2018 (9) TMI 1185 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA – 2018 (17) G. S. T. L. 451 (App. A. A. R. – GST) – Levy of GST – liquidated damages for delay in erection, testing and commissioning – independent supply or not? – construction of new power plants or renovation of old plants or for operation of maintenance activities, etc. – whether the levy of liquidated damages would be supply of services by the appellant u/s. 7(1)(d) of the CGST Act, 2017 as referred at Sr.No. 5(e) in Schedule 2 to the CGST Act? – challenge to Advance Ruling decision.
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Held that:- Section 3 of the contract the specific clause – 7 provides for the levy of liquidated damages if the project completion is delayed beyond the scheduled date. This clause leads us to the conclusion that the appellant is in a contractual agreement with the contractor to impose levy of liquidated damages and to accept the amount of liquidated damages in case of the completion of the project beyond the scheduled date
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ties agreed that such will not be the effect in case of delay. The appellant agrees to tolerate the delay done by the contractor in return for payment of liquidated damages. The appellant could have opted for harsh measures like termination of contract but instead it chooses to tolerate the delay in return of payment of money – the said act falls under clause 5(e) of Schedule-II of the Act.
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The consideration remains unchanged and how the amount is recovered would not change the nature of the supply. Also, neither the definition of 'contract price' nor 'contract value' as given in the Agreement refers to the contingency of liquidated damages. Contract price is defined in clause 3.13 (A) as the total lump sum price plus the price variations. This is an independent clause having no relation to the eventuality of liquidated damages, for which as we have said above, a separate clause has been given. The fact that the liquidated damages are recovered from the bill is only a method of p
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en filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as the CGST Act and MGST Act ] by Maharashtra State Power Generation Company Limited (herein after referred to as the Appellant ) against the Advance Ruling No. GST-ARA-15/2017-18/B-30 dated 08.05.2018 = 2018 (5) TMI 1332 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRA BRIEF FACTS OF THE CASE A. The appellant is engaged in generation of power with object of making power available on affordable rates. B. The appellant enters into contract with various contractors for the purpose of construction of new power plants or renovation of old plants or for operation of maintenance activities, etc. For example, the Appellant has awarded the contract to M/S. BHARAT HEAVY ELECTRICALS LIMITED for the purpose of erection, testing & commissioning of main plant package. C. As per the contract, the contractor is required to commence the trial operatio
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vy of Liquidated Damages. 7.3 The payment by Contractor or deduction by Owner of any sums under the provision of this clause shall not relieve the Contractor from his obligations to complete the works or from his other obligations under the contract. 7.4 The liability of payment of these liquidated damages by the Contractor will be established once the delay in successful completion of trial operation is established on the part of the Contractor and the Owner shall not be required to take any further action like arbitration or approaching the COUR of Law for levying the Liquidated damages. 7.5 Since the Liquidated damages are limited and the same cannot compensate the consequential loss of the Owner due to delay on the part of the Contractor, the Owner reserves the right to get the work done at the risk and cost of the Contractor, in case delay on the part of the Contractor has been established after giving notice to the Contractor, as may be deemed fit in the interest of completing th
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price of both the units. Similar clauses are there in supply of balance of plant package, erection testing and commissioning of balance of plant package, supply of main plant package, civil and structural works of balance of plant package and various other contracts entered into with various parties. The Appellant enters into contract with various suppliers which inter-alia includes: BHARAT HEAVY ELECTRICALS LIMITED. BGR ENERGY SYSTEMS LIMITED. TATA PROJECT LIMITED. LANCO INFRATECH LIMITED The contract is more or less similarly worded. Each such contract has time line for completion of the project and levy of Liquidated Damages, if not completed within time. The specimen clause reproduced above represents the manner and purpose of levying the Liquidated Damages for all the contracts. D. The appellant filed the Advance ruling application dated 30.12.2017 under section 97 of the CGST Act, 2017 before the advance ruling authority. E. The appellant also submitted the additional submission
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entire contract value, the retention from each bill received after scheduled completion period is to be made at accelerated rate so as to reach the intended amount based upon the entire contract value. The contractor submits Running Account Bills during construction period and the same are passed in the manner specified above. After completion of the contract, the reasons for delay are assessed. If it is assessed that the delay in completion of contract was on the part of the contractor, then the amount of LD is finalised. The amount of LD so determined and kept as retention is transferred to LD Account and LD amount is then transferred to project cost and as such project cost is reduced to that extent. This explains the manner in which the recovery of liquidated damages is made by the Appellant. F. The advance ruling authority, vide order No. GST-ARA-15/2017/B-30 dated 08.05.2018, held that the GST will be levied on the liquidated damages, treating it as independent supply and rejecte
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Dunedine in his list of rules in Duniop Pneumatice Tyre Co. v. New Garage and Motor Co. since when, as part of these rules , it has often been resorted to. The intention behind such a provision is generally to avoid, wherever the amount of the damage which would probably result from breach is likely to be uncertain, the difficulty of proving the extent of the actual damage at the trial of the action for breach. 443. A stipulated sum will, however, be classed as a penalty where it is in the nature of a threat fixed in terrorem of the other party. This is again the modern phrase, also to be found in Clydebank Engineering Co. v. Don Jose Ramos Yzquierdo Y Castaneda, this time in Lord Halsbury s speech, and also incorporated by Lord Dunedin in his list of rules in Dunlop Pneumatic Tyre Cop. v. New Garage and Motor Co. The intention behind such a provision is generally to prevent a breach of the contract by establishing a greater incentive for its performance. The onus, however, of proving
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y supply of service but paid for the compensation of the loss. This can be explained by an example. Say on a road a driver damages a car driven by Mr. X. The driver agrees to pay compensation for the damages to Mr. X. The amount is paid to compensate repair charges to the car of Mr. X. It therefore, cannot be said that Mr. X has supplied the services of toleration of an act to the driver. Rather, it is feared that the imposition of tax on such amount may not only be incorrect but also ultra vires. 2. Any supply is a voluntary act: The GST is a contract base levy. The supplier agrees to supply the goods or services and the recipient agrees to pay the consideration. The supply made by the supplier is a voluntary act undertaken by him for making a supply. It is submitted that in the case of damages specified in the contract, the recipient has no option but to accept the amount for the loss caused to him. He does not intend that the supplier should delay. Since in this case, the recipient
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ope of such words. In 'Statutory Interpretation' Rupert Cross says : ……The draftsman must be taken to have inserted the general words in case something which ought to have been included among the specifically enumerated items had been omitted…… [page 116] The principle underlying this approach to statutory construction is that the subsequent general words were only intended to guard against some accidental omission in the objects of the kind mentioned earlier and were not intended to extent to objects of a wholly different kind. This is a presumption and operates unless there is some contrary indication. But the preceding words or expressions of restricted meaning must be susceptible of the import that they represent a class. If no class can be found, ejusdem-generis rule is not attracted and such broad construction as the subsequent words may admit will be favoured. As a learned another puts it: ……if a class can be found, but the specific words exhaust the class, t
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9;there is no room for the application of the ejus-dem-generis doctrine'. [p. 831] In S.S. Magnild (Owners) v. Macintyre Bros. & Co. [1920 (3) KB 321] Me Cardie J. said: So far as I can see the only test seems to be whether the specified things which precede the general words can be placed under some common category. By this I understand that the specified things must possess some common and dominant feature. In Tribhuban Parkash Nayyar v. Union of India [(1970) 2 SCR 732] = 1969 (10) TMI 66 – SUPREME COURT the Court said: …….This rule reflects an attempt to reconcile incompatibility between the specific and general words, in view of the other rules of interpretation, that all words in a statute are given effect if possible, that a statute is to be construed as a whole and that no words in a statute are presumed to be superfluous….. [p. 740] In U.P.S. C. Board v. Hari Shanker [A.I.R. 1979 SC 65] = 1978 (8) TMI 227 – SUPREME COURT it was observed : ……The true scope of
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means that, when two or more words which are susceptible of analogous meaning are coupled together they are understood to be used in their cognate sense. They take as it were their colour from each other, that is, the more general is restricted to a sense analogous to a less general. The same rule is thus interpreted in Words and Phrases (Vol. XIV, p. 207) : Associated words take their meaning from one another under the doctrine of noscitur a sociis, the philosophy of which is that the meaning of a doubtful word may be ascertained by reference to the meaning of words associated with it; such doctrine is broader than the maxim Ejusdem generis. In fact the latter maxim is only an illustration or specific application of the broader maxim noscitur a sociis . The argument is that certain essential features or attributes are invariably associated with the words business and trade as understood in the popular and conventional sense, and it is the colour of these attributes which is taken by t
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not have been intended in the context in which it has been used. The cases are too numerous to need discussion here. It should be sufficient to refer to one of them by way of illustration. In Rainbow Steels Ltd. v. C.S.T. (981-2 S.C.C. 141) = 1981 (1) TMI 213 – SUPREME COURT OF INDIA this Court had to understand the meaning of the word old' in the context of an entry in a taxing tariff which read thus : Old, discarded, unserviceable or absolete machinery, stores or vehicles including waste products Though the tariff item started with the use of the wide word old', the Court came to the conclusion that in order to fall within the expression old machinery' occurring in the entry, the machinery must be old machinery in the sense that it has become non-functional or non-usable . In other words, not the mere age of the machinery, which would be relevant in the wider sense, but the condition of the machinery analogous to that indicated by the words following it, was considered re
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frain or tolerate or to do an act. This act of provider benefits recipient. Therefore, recipient consumes the service and pays for the same. All the 3 situations can be explained by an example. (a) Refrain from Act – Very often, the parties enter into agreement for non-compete with each other. For example, in case of sale of brand name or on-going concern or dissolution of partnership etc. Say X person sell brand name B to Y. X may agree that he will not sell similar product under any other brand in the market for a specified number of years. X may be paid for refraining from selling similar products for specified number of years. In this case, as per the contract, X specifically refrain himself from acting (selling) the product B. Since agreement to refrain forms the contract between X and Y, refrainment of X will be taxable under this category. The refrainment of X for not selling the similar products benefits Y. (b) Tolerate the Act or Situation – Similarly, the person or institutio
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theatre cold drink with brand name of particular company is only sold. The retailers enter into agreement with the company like Pepsi, Coca Cola, Parle, etc. 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. 4.3 In all the above situation, there is specific agreement by the provider to carry out obligation specified in the contract. Therefore, this event is taxable. In the case of liquidated damages, there is no agreement to tolerate any situation or act. 5. Taxable supply arises on performance of activity 5.1 The section 7 defines 'supply' as follows: 7. (1) For the purposes of this Act, the expression supply includes (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the co
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y of services; or (b) a supply of services and not as a supply of goods. The performance of any action by the person is important to consider as supply. Further it provides that activities to be treated as supply of goods or supply of services as referred in schedule ll. It is submitted that in respect of services specified in clause 5 of schedule Il, the service provider must carry out the activity. The taxability arises when the provider of service carries out certain activity. The clause 5 of schedule Il specifies services in 6 different entries. It is submitted that in all the 6 entries presupposes performance of activity either active or passive. The taxable event occurs when provider performs the services. This will be evident from the following table that different activities must be carried out by the provider. Sr.No. Entry No. of Clause 5 of Schedule-II Description Nature of activity 1 (a) Renting Permitting use of immovable property 2 (b) Construction of complex Builder/devel
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eris, the activity specified in clause 5 of schedule Il will become taxable only when the provider of service has performed certain activity. It is submitted that all these clauses shall be interpreted based on the principle of interpretation known as ejusdem generis. The meaning takes colour from the preceding or succeeding clauses. The word tolerating an act is preceded by the word 'Refrain from an Act and succeeded by To do an Act . Both these pre-supposes the voluntary act from the supplier to perform in a particular manner. Therefore, acceptance of damage amounts for compensating the loss and it cannot be considered as a 'Tolerating of an Act' 6. The Liquidated damages cannot be treated as independent supply. Therefore, the impugned advance ruling passed by the authority needs to be set aside. 6.1 The liquidated damage is not an independent supply or divisible contract: The authority has held that the liquidated damage (LD) is an independent levy from the performance o
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y it, not necessarily dependent on each other nor intended by the parties so to be. The term divisible contract whose synonym is severable contract is also defined in the same dictionary on page no. 1373 as under: 6.3 Severable contract: – A contract which includes two or more promises which can be acted separately such that the failure to perform one promise does not necessarily put the promisor in breach of the entire contract. A contract, the nature and purpose of which is susceptible of division and apportionment, having two or more parts, in respect to matters and things contemplated and embraced by it, not necessarily dependent upon each other, or intended by parties as being dependent. Gross v. Maytex Knitting Mills of Cal., 116 C.A.2d 705, 254 P.2d 163, 167. see separability clause. When a contract is severable, a breach may be found to constitute a default as to only the specific part breached, thus relieving the defaulting party from liability for damages for breach of the en
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ontract as per which the contractor is required to perform the erection and commissioning of the plant within a given stipulated time period. This cannot be taken as two separate promises by the contract. The price of the contract is also dependant on the fact of performance of the activity by the contract within a given period of time. Thus, if the activity is not performed within the stipulated time, the contract price will definitely be varied. 6.6 Further, the basis on which the authority has contended that the claiming of LD is an independent activity is that the LD is not mentioned as an allowable deduction under the clauses of contract price and deduction. It is submitted that the agreement in clause 7.3 of the special conditions to the contract, reproduced in para 3 of the facts of the case above, clearly mentions that the liquidated damages can be in the form of deduction. Therefore, the contention of the authority that the contract clause relating to contract price and deduct
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5(2)(d) reads as follows: – (d) interest or late fee or penalty for delayed payment of any consideration for any supply; and It is evident from the same that the interest, late fees or penalty will be added to the consideration of the original supply. They will not be considered as a separate supply of toleration of an act, If the intention of the legislature was to tax such penalties under the clause 'toleration of an act', then there was no need for adding this clause in section 15. They would have automatically got covered under the entry 5(e) of schedule II. The penalty will be leviable for breach of any condition of contract. The penalty as per statutory provision, therefore has been considered as a part of value of supply and not as amount received for toleration of an act. Similarly, interest will be charged for delay in making payment by the recipient. The interest therefore cannot be considered as part of amount received for toleration of an act or delay in making paym
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sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods. 10. The appellant relies on the following judgments wherein it has been held that the Transaction value should not include the amount of Liquidated Damages and hence the duty was payable on the transaction value after considering the amount of Liquidated Damages: a) COMMR. OF C. EX., CHANDIGARH-I Versus H.F.C.L. (WIRELESS DIVISION) 2015 (11) TMI 893 – CESTAT NEW DELHI b) VICTORY ELECTRICALS LTD 2013 (298) E.L.T. 534 (Tri. – LB) = 2013 (12) TMI 81 – CESTAT CHENNAI c) M/s. Priyaraj Electronics Ltd. Versus Commissioner of Central Excise Bangalore 2016 (6) TMI 8
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re of services, the value of services and the time frame within which the services are required to be completed. The contractor undertaking the supply of service is aware of the fact that in case the services are not completed within the stipulated period, the value of contract will reduce. Since the recovery of Liquidated Damages is a part of the contract, it is submitted that the value of the main supply reduces to the extent of Liquidated Damages deducted by the Appellant. 12. The authority has distinguished the judgment relied upon by the appellant on the ground that those judgments, the contract clearly specified reduction of transaction value in the case of delayed delivery which is not there in the present case. 13. It is submitted that the contention of the authority is not correct. The relevant extract of the facts in the case of Victory Electricals Ltd (2013 (12) TMI 81 – CESTAT CHENNAI) is reproduced below: 7. The assessee was engaged in manufacture of electrical transformer
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n the parties does not specify that the amount of liquidated damages will be reduced from the contract price. Further, the contract mentions the liquidated damages to be in the nature of penalty. Also, the term used for recovery of LD is 'levy'. The facts in the above case are similar to the present case. Therefore, the judgment can be applied to the present case. 15. Further, once it is established that the amounts are in the nature of liquidated damages, it is not of much importance under which clause the same is mentioned. This is because, once it is liquidated damages, it will have to be reduced from the price payable and therefore tax will be levied on the net amount. Therefore, the contention of the authority is not sustainable. 16. Under the service tax law also, in case of re-negotiation on account of deficient provision of service, revised amount will be the amount of consideration liable to tax. 17. Further, the CBEC, vide their circular dated 31.03.2011, clarified th
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rvice receiver. However, concession is not available for bad debts. 18. It is evident from the above circular, that in case the consideration for any other service is changed as per the term and conditions laid down in the contract, then service tax will be payable on the renegotiated amount. These provisions in rule 6(3) were continued even after July 2012. The section 66E declared agreeing to obligation to tolerate an act as taxable supply even then the above clarification continued. 19. In the present case, there is deficient provision of service in as much as the contractor could not complete the service within the stipulated time period. Therefore, applying the ratio of the above circular, it can be said that tax will also be levied on the revised amount of consideration only. 20. Reliance is also placed on Australian Ruling issued under the Australian Goods & Service Tax Act, 1999: The appellant had submitted the below arguments before the authority also. However, the authori
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of the Commissioners opinion about the way in which the relevant provision applies or would apply to the entities, generally to a class of entities in relevant to a particular scheme. The Commissioner issued the public ruling on the payment of damages on early termination of lease of goods, cancellation of contracts and out of court settlements wherein they had discussed the taxability of the liquidated damages. The same along with cases and books has been discussed as follows: In GSTR 2003/11 of Goods and service tax ruling relating to payment on early termination of lease of goods, it was clarified that if clause relating to early termination has been specified in the original contract of lease and early termination has been in a accordance with the said contract than termination payment will be considered as change of consideration of earlier supply (i.e. re-determination of consideration). It will not be considered as separate supply, but will be considered as adjustment event in r
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ontract i.e. if liquidation of damages are to be borne by the service provider then same will be considered as towards deficiency of services and thereby reduces the original consideration and it will not be considered as separate service and hence it is not covered by the term 'Obligation to tolerate an act or a situation'. 23. The deficiency of service may arise on account of poor quality of service or delay in rendering the service and therefore it is our interpretation that deduction of the contract price on account of delay in contract will be considered towards deficiency of service and therefore will not liable to GST in the hands of the Appellant. 24. It is to be noted that 'an obligation to tolerate an act' is also a supply which is similar to the provisions in India. The tax officers in Australia have decided the taxability of LD in the background of this provision also. 25. Liquidated damages cannot be said to be the payment for tolerating an act or a situati
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at primary intention of the parties in agreement is not to 'tolerate' an act or a 'situation'. 30. Performance is the essence of a contract and hence parties to contract generally incorporate their expectation in terms of damage caused by failure of either party to perform its obligations completely or as per the agreed terms. 31. The contract may prescribe damages for deficiency in the performance of contract known as 'liquidated damages'. It is to dissuade unsatisfactory performance or nonperformance. For instance, contracts state that time is the essence of contract, and any delay invites say, 1/2% or 1% of the value of the contract for every week of delay and the like. Similarly, it is common to forfeit earnest money deposit (EMD) from a bidder in case he wins the bid but fails to act thereafter. This forfeiture clause is a deterrent for non-serious bidders entering the fray. Other examples may be rent for delay in lifting goods; agreeing to shoulder testing
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33 STC 514 (Orissa), = 1974 (1) TMI 91 – ORISSA HIGH COURT the assessee was carrying on private practice as a radiologist and for that purpose had installed an X-ray plant. He used to purchase X-ray plates and other chemicals and take X-ray photographs of patients according to requisitions from physicians as also of his own patients. 35. After taking the X-ray, he used to give technical advice to his patients and was charging a flat rate towards his remuneration and cost of materials. Sales Tax Officer was of the view that the turnover arising from such transactions was liable to tax under the Act. The hon'ble High Court of Orissa held that: 'Mere passing of property in an article or commodity during the course of the performance of the transaction in question does not render it a transaction of sale. For, even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work and property in such articles or materials may
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dering these settlements as a separate and distinct 'supply' from that of the LSTK's scope and ambit seems to be a bit too far stretched. 38. If this argument is found to have some merit, then what could possibly attract levy of GST under the impugned clause could be an arrangement where primary intention is to tolerate an act or a situation. 39. Recovery of damages cannot be equated to supply of service: 39.1 Liquidated damages are recovered for compensating the loss/damage suffered by the recipient. The section 73 and section 74 of the Indian Contract Act, 1872 provides for recovery of liquidated damages in case of breach of contract. The provision of the section 73 and section 74 of the Indian Contract Act, 1872 reads as follows: – 73. Compensation for loss or damage caused by breach of contract. – When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage c
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under the orders of the 2[Central Government] or of any [State Government], gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein. Explanation -A person who enters into a contract with Government does not necessarily thereby undertake any public duty or promise to do an act in which the public are interested. 40. It has been consistently held that liquidated damage is to compensate the person for loss suffered by him. In the present case, when the contractor does not complete the erection and commissioning of the plant on time, it leads to loss to the appellant in the form of opportunity to generate and supply electricity and the profits forgone on the same. Therefore, it is submitted that the damages are not received by the person for the toleration of an act, but it is made for compensate the loss suffered by the appellant. Theref
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Section 9-10 of Australian GST defines 'supply' as follows: (1) A supply is any form of supply whatsoever. (2) Without limiting subsection (1), supply includes any of these: (a) a supply of goods; (b) a supply of services; (c) a provision of advice or information; (d) a grant, assignment or surrender of real property; (e) a creation, grant, transfer, assignment or surrender of any right; (f) a financial supply; (g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation; (h) any combination of any 2 or more of the matters referred to in paragraphs (o) to (g). The definition of supply in section 7 of GST Act is same as given in section 9-10 of Australian GST Act. Both include all forms of supply. Further clause 5(e) of schedule II to GST Act declares 'agreeing to an obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' as service. Similar provisions ar
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e money. The Court in para 14 and para 18 observed as follows and held that no GST is payable when the plaintiff has made payment of the damages to respondent. 14. In both countries it has been held that supply is a word of very wide import. Customs & Excise Commissioners v Oliver [1980] 1 All ER 355. However, counsel did not refer me to any case in New Zealand or the United Kingdom in which the argument raised by Mr. McElwaine has been considered and my own researches have revealed none. It seems that at least in New Zealand, absent a connection with a taxable supply, a release of an obligation for consideration within the meaning of the Act, s 9-10(2)(g) is not considered to be a supply. In Case S77 (1996) 17 N ZTC 7483 a compromise of a cause of action was held not to be a supply. In that case farmers were burning off scrub on their farm when the fire got out of control and damaged some machinery belonging to contractors. The contractors commenced proceedings for damages but the
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titute a supply. The receipt of payment by a judgment creditor does not obviously involve the creation, grant, transfer, assignment or surrender of any right or the entry or release from an obligation (s 9-10(2)(e)(f)). When the judgment is satisfied the debt created by the judgment is thereby extinguished and does not depend on the surrender of any rights or the release of the judgment debtor. e) Further, Australian Tax Office publishes Goods & Service Tax Rulings. They have published GST Ruling titled 'Goods & Service Tax on consequences of court orders and out-of-court settlements . The purpose of rulings has been explained in para 1 as follows: 1. This Ruling considers the goods and services tax (GST) consequences resulting from court orders and out-of-court settlements. It explains how a payment (or act or forbearance) that is made in compliance with a court order or out-of-court settlement should be treated for the purposes of A New Tax System (Goods and Services Tax)
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ury suffered. This damage, loss or injury being the substance of the dispute, cannot in itself be characterised as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act On a combined reading of judgments and rulings, it is evident that award of damage by Court does not in itself constitute a supply by the person receiving such damage. Currently, there are no rulings from authority in India. However, very often, courts have followed rulings of other nation to decide similar issues. Therefore, in view of the above, no GST will be payable by the company on the amount payable to claimant by querist as per the award of Arbitrator Court. 42. The reply to question no.(e)of the appellant was based on incorrect fact: The question no. (e), reads as follows: – (e) If some part of delay has occurred before GST roll-out and some part of delay has occurred after GST roll-out, whether GST will be app
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ract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation per week of delay or part thereof subject to the maximum 10% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation. 43. It is submitted that the Honourable Advance Ruling Authority itself has reproduced the above in para 5 (page no. 9) of its order. Therefore, the findings of the authority are incorrect to this extent. Hearing 44. Hearing in the matter was fixed on 14.08.2018 which was attended by Shri S.S. Gupta, C.A., the representative of the Appellant and Shri S.D. Page, Deputy Commissioner of State Tax, in the capacity of the Jurisdictional officer. The Appellant as well as respondents reiterated their written submissions during the said hearing. DISCUSSION AND FINDINGS 45. We have gone through the facts of the case. The question put forth by the appella
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yment of liquidated damages by the contractor to the appellant is covered by the term 'Obligation' to tolerate an t act' or a 'situation' and is taxable under the provisions of the CGST Act. In order to understand the issue, let us refer to the relevant clauses of specimen contract: 10.0 LIQUIDATED DAMAGES 10.1 If the Contractor fails to achieve the trial operation of the unit within the stipulated time period as indicated above from the zero date then the Owner shall levy Liquidated Damages on the contractor @1/2% of the contract price for Erection, Testing & Commissioning along with applicable price variation price per week of delay or part thereof subject to a maximum of 10% of the price for Erection, Testing & Commissioning along with applicable price variation. For the purpose of levy of liquidated damages, the contract price for Erection, Testing & Commissioning excluding Insurance charges and taxes & duties and the same for one unit shall be h
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ntractor or deduction by Owner of any sums under the provision of this clause shall not relieve the Contractor from his obligations to complete the works or from his other obligations under the contract. 7.4 The liability of payment of these liquidated damages by the Contractor will be established once the delay in successful completion of trial operation is established on the part of the Contractor and the Owner shall not be required to take any further action like arbitration or approaching the Court of Law for levying the Liquidated damages. 7.5 Since the Liquidated damages are limited and the same cannot compensate the consequential loss of the Owner due to delay on the part of the Contractor, the Owner reserves the right to get the work done at the risk and cost of the Contractor, in case delay on the part of the Contractor has been established after giving notice to the Contractor, as may be deemed fit in the interest of completing the balance works. 7.6 If the Contractor fails t
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n from the contract agreement between the appellant and BHEL (Contractor) for erection and commissioning of main Plant package at Chandrapur T PS expansion project 2 X 500 MW. It can be seen from the above clauses that specific provisions have been made for the payment of liquidated damages. It can be seen from clause 10.1 that the liquidated damages have been determined at 1.5% of the contract price for erection, testing and commissioning along with the other applicable price variation. This clause makes it clear that there is a separate provision in the agreement for payment of liquidated damages by the contractor to the appellant. We are in agreement with the ARA that as separate provisions have been made for the payment of liquidated damages, the contract price and liquidated damages are two different aspects completely separable from each other. It has been held by the ARA that liquidated damages would be covered by the entry (e) of clause 5 of Schedule Il which reads as follows:-
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idated damages is an act of tolerance in the sense that when there is delay in the completion of the project, the appellant is put to certain hardships which he tolerates in return of the payment of liquidated damages. What entry 5(e) provides that any supply of services of tolerating an act is a supply and therefore the impugned transaction is also a 'supply' under the provisions of the CGST Act. Let us, for support, refer to the definition of 'liquidated damages' given in the Black Law Dictionary which is as under:- Black's Law Dictionary (Tenth Edition) on page 473 defines Liquidated damages thus: 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 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. The definition clearly provides that if the parties agree f
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e contractor and the payment of the liquidated damages are a part of the same supplies and it is mere redetermination of the consideration of the same supply. The damages are recovered by the appellant by deducting them from the bill and therefore it is contended that the liquidated damages are a part of the same supplies and is a mere redetermination of the consideration. But the deduction is mere method of recovering the money but the fact remains that there is a separate agreement for payment of liquidated damages. We agree with the AAR when they say that value of the work done and which is to be paid is not affected by the amount deducted therefrom towards liquidated damages. The consideration remains unchanged and how the amount is recovered would not change the nature of the supply. Also, neither the definition of 'contract price' nor 'contract value' as given in the Agreement refers to the contingency of liquidated damages. Contract price is defined in clause 3.1
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e amounts for compensating the loss and it cannot be considered as 'tolerating of an act.' We have already discussed how the impugned activity falls within the expression of 'tolerating an act'. As to the insistence of it not being voluntary in nature, we only say that when both the parties voluntarily agree that once the delay occurs, the damages become due, the said becomes nothing but voluntary. 51. The appellant has referred to certain provisions of the Central Excise Act in support of his contention that liquidated damages reduce the value of original supply. The issue relates to the provision of existing law and not relevant here. The appellant has also referred to certain judgments in the case of Commissioner of Central Excise v. HFCL (Dt.05.02.2014), = 2015 (11) TMI 893 – CESTAT NEW DELHI, Victory Electricals 2013 (298) ELT 534 ( Tri-LB), = 2013 (12) TMI 81 – CESTAT CHENNAI M/s. Priyaraj Electronics 2016 (6) TMI 873 CESTAT Bangalore, United Telecom 2006 (204) EL
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f new power plants or renovation of old plants Or is applicable in both cases? Regarding the agreement between Maharashtra State Power Generation Company Limited (Owner) and Bharat Heavy Electricals Limited (Contractor) for Erection & Commissioning of Main Plant Package at Chandrapur T.P.S. Expansion Project 2 x 500 MW, we agree with the finding of the AAR that GST would be applicable on the Liquidated Damages. Question 2 If GST is applicable, kindly clarify the following related aspects also a) Whether the GST on Liquidated Damages is covered under Schedule Il entry No 5(e) vide HSN code 9997-0ther Services rate 18% is correct or any other entry is relevant? We confirm the finding of the AAR that the following schedule entry under the Notification no.11/2017 – Central / State Tax (Rate) [as amended from time to time] for taxable services would cover the impugned levy of liquidated damages – Sl.No. Chapter, Section or Heading Description of Service Rate (per cent.) [CGST + MGST] 35
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o the period falling after GST roll-out? In case when GST is to be imposed for period after date of GST rollout but due to maximum capping of LD, the amount of LD is calculated at given percentage instead of being period-based, then how GST needs to be levied. The AAR held that since no precise facts were before them, the section 14 of the GST Act would have to be referred to by the appellant. We agree with the same. d) Whether the contractor / vendor will be able to utilize the amount of LD imposed over him as Input Tax Credit subject to satisfying all other conditions? We agree with the AAR that the answer to the above is that input tax credit would be admissible subject to the conditions and restrictions as specified in the GST Act and the Rules made thereunder. In view of the discussion held hereinabove, we pass the following order: ORDER (under section 101 (1) of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017) For reasons discusse
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