a contract. Liquidated damages cannot be said to be a consideration received for tolerating the breach or non-performance of contract. They are rather payments for not tolerating the breach of contract. Payment of liquidated damages is stipulated in a contract to ensure performance and to deter non-performance, unsatisfactory performance or delayed performance. Liquidated damages are a measure of....
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....Such payments being merely flow of money are not a consideration for any supply and are not taxable. The key in such cases is to consider whether the impugned payments constitute consideration for another independent contract envisaging tolerating an act or situation or refraining from doing any act or situation or simply doing an act. If the answer is yes, then it constitutes a 'supply' within the meaning of the Act, otherwise it is not a "supply". Para-7.1.6: If a payment constitutes a consideration for a supply, then it is taxable irrespective of by what name it is called; it must be remembered that a "consideration" cannot be considered de hors an agreement/contract between two persons wherein one person does something for another and that other pays the first in return. If the payment is merely an event in the course of the performance of the agreement and it does not represent the 'object', as such, of the contract then it cannot be considered 'consideration'. For example, a contract may provide that payment by the recipient of goods or services shall be made before a certain date and failure to make payment by the due date shall attract late fee or penalty. A contra....
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....ed with the principal supply such as of electricity, water, telecommunication, cooking gas, insurance etc. it should be assessed at the same rate as the principal supply. However, the same cannot be said of cheque dishonor fine or penalty as discussed in the preceding paragraphs. Para 11.5 However, as discussed above, forfeiture of earnest money by a seller in case of breach of 'an agreement to sell' an immovable property by the buyer or such forfeiture by Government or local authority in the event of a successful bidder failing to act after winning the bid for allotment of natural resources, is a mere flow of money, as the buyer or the successful bidder does not get anything in return for such forfeiture of earnest money. Forfeiture of earnest money is stipulated in such cases not as a consideration for tolerating the breach of contract but as a compensation for the losses suffered and as a penalty for discouraging the non-serious buyers or bidders. Such payments being merely flow of money are not a consideration for any supply and are not taxable. Perusal of the above clauses of the above circular will reveal the situation, conditions and legal premises when the consi....
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....ere that the supply/work was completed during Pre-GST period. However though the execution of the contract was over in Pre-GST period, the Arbitration Award was announced only in the GST period. Accordingly the award/amount received under the said arbitration is also examined in terms of transitional provisions provided under CGST Act, 2017.. 9.11 The relevant provisions are as follows:- Section 142(10): Save as otherwise provided in this Chapter, the goods or services or both supplied on or after the appointed day in pursuance of a contract entered into prior to the appointed day shall be liable to tax under the provisions of this Act. Section 142(11) (a) notwithstanding anything contained in section 12, no tax shall be payable on goods under this Act to the extent the tax was leviable on the said goods under the Value Added Tax Act of the State; (b) notwithstanding anything contained in section 13, no tax shall be payable on services under this Act to the extent the tax was leviable on the said services under Chapter V of the Finance Act, 1994 (32 of 1994); (c) where tax was paid on any supply both under the Value Added Tax Act and under Cha....
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...., a works contract service, then there will be a tax to the extent of supplies made under the GST regime, though the contract is entered prior to the GST regime. If the taxpayer has paid tax on such supplies (that are yet to be provided and provided in GST regime), he can claim the credit of such taxes. • As to the receipt of the award amount during GST regime, would create any issue under the provisions of CGST Act is to be now analysed. This also, in our view, should not create any issues, especially, when the provisions of Section 142(11)(b) use the expression 'notwithstanding anything contained in Section 13'. In other words, the receipt of payment may have created any issue in other situations, since the receipt also triggers the time of supply (that is time when tax is to be paid). However, since the provisions of Section 142(11)(b) in clear terms state that there cannot be any tax under the provisions of CGST Act, notwithstanding anything contained in Section 13, the receipt alone cannot trigger any tax under CGST Act. • As per Section 142(2)(a) of CGST/TGST Act' 2017 "where, in pursuance of a contract entered into prior to the appointed day, the pr....