TaxTMI 
TaxTMI 
2025 (6) TMI 912
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....osit or Earnest Money Deposit in case of refusal to accept the work order despite of being Lowest One (L1) or failure of performance by the supplier or contractor. d. Old and unclaimed Creditors balance written back to income A/c after Three (03) Years from the date of completion of the contract. e. Write back of Old and unclaimed Earnest Money Deposit (EMD) / Security Deposit (SD) to income A/c after Three (03) Years from the date of the completion of the guarantee period as per contract. f. Penalty or charges applied for violation of conditions of contract. 2. If the above are decided as "supply", then: a. What shall be the time of supply for each of the above items? b. What shall be the HSN/SAC Code and rate of GST for such "supplies"? c. Whether ITC can be utilized against payment of GST on such supplies? d. What shall be the value of supply? That the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under t....
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....completion of the guarantee period as per contract. f. The company charges a penalty for violation of terms and conditions of the contract. In the above scenarios, the company wishes to know, if GST is applicable on such cases. If applicable, what would be the rate of GST and time of supply in such cases. 2. STATEMENT CONTAINING APPLICANT'S INTERPRETATION OF LAW The company has referred following circular and advance rulings to understand the taxability in such cases: 2.1 Circular no. 178/10/2022-GST dated 3rd August, 2022 The said circular was issued to cover issues of taxability of various issues such as: a. Liquidated Damages/Penalty recovered for breach of contract. b. Penalty imposed for violation of laws. After examining the circular, the company is of the view that the cases mentioned at para 1.2 above are not taxable under GST. 2.2 Advance Ruling by Haryana Authority for Advance Ruling in the case of M/s. Rites Limited (Advance Ruling no. HR/ARL/19/2022-23 dated 18/10/2022) The company has also referred this advance ruling by Haryana AAR in the case of M/s. Rites Limited in which the authority decided that the following act....
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....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 such breach. Such payments do not constitute consideration for a supply and are not taxable. Further, Haryana Authority for Advance Ruling No. HR/ARL/19/2022-23 dated 18.10.2022 held that GST is not applicable on Liquidated Damages for non-performance/short-performance/delay in performance. In view of above submission, it is requested to clarify the applicability of GST Liquidated Damages/Penalty for breach of Contract and Violation of Contractual Terms and issue Advance Ruling accordingly. 3. CONTENTION - AS PER THE JURISDICTIONAL OFFICER: The A....
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....does not constitute a supply since it lacks the element of consideration for any service rendered. Accordingly, such transactions are not taxable under GST. (f) Penalty or Charges Applied for Violation of Conditions of Contract As clarified in Circular No. 178/10/2022-GST, penalties imposed for breach of contractual terms are taxable, as they constitute consideration for tolerating an act. These will be covered under Section 7 (1) (a) read with Schedule II, Entry 5 (e) of the CGST Act. 3.2 If the above transactions are deemed as "Supply", then: (a) Time of Supply for Each of the Above Transactions As per Section 13 of the CGST Act, 2017, the time of supply shall be determined as follows: • For Liquidated Damages /Penalty (Points a, b, f): The time of supply shall be the earlier of the date of receipt of payment or the date of issuance of an invoice or any other document evidencing the transaction. • For Forfeited Deposits and Write-Backs (Points c, d, e): Since these transactions do not qualify as a "supply," no GST liability arises. (b) HSN/SAC Code and Rate of GST: Pursuant to Circular No. 178/10/2022-GST: ....
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....the applicant and the jurisdictional officer. 5.1 Maharashtra State Electricity Transmission Company Limited (hereinafter referred to as 'MSETCL' or 'the Company' or 'the applicant' is a leading state transmission utility in the country. MSETCL owns and operates largest Electricity Transmission System in the state. The Company is a wholly owned corporate entity of Maharashtra Government incorporated on May 31, 2005 after restructuring and trifurcation of the erstwhile Maharashtra State Electricity Board. 5.2 The company is in the business of Transmission of Electricity. Services by way of transmission of electricity by an electricity transmission utility is exempt from GST under Notification No. 12/2017-CT (R), SI. No. 25. Hence, the major activities of the company are exempt from GST. 5.3 The applicant, is seeking an advance ruling in respect of the various questions. Let us discuss these issues one by one. 1. Whether the following can be termed as "supply"? a. Liquidated Damages (LD)/Penalty recovered from contractors/suppliers for breach of contract:- The company engages services of various contractors to construct EHV Substations, EHV Lines etc. As per the ....
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....m 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 case of breach of 'an agreement to sell' an immovable property by the buyer or 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. The key in such cases is to consider whether the impugned payme....
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....ch 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. 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". The provisions for Forfeiture of Security Deposit or Earnest Money Deposit in the event of non-acceptance of the work order despite the bid being Lowest One (L1) or failure of performance by the supplier or contractor are in place to discourage non-serious supplier/contractor. The said amounts are recovered by the MSETCL not as a consideration for tolerating the act but as penalties for dissuading the non-serious supplier/ contractor and to discourage and deter such a situation. Therefore, such amounts recovered by the MSETCL are not taxable as conside....
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....ne without such a relationship i.e., without the express or implied contractual reciprocity of a consideration would not be an 'activity for consideration'. The element of contractual relationship, where one supplies goods or services at the desire or another, is an essential element of supply. 5. The description of the declared service in question, namely, agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act in para 5 (e) of Schedule II of CGST Act is strikingly similar to the definition of contract in the Contract Act, 1872. The Contract Act defines 'Contract' as a set of promises, forming consideration for each other. 'Promise' has been defined as willingness of the 'promisor' to do or to abstain from doing anything. 'Consideration' has been defined in the Contract Act as what the 'promisee' does or abstains from doing for the promises made to him. 6. This goes to show that the service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is nothing but a contractual agreement. A contract to do something or to abstain from doing something cannot be said to ha....
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....or refraining from an act or for tolerating an act or situation. Payments such as liquidated damages for breach of contract, penalties under the mining act for excess stock found with the mining company, forfeiture of salary or payment of amount as per the employment bond for leaving the employment before the minimum agreed period, penalty for cheque dishonour etc. are not a consideration for tolerating an act or situation. They are rather amounts recovered for not tolerating an act or situation and to deter such acts; such amounts are for preventing breach of contract or non-performance and are thus mere 'events' in a contract. Further, such amounts do not constitute payment (or consideration) for tolerating an act, because there cannot be any contract: (a) for breach thereof, or (b) for holding more stock than permitted under the mining contract, or (c) for leaving the employment before the agreed minimum period or (d) for doing something leading to the dishonour of a cheque. As has already been stated, unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such a....
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....ach. 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-fulfilment of the promise by the other party. 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 such breach. Such payments do not constitute consideration for a supply and are not taxable. 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 ....
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....act 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 pre-payment 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 pri....