TaxTMI 
TaxTMI 
2024 (7) TMI 155
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....ly) 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 opts for tendering process and enters into contract agreement with the successful bidders. The Applicant submits ....
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....fied 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 applicant is under State jurisdiction i.e, Special circle, Vijayawada Division. Accordingly, the application has been forwarded to the jurisdictional officer and a copy marked to the Centr....
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....ssue 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 the Department. In the case of GE T & D India Ltd. v. Deputy Commissioner of Central Excise, Chennai reported in 2020 (35) G.S.T.L. 89 (Mad.) held that notice pay is not taxable under service tax as ....
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....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 collected under the nomenclature of penalty cannot be subjected to the levy of GST. 6. Personal Hearing: The proceedings of Personal Hearing was conducted on 02.04.2024, for which the authorized representative, Sri R. Narasimha Murthy, Advocate and reiterated the submiss....
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.... 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 exceeds or falls short of the actual damages." * APPLICABILITY OF GST ON LIQUIDATED DAMAGES As per Section 7 (1A) of the CGST Act, scope of supply includes activities or transactions which constitute a supply under Section 7 (1) of the CGST Act, as referred to in Schedule II of the CGST Act. Paragraph 5 of Schedule II of ....
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.... 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, which may be recovered in the courts by any person who has suffered loss, detriment, or injury, whether to his person, property, or rights, through the unlawful act or omission or negligence of another." Indian Contract Act clearly provides for compensation for loss or damage caused by breach of contract to the affected party. Such damages may be a pre-estimated damage which the parties agree while making the contract or may be left ....
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....ctionary (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 doing a particular act for which he receives payment. For example: The retailers enter into agreement with the companies that they will sell the cold drink of particular brand of the Company, and he will not sell the cold drink of other company. In such case, retailers agree to act in a particular manner for which he is paid the amount. Since supply is undertaken for a consideration, one may refer to the definition of 'Consideration' which in relation to supply of goods or services includes: "(a) any payment made or to be made, wh....
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....ame 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 arise from an obligation on part of any of the parties. Hence, the same can be considered as the payments for a service." Damages are to compensate for disruption of a service and towards non-performance of the service. They should be viewed as alternative mode of performance and accordingly, should be subject to tax. The empowerment to levy liquidated damages is for the reason that there had been a delay and the same would be tolerated, but for a price or damages. The income though presented in the form of a deduction from the payments to be made to the contrac....
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.... 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 customer nor the appellant. There is a clear mathematical formula as to calculation of such amount and the conditions/scenarios contingent upon which the amounts are payable are clearly narrated in the agreement itself. It is simply inconceivable that any prudent business person will pay amounts for no merit and benefit. It is certain that the customer is paying the said amounts only for certain advantage derived or to ward-off any disadvantage incurred. Hence it is only in response to something done by the applicant. It is inconsequential whether the payment is for tolerating the mistake or not-tolerating. The cir....