Recently, Telangana State Appellate Authority for Advance Ruling in Order-in-Appeal No. AAAR/10/2022 dated 19.10.2022 has held that liquidated damages recoverable by the applicant from Bi-electric India on account of delay in commissioning, does not qualify as a ‘supply’, thereby GST shall not be payable.
In this case, Telangana Appellate Authority of Advance Ruling (AAAR) has made following observations:
- There is no contractual reciprocity or concurrence to assume an obligation to refrain from an act or tolerate an act between the applicant and the contractor, which are indispensable and essential for a transaction to qualify as a ‘supply of service’.
- The liquidated damages preferred by the applicant are not in lieu of any activity/obligation agreed to be performed at the behest of the service recipient, but on account of breach of contract (delay in compensation of project timelines).
- The applicant case does not get covered under clause 5(e) of schedule II of the CGST Act,2017.
- Mere inclusion of specific clause for payment of damages should not change the nature of transaction to transform a lawful right into an ‘obligation to tolerate’.
- Recovery of liquidated damages by the recipient can be viewed as mere renegotiation of the price of the original contract and not a separate transaction.
- There is difference between term ‘condition to a contract’ and consideration to a contract’ merely because the service recipient has to fulfill the conditions attached to the contract would not mean that the value would form part of the value of taxable services that are provided.
- The recovery of liquidated damages is in the nature of ‘actionable claim’, outside the ambit of GST.
The CBIC has issued Circular No. 178/10/2022-GSTdated:3.8.2022 related to GST applicability on liquidated damages. As per para 7.1.6 of the said circular, it was, interalia, observed that when principal supply is exempt, the ancillary activities to such principal supply would not get attracted to GST. Since in the present case, the applicant’s principal supply is production and distribution of electricity, which is exempt from payment of GST, the liquidated damages received by the applicant towards such supply need to be considered as flow of money without having implication of GST payment.
As per the circular 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 do or abstain from doing 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.
On the basis of above observations, Telangana State Appellate Authority for Advance Ruling has held that liquidated damages recoverable by the applicant from Bi-electric India on account of delay in commissioning, does not qualify as a ‘supply’, accordingly GST shall not be payable.
Applicant’s Name: M/s Achampet Solar Private Limited