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2023 (6) TMI 1229

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.... 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 (4) years upto 2017. The execution of the projec....

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....ue 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 Fabrication Unit 1,2,3-Cost Impact due to Increase in Inch Dia BOQ 68,19,469.00 6 Fabrication Unit 1,2,3- Cost Impact of Additional I....

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....ng 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 GST at the hands of the applicant. Summary of Award passed by the Tribunal as Compensation S.No Particulars Amount 1. Liquidated damages due to delay on the part of the Applicant was allowed based on the Claims Submitted by the Claimant 21,66,92,163 2. ....

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....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 compliance with the arbitral award. 4.2 Company Background: TPSC (INDIA) PRIVATE LIMITED (CIN: U29219TG1998PTC030591) with a registered address at A-1 Module, D - Quadrant, 2nd Floor, Cyber Towers, HITEC City, Madhapur, Hyderabad, Telangana - 500 081, INDIA and hereinafter briefly referred to as Applicant herein. The ....

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....ar 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 higher quantum of work. This work was later entrusted to other suppliers. Aggrieved by reducing the quantum of work DGAL issued a notice for arbitration for compensation. The arbitration tribunal awarded a compensation of Rs. 42.45 Cr. against which the applicant has preferred an appeal under Section 34 of Arbitration and Conciliation Act, 1996 before the Principal Special Court. During the pendency of this ....

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.... 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 page No. 37 of the minutes. The said circular was notified vide Circular No. 178/10/2022-GST, dated: 03-08-2022. This circular was ratified in the 48th GST Council Meeting held on 17-12-2022. This circular discusses the taxability of an activity on a transaction as supply of service of agreeing to the obligations to refrain from an act or to tolerate an act or a situation, or to do an act under the GST. This includes applicability ....

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....gation 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 the employment before the agreed period; vi. Late payment charges collected by any service provider for late payment of bills; vii. Fixed charges collected by a power generating company from State Electricity Boards (SEBs) or by SEBs/DISCOMs from individual customer for supply of electricity; viii. Cancellation charges recovered by railways for cancellation of tickets, etc. While discussing the aspect of "Liquidated Damages" it is observed in the circular that: Para-7.1: Breach or non-performance of contract by one party results....

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....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. Para-7.1.5: Examples of such cases are damages resulting from damage to property, negligence, piracy, unauthorized use of trade name, copyright, etc. Other examples that may be covered here are the penalty stipulated in a contract for delayed construction of houses. It is a penalty paid by the builder to the buyers to compensate them for the loss that they suffer due to such delayed construction and not for getting anything in return from the buyers. Similarly, forfeiture of earnest money by a seller in....

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....he 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 or penalty, are actually payments that amount to consideration for supply, and are subject to GST, in cases where such supply is taxable. Since these supplies are ancillary to the principal supply for which the contract is signed, they shall be eligible to be assessed as the principal supply, as discussed in detail in the later paragraphs. Naturally, such payments will not be taxable if the principal supply is exempt. A reading of the above clauses of the above circular will reveal the situation, conditions and legal premises when the consideration for tolerating a breach of contract becomes taxable under ....

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....hedule-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. Whether the liquidated damages, without any supply of materials and labor be assessed to GST under GST Act, 2017? No. Please see discussion above 3. The mutually agreed and settled amount, based on arbitral award, in the nature of compensation, payable for delay in completion of the contract and agreed to be payable by the Applicant to DGAL without any supply of goods or services, is liable to be taxed under GST? No. Please see discussion above 4. Whether DGAL is eligible to claim ITC on the GST amount if any levied on the mutually agreed arbitral award amount received from the Applicant? Does not arise 5. Whether there is any taxability under GST on Interest payable on the l....

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....ment 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 declared to be a supply in para 5 (e) of Schedule-I of CGST Act. Various transactions have been sought to be classified by the tax authorities under the said description and in many cases this has led to disputes and litigation. The issues arising out of taxation of activities by 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 ....

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....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 illustrated 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 ....

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....ch 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 loss 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 aggrieve....

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....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 contract for 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 ....

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....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 consideration for tolerating a breach of contract becomes taxable under GST. In view of the above prescriptions in the circular the nature of transaction which took place between the applicant and his sub-contractor is briefed as follows: 1. The applicant has not fulfilled his promise to award the total work to the sub-contractor as stipulated in their work order. 2. There is a breach of contract by the applicant 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. It is not taxable if the liquidated damages are paid only to compensate injury or loss of damage suffered by the aggrieved party due to breach of the contract. 5. Against the Arbitral Award, the Applicant preferred an appeal u/s. 34 of Section 34 of the Arbitration and Conciliation Act, 199....

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....x 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 Chapter V of the Finance Act, 1994 (32 of 1994), tax shall be leviable under this Act and the taxable person shall be entitled to take credit of value added tax or service tax paid under the existing law to the extent of supplies made after the appointed day and such credit shall be calculated in such manner as may be prescribed. Section 142(2)(a): where, in pursuance of a contract entered into prior to the appointed day, the price of any goods or services or both is revised upwards on or after the appointed day, the registered person who had removed or provided such goods or services or both shall issue to the recipient a supplementary invoice or debit note, containing such particulars as may be prescribed, within thirty days of such price revision and for the purposes of this Act such supplementary invoice or debit note shall be deemed to have been issued in respect of an outward supply made under this Act; 9.12 In view of the above facts and provisions of the Act we summarize as follows: In light of Sec....

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....ion 142(2)(a) of CGST/TGST Act' 2017 "where, in pursuance of a contract entered into prior to the appointed day, the price of any goods or services or both is revised upwards on or after the appointed day, the registered person who had removed or provided such goods or services or both shall issue to the recipient a supplementary invoice or debit note, containing such particulars as may be prescribed, within thirty days of such price revision and for the purposes of this Act such supplementary invoice or debit note shall be deemed to have been issued in respect of an outward supply made under this Act;" Therefore GST is applicable on the additional consideration given after 1/7/2017 if the same happens due to upward revision of price as allowed in the contract agreement between the contracting parties. But there was no upward revision of price in the present issue where the supplier/claimant had to obtain the additional payment by way of compensation through award by Hon'ble Tribunal for Arbitration. * Interest has to be assessed at the same rate as the principal supply as per the provisions of Section 15 of CGST/TGST Act' 2017. Section 15 of CGST/TGST Act' 2017 states that value....