The Telangana Authority of Advance Ruling (AAR) in its recent ruling in the case of M/s. The Singareni Collieries Company Limited, has ruled that the liquidated damages and penalties received due to breach of conditions of the contract by the contractor are exigible to GST.
Facts of the Case:
The applicant, M/s. Singareni Collieries Company Limited, is entering into contracts with a host of vendors and suppliers for the extraction of coal. The applicant is recovering liquidated damages for lapses on the part of the supplier of service.
The applicant demanded penalties and liquidated damages from the contractors for lapses in the performance of the contract, including delays, underperformance with respect to targeted extraction, and breach of terms of the contract.
Issue on which ruling is sought:
The applicant sought an advance ruling on the issue of whether the liquidated damages/penalties received by the applicant can be said to be for any ‘supply’ under the CGST Act, 2017, attracting the levy of GST or should be treated as a price adjustment to the main supply.
Order of AAR on GST on Liquidated Damages : Deliberation and Ruling
The AAR observed that a combined reading of the provisions (1) & (3) of Sec 55 of the Indian Contract Act, 1872 reveals that a failure to perform the contract at the agreed time renders it voidable at the option of the opposite party and alternatively such party can recover compensation for such loss occasioned by non-performance.
AAR noted that Liquidated damages are claimed by the applicant from the contractor due to the delay in performance of the contract, beyond the date prescribed in such contract by the contractor. Similarly, penalties are fixed for breach of the provisions of the contract. These amounts are consideration for tolerating an act or a situation arising out of the contractual obligation.
The entry in 5(e) of Schedule II to the CGST Act classifies this act of forbearance as follows:
5(e): Agreeing to the obligation to refrain from an act, or tolerate an act, or a situation, or to do an act.
AAR also stated that Section 2(31)(b) of the CGST Act mentions that consideration in relation to the supply of goods or services or both includes the monetary value of an act of forbearance. Therefore such a toleration of an act or a situation under an agreement constitutes a supply of service and the consideration or monetary value is exigible to tax.
In view of the above deliberations, Telangana AAR consisting of members K.V. Kasi Visweswara Rao and B. Ragu Kiran held that Liquidated damages and penalties received by the applicant due to breach of conditions of the contract from the contractor are exigible to tax under CGST and SGST Acts.
Further AAR observed that the consideration received for such forbearance is taxable under CGST and SGST at the rate of 9% each under the chapter head 9997 at serial no. 35 of Notification No.11/2017-Central/State tax rate.
READ / DOWNLOAD ORDER:
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Frah Saeed is a law graduate specializing in the core field of indirect taxes and is the Co-founder of taxwallah.com. She has authored many publications on GST and is into full-time consultancy on GST to big corporates. She as a part of taxwallah.com heads a team comprising of Chartered Accountants and Advocates and plays a key role in our mission to disseminate GST knowledge to all.
