TaxTMI 
TaxTMI 
2024 (7) TMI 155
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....red to CGST Act and APGST Act respectively) by M/s. Transmission Corporation Of Andhra Pradesh Limited (hereinafter referred to as applicant), registered under the AP Goods & Services Tax Act, 2017. 3. Brief Facts of the case: 1. M/s. Transmission Corporation Of Andhra Pradesh Limited, (Hereinafter referred to as "applicant") a Licensed Distribution Company for supply of electricity. The Applicant enters into multiple contracts and agreements with Suppliers (contractors) in order to construct and maintain the Transmission Network in the State of Andhra Pradesh in line with demand growth and general expansion in an efficient manner so as to ensure highest availability of electricity at lowest operational costs. 2. The Applicant mainly deals in Goods and Services, which include: • Electrical energy • Various Wastes and Scraps. • Electrical transformers, static converters (for example, rectifiers) and inductors - other transformers: having a power handling capacity exceeding 500 KVA. • Consulting Engineer • Erection, commissioning and installation, etc.. • Works Contract Services 3. The Applicant....
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....ject to Force Majeure Clause as given at clause 11, if the Supplier fails to deliver any or all lf the Materials or to perform the Services within the period (s) specified in the Contract, the Purchaser will, without prejudice to its other remedies under the contract, deduct from the Contract Price, as liquidated damages, a sum equivalent to 0.5% per week on the undelivered portion subject to a maximum of 5% of the total value of the contract. Once the maximum is reached the Purchaser may consider termination of the contract. 6. The Applicant is seeking an Advance Rulings with regard to application of GST on the penalties, i.e., liquidated damages collected by them from the Contractors/Suppliers on account of breach of contract. 4. Questions raised before the authority: The applicant sought advance ruling on the following: 1. Whether the amount recovered by the Applicant from the Suppliers or the Contractors as part of breach of contract or for Non-performance of Contract within the stipulated period, as represented by the penalty, i.e., Liquidated Damages is leviable to GST ? On Verification of basic information of the applicant, it is observed that the applic....
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....uded "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" as taxable service, which is identical to the service specified under GST era. The issue of subjecting the liquidated damages to service tax levy was subject to judicial scrutiny and in number of judgements including in the case of Neyveli Lignite Corporation. Ltd. v. CCE & Service Tax reported in 2021 (53) G.S.T.L. 401 (Tri. - Chennai; Paradip Port Trust Vs CCGST & EXCISE, BHUBANESWAR reported in 2022 (62) G.S.T.L. 186 (Tri. - Kolkata), it was held that the receipt of liquidated damages on the grounds of breach of contract or non-performance by the defaulting party cannot be subjected to service tax as the said liquidated damage received is not consideration for either tolerating an act or refraining from action. F. Under GST Enactments, Entry 5(e) in Schedule II of CGST Act, 2017 classified transactions viz., "agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act" would constitute supply of service. Consequent upon the implementation of the GST law, the matter of levy of GST on liquidated damages has been agitated by t....
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....an act or situation and to deter such acts, i.e., such amounts are for preventing breach of contract or non-performance and thus, the said activity does not fall within the mischief of Entry 5(e) in Schedule II and thus, no GST liability arises on the said liquidated damages. K. The Applicant further submits that in large number of decisions rendered on the subject matter of liquidated damages, it has been held that collection of liquidated damages does not indicate tolerance of act or abstain from action. Some of such decisions are cited hereunder for ready reference: a. Rajcomp Info Services Ltd. Vs Principal Commissioner, Cgst & C. Ex., Jaipur-I Reported In 2023 (73) G.S.T.L. 237 (Tri. - Del.) b. South Eastern Coalfields Ltd. Vs Commr. Of C. Ex. & S.T., Raipur Reported In 2021 (55) G.S.T.L. 549 (Tri. - Del.) c. Madhya Pradesh Power Transmission Co. Ltd. Vs Principal Commissioner Of Cgst & C. Ex., Bhopal Reported In 2023 (385) E.L.T. 152 (Tri. - Del.) L. Going by the ratio of above decisions read with the clarification issued by the CBIC vide Circular No. 178/10/2022 - GST dated 03rd August 2022, the Applicant contends that the liquidated damages ....
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....e Contract Act provide for Damages and Liquidated Damages. Section 73 of the Contract Act provides for compensation for loss or damage caused by breach of contract. It states that a party who suffers by the breach of contract is entitled to receive compensation for any loss or damage naturally arising in the usual course of things from such breach, from the party who breaches the contract. Section 74 of the Contract Act deals with compensation for breach of contract where penalty is stipulated. It states that in case of breach of a contract, if the contract stipulates the amount to be paid in case of such breach or stipulates any penalty, the aggrieved party is entitled to receive from the defaulting party reasonable compensation to the extent stipulated in the contract, without proving actual damage or loss caused to him. The term 'Liquidated Damages' is defined in Black's Law Dictionary as "an amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches. If the parties to a contract have properly agreed on liquidated damages, the sum fixed is the measure of damages for a breach, whether it ....
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....eal Pharmaceuticals (P.) Ltd. (GUJ/GAAR/R/51/2020 dated 30.07.2020) - Gujarat AAR held that GST is applicable on compensation paid by an employee to the employer for not serving the stipulated notice period. M/S TP Ajmer Distribution Limited [(2019) 103 taxmann.com 227 (AAAR-RAJASTHAN)] - Rajasthan Appellate AAR held that GST is applicable on fees paid in lieu of dishonoured cheque. M/S Bajaj Finance Limited (MAH/AAAR/SS-RJ/24/2018-19) - Maharashtra AAR held that GST is applicable on compensation paid by the owner to tenant for temporary relocation. In common parlance of trade, before executing any transaction, parties enter into a legal contract wherein the rights and obligations of both the parties are clearly laid down. The basic structure of the contract is governed by the Indian Contract Act, 1872 which highlights the provisions relating to performance, non performance and the breach of contract. Going by the literal understanding of the word 'damage', it is a remedy in the form of monetary reward paid to a claimant as compensation to loss or injury. Black's Law Dictionary defines damage as under: "A pecuniary compensation or indemnity, whic....
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....GST Act, Refrain from act: • An agreement for non compete with each other. For example: Sale of brand name by X to Y where X agree that he will not sell similar product under any other brand in the market for a specified number of years. In this case, as per the contract, X specifically refrain himself from acting (selling) the product. • Tolerate an act or situation : The person or institution may agree to tolerate an act of others. Toleration is defined in Black's Law Dictionary (Tenth Edition) as "The act or practice of permitting or enduring something not wholly approved of; the act or practice of allowing something in a way that does not hinder." For example: In a society, for work to be permitted to be carried in the lift during a particular time etc., society charges the person carrying out the repair for the inconvenience caused to other members. This, in commercial term, is known as "hardship amount". In such situation, the members agree to tolerate the act carried out by other person. This benefits the society in the form of certain considerations. • To do an act: Service provider may sometimes agree for....
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....ear. It can be established that a specific amount has been agreed upon as a quid pro quo for undertaking any particular activity or otherwise by a partner, it can be assumed that there was a consideration agreed upon for any specific activity so as to constitute a service." Given aforementioned legal provisions and judicial precedents, it is evident that it is a well settled law that receipt of money along with activity would tantamount to consideration and consideration is flowing at the desire of the party for undertaking a particular activity, or otherwise same would be qualified as consideration. There is a marked distinction between 'conditions to a contract' and 'consideration for the contract'. A service recipient may be required to fulfil certain conditions contained in the contract but that would mean that this value would form part of the value of taxable services provided. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same can be said to be towards 'toleration' of the defaulting party. Liquidated damages were not received to make good the losses or injuries from 'unintended' events and does a....
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.... 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 person but shall not include any subsidy given by the Central Government or a State Government; (b) the monetary value of any act or forbearance, 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 person but shall not include any subsidy given by the Central Government or a State Government: Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply; As per the above definition, the meaning of the word consideration is very broad. It includes any payment made or to be made, whether in money or otherwise, a) in respect of b) in response to c) for inducement of supply of goods or services. In the present case the customers are paying certain amount to the applicant. The amount so paid is neither ad-hoc, unconditional nor at the whims of any....