2018 (10) TMI 1339 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRA – 2018 (18) G. S. T. L. 525 (A. A. R. – GST) – Levy of GST – Liquidated damages – Supply or not – point of taxation – valuation of supply. – liquidated damages claimed and awarded to the Applicant under the arbitral award – Held that:- As per the terms and conditions of the agreement there was clearly an agreement between the applicant and SPL to tolerate an act or situation in case such act was done by the other or such a situation arose because of default on part of one or the other during the course of the project covered under the Association agreement and in case of default of terms of the agreement by one of the parties to this Association Agreement, the defaulting party was required to compensate the other party as per the terms and conditions of the Agreement – However we find that if there was further dispute in respect of the claims to be recovered/received by the one party from the other in view of violations o
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consideration” which would clearly be taxable for the supply of services as per Sr. No. 5(e) of Schedule II of the CGST Act, 2018.
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Ruling:- The consideration that may be awarded to the applicant by the ICC would qualify as supply of service as per Section 5(e) of Schedule II of Section 7(1) of the CGST Act as per detailed discussions above in this regard.
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The provisions of Section 13 of the CGST ACT will determine the time of supply in cases of supply of services. In the subject case the liability of tax would arise on the applicant as per Sr.No.5(e) of Schedule II of Section 7(1) of the CGST Act and the time of supply would be determined as per the provisions of Section 13 of the CGST Act after the award of arbitration proceedings is given by the Arbitration Tribunal as administered by the ICC as per the Association Agreement by the parties to dispute, in the present proceedings.
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The value of supply of services will be actual liquidated damages cum consideration as d
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e, what should be the time of supply, that is to say, the point of time in which NACC's liability to pay GST arises ? 3. If the answer to Question No. 1 is in the affirmative, what should be the value of supply on which GST is payable, that is to say, whether the Applicant is liable to pay GST on amount of liquidated damages claimed and awarded to the Applicant under the arbitral award or the amount which is actually received by the Applicant after conclusion of the matter before the final Appellate authority. At the outset, we would like to make it clear that the provisions of both the CGST Act and the GST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, a reference to such a similar provision under the CGST Act / MGST Act would be
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e mining of lignite as fuel for power generation by electric utilities. 3. Sasan Power Limited ("SPL" or "Reliance") is a company incorporated under the provisions of the Companies Act, 1956, having its registered office in Mumbai. It is a wholly owned subsidiary of Reliance Power Limited and is a part of the Reliance Anil Dhirubhai Ambani Group. It carries on the business of developing, designing, operating maintaining and owning an Ultra Mega Power Project in Sasan, Madhya Pradesh, India. 4. NACC US has entered into an Association Agreement for mine development and operations ("Association Agreement with SPL effective January 1, 2009 (Refer Annexure A) in order to provide technical know-how to SPL in relation to mine development and operations. The technical know-how, generally identified as evaluation of geological data preparation of feasibility study, development of annual mining and life of mine plans, mine planning design, assistance in training the SPL
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licant, and through the Assignment and Assumption Agreement, Consent, and Second Amendment to the Association Agreement dated April 1, 2011 (Refer Annexure C), the rights and obligations of NACC US as per the original Association Agreement were transferred and assigned to the Applicant, with the consent of SPL. 7. Further, the Applicant has entered into an Intellectual Property License and US Service Agreement ("IP & Services Agreement") with NACC US dated 1st April 2011 (Refer Annexure D), for receiving services and a non-exclusive license of Intellectual Right from NACC US. The terms of the IP & Services Agreement includes the following scope for the years under consideration: Grant by NACC US to the Applicant of non-exclusive, non-transferable, non assignable, non-sub licensable license to use the Licensed Intellectual property in India in connection with the Applicant's provision of mining services to SPL and any other customer in India. Provision of US based
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monitoring, mine plan modifications to suit on-ground requirements, regular troubleshooting etc. This phase broadly covered the period from April 2009 and was expected to continue till December 2014. The Development phase would continue to the first date following a period of thirty consecutive days during which the annualized rate of coal production at the Sasan mine has equalled the rate of seven million tonnes per year for such thirty days. As per the Association Agreement, SPL was required to pay a development phase fee USD 250,000 per quarter for each calendar quarter after the Pre-Development phase. (iii) Production Phase – The production phase pertains to the period of production of coal and includes the postproduction on-site and offsite activities viz. regular recommendations relating to mining operations; monitoring and review of mine operations; preparation of policies and recommending systems for mining operations, equipment maintenance and environmental compliance; audit
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shall be accompanied by reasonable supporting documentation in respect of any unpaid amounts described in Section 5.1(a). Payment by Reliance shall be due within thirty (30) days of Reliance's receipt of such invoice. (b) Post-Effective Date Services. Within fifteen (15) days after the end of each calendar quarter, NAC shall invoice Reliance for (i) the amounts described in Section 5.1 (a) and (ii) the amounts described in Section 5.2 that were incurred during such quarter (and after the Effective Date). The invoice shall be accompanied by reasonable supporting documentation. Payment shall be due within thirty (30) days of Reliance's receipt of such invoice. (c) Development Phase Fee. Each quarterly installment of Development Phase Fee, together with the Gross-Up Payment, shall be due on the forty-fifth (45th) day of each quarter during the Development Phase. NAC shall invoice Reliance for the U.S. Dollar amount of the applicable Development Phase Fee and the estimated Cross-Up
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in-house international consultants. The last invoice paid by SPL pertained to the period up to September 2013 and it stopped making payment of invoices of the Applicant pertaining to services performed after the period October 1, 2013. The total unpaid invoices raised on SPL are detailed below: Invoice No. Invoice Description Invoice Date Terms Due Date Amount USD Amount INR 2013/14-008 Q4 2013 Dev. Fee 01-Oct-13 45 days 15-Nov-13 311,046.27 2013/14-011 Q1 2014 Dev. Fee 02-Jan-14 16-Feb-14 311,046.27 2013/14-012 Q4 2013 exp. 16-Jan-14 30 days 15-Feb-14 5,032,790 2014/15-001 Q2 2014 Dev. Fee Ol-Apr-14 45 days 16-May-14 315,602.34 2014/15-002 Q1 2014 exp. 11-Apr-14 30 days 11-May-14 6,628,189 2014/15-003 Q1 2014 exp. 11-Apr-14 30 days 11-May-14 71,235.97 2014/15-004 Interest 23-May-14 Receipt 23-May-14 44,320.42 2014/15-005 Interest 23-May-14 Receipt 23-May-14 212,646 2014/15-007 Interest 01-Ju 1-14 Receipt Ol-Jul-14 14,626.54 2014/15-008 Interest Ol-Jul-14 Receipt Ol-Jul-14 169,050 2014
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reement with SPL. In this regard, the relevant Articles of the Association Agreement are reproduced below: ARTICLE VI TERM AND TERMINATION "Section 6.1 Term. Under earlier terminated in accordance with Section 6.2, the term of this Agreement shall commence on the Effective Date an shall continue until the end of the Production Phase (the " Initial Term"). Following the Initial Term, the parties may extend this Agreement by written agreement for any number of one (1) year terms (each, an "Extended Term" and, together with the Initial Term, the "Term") until the Agreement is terminated pursuant to Section 6.2. Section 6.2 Termination. This Agreement may be terminated : a) At any time by mutual agreement of the parties; b) By either parties in accordance with Article VII (Force Majeure); or c) By either parties in accordance with Article VIII (Events of Default). Section 6.3 Effect of Termination (a) Upon termination of this Agreement for any reason, NAC
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y to NAC, as liquidated damages and not as a penalty or other punitive amount, the amount specified below: If Termination Occurs During: Then the Termination Payment is U.S.: Year 1 of the Development Phase $11 million Year 2 of the Development Phase $13 million Year 3 of the Development Phase $15 million Year 4 or later of the Development $17 million phase Any year in the production phase $17 million, less the aggregate amount of the Production Phase Royalties received by NAC prior to the termination date" ARTICLE VIII EVENTS OF DEFAULT Section 8.1 Default by Reliance. If Reliance shall at any time be in breach of its (a) payment obligations, (b) other obligations pursuant to this Agreement, including failure to provide reasonable access to the Mine, the Preparation Plant or any Mining Project that are relevant to the duties and obligations of NAC hereunder and the failure to timely provide presentations in section 13.2(1, NAC may give written notice of such default to Reliance,
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ces hereunder, Reliance may give written notice of such default to NAC, in which case NAC shall have ten (10) days within which to cure the default. If, at the end of the ten (10) day period, NAC has not cured the default Reliance shall have the right (i) to cease reimbursing NAC for Services not actually provided until such time as the event of default is cured or (ii) if the default is not cured within sixty (60) days and Reliance is not then in breach of this Agreement, to terminate this Agreement. Reliance shall not be responsible for the On-Site Costs during the period of default and prior to the termination of this Agreement, other than the repatriation and tax equalization costs identified in Annex C and, if any, on the On-Site Consultants Schedule" 13. On May 23, 2014, the Applicant served notice on SPL in accordance with Section 14.1 of the Association agreement for an event of default as defined in Section 8.1 for failure by SPL to make payments as required under Article
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ement. 16. The termination affected by the Applicant under the terms of Association Agreement resulted in the Applicant claiming from SPL the past due and amounting to USD 1,259,310 for development fee and INR 17,087,113 for reimbursement of expenses (including interest thereon) and of liquidated damages to the tune of USD 17 million as per Section 6.3 of the Association Agreement. A copy of the said notice for termination of the Association Agreement is attached as Annexure E. 17.Upon SPL's refusal to pay the aforesaid claims due to Applicant under the Association Agreement, the Applicant filed a request for arbitration on August 8, 2014 with the International Chamber of Commerce (ICC) in London pursuant to the dispute resolution terms/procedure set out in section 12.2 of the Association Agreement. The relevant section of the Association Agreement is reproduced below "Section 12.2 Dispute Resolution: Arbitration (a) Any and all claims, disputes, questions or controversies inv
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f the appointment of the second arbitrator, then the ICC shall appoint such arbitrator or the chairperson, as the case may be, in accordance with the listing, ranking and striking provisions of the rules. Save and except the provision under Section 9, the provisions of the Part 7 of (Indian) Arbitration and Conciliation Act, 7 996, as amended (the "Arbitration Act") shall not apply to the arbitration. The arbitrators shall not award punitive, exemplary, multiple or consequential damages. In connection with the arbitration proceedings, the parties hereby agree to cooperate in good faith with each other and the arbitral tribunal and to use their respective best efforts to respond promptly to any reasonable discovery demand made by such party and the arbitral tribunal. (b) All arbitration proceedings shall be conducted in the English language and the arbitral award (the "Award") shall be rendered no later than six (6) months from the commencement of the arbitration or
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shall include interest from the date of any breach or other violation of this Agreement and the rate of such interest shall be specified by the arbitral tribunal and shall be calculated from the date of any such breach or other violation to the date when the Award is paid in full. (e) All notices and other communications by any party to the other party or by the arbitral tribunal to any disputing party in connection with the arbitration hereunder shall be in accordance with the provisions of Section 14.1. (f) Each of the Parties expressly understands and agrees that the Award shall be the final and binding remedy between them regarding any and all Disputes presented to the arbitral tribunal." 18. The ICC had accepted jurisdiction on August 11, 2014 and, at the request of the Applicant and NACC US, which had instituted a separate arbitration proceeding against SPL, consolidated the two arbitrations into one arbitration proceeding on March 12, 2015. 19. Thereafter, SPL filed a civi
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le Court delivered its final order on September 11, 2015 dismissing the appeal of SPL by holding that when the parties have agreed to resolve all their disputes by arbitration, they cannot be permitted to avoid arbitration. 21. Aggrieved by the order of the Madhya Pradesh High Court, SPL filed a Special Leave Petition ("SLP") on September 19, 2015 before the Hon'ble Supreme Court of India against the above mentioned judgement of the Hon'ble Madhya Pradesh High Court which is pending disposal. 22. By way of Order dated August 24, 2016, the Hon'ble Supreme Court disposed of the SLP filed by SPL by ruling that the parties can participate in arbitration proceedings outside India despite being companies incorporated under Companies Act, 1956, in India. 23. Pursuant to the aforesaid Order of the Hon'ble Supreme Court, the parties have initiated the arbitration proceedings before ICC. ICC has fixed the date of hearing in the matter from 3 April 2018 to 8 April 2018.
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ority is annexed herewith as Annexure F. 25. The Applicant humbly submits that the above order of the Authority should not, in any manner, whatsoever, stand in Applicant's way of approaching your good self yet again as there is no bar prescribed in this regard under the GST law and the questions posed by the Applicant in the instant application qualifies as questions in respect of which an advance ruling can be sought by the Applicant under the CGST Act, 2017 in terms of Section 97(2) of the Act. 26. Further, the Applicant being a wholly owned subsidiary of a foreign holding company is eligible to approach this Hon'ble Authority for an advance ruling and qualifies as an applicant under Secrion 97 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the "CGST Act"). 27. The Applicant submits that there are no pending proceedings against the Applicant or initiated by the Applicant in relation to the questions raised herein before any authority, Tr
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he course or furtherance of business, (c) the activities specified in Schedule 1, made or agreed to be made without a consideration; and (d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II. 3. Section 7 of the CGST Act, 2017 defines the term 'supply' to include all forms of supply of goods or services or both and it expressly seeks to include all activities treated as supply of goods or supply of services as referred to schedule II of the CGST Act, 2017. In this regard, clause 5(e) provides that agreeing to the obligation to refrain from an act, or to tolerate act or a situation, or to act shall be treated as a supply of services. The relevant portion in Sch II is as below: SCHEDULE II (Section 7) 5. Supply of services The following shall be treated as supply of services, namely:- (a) ……….. (b)………….. (e) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and
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not its furtherance. All the obligations of the Applicant qua the service recipient under the Association to exist once the Association Agreement is terminated and the same cannot be said to be in furtherance of the Applicant's business. Also, the act of termination cannot be called 'in course of any business as the usage of the term 'in course' indicates the continuity of an activity. When the Applicant terminates the Association Agreement, there is no continuation of any business of the Applicant with the service recipient as all obligations under the Association Agreement cease to exist. In the light of the above, the damages claimed for such termination can, therefore, not be regarded as being in the course or furtherance of business. Therefore, such claim cannot be regarded as being towards 'supply of any service'. 7. The Ld. Sales Tax Officer appears to be of the view that liquidated damages claimed for nonperformance of a contract gets covered under Claus
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;Obligation". Therefore, it would be relevant to examine the definition of the said term under other legislations/ judicial pronouncements and understand its dictionary meaning. 11. The term "Obligation" has been defined under Section 2(a) of the Specific Relief Act, 1963 as follows: "2. Definitions. (a) "Obligation" includes every duty enforceable by law; 12. The Andhra Pradesh High Court in case of Hyderabad Stock Exchange Ltd vs Rangnath Rathi & CO (AIR (1958) AP 431 has held that 'An obligation is a tie or a bond which constraints a person to do or suffer something'. 13. As per the Black's law dictionary, the term "Obligation" has been defined as: "A legal or a moral duty to do or not do something." 14. As per Wharton's law lexicon, the term "Obligation" has been defined as: "An act, which binds a person to some performance; or for the performance of a covenant etc." 15. From conjoint reading
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ment to terminate the Association Agreement. There is no obligation on the Applicant to terminate the Association Agreement. Also, there is no consideration assigned for any obligation to terminate it. 19. The intention of the contracting parties emanating from the Association Agreement clearly indicates that the Applicant intends to supply and the recipient intends to receive technical know-how. There is nothing whatsoever in the Association Agreement that indicates that the intention of the contracting parties is really to effect a breach of the contract, which is to be tolerated by the either of them. 20. It is critical to note that there is no clause in the Association Agreement that obligates the Applicant to tolerate the act of default on part of the service recipient, and continue to supply services despite such default. 21. On the contrary, Section 6.2. (c) read with Section 8.1 the Association Agreement provides that the Applicant has a right to determine the contract upon occ
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cause there is no tolerance on its part of the breach effected by the service recipient. Liquidated Damages received for breach/termination of contract cannot qualify as 'consideration' 30. Under the GST law, the term consideration has been defined under Section 2(31) of the Central Goods Service Tax Act, 2017, as follows: " (31). "consideration" in relation to the supply of goods or services or both includes ,- (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Governme
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service recipient. It is submitted that the liquidated damages in the instant case cannot be regarded as consideration for any provision of service as payments made on early termination by the lessor because of a lessee's default cannot qualify as consideration as the payments made i) are damages for the loss suffered by the Applicant and ii) have no nexus with any identified supply. The payment of liquidated damages by the service recipient is made as a consequence of a breach leading to termination and is not a fee or remuneration for any obligation or tolerance undertaken by the Applicant. 33. The nature of damages claimed on termination of a contract was examined by the Apex Court in Maharashtra State Electricity Distribution Company v. Datar Switchgear Limited & Others, (2018) 3 SCC133. The principle laid down by the Court is that the injured party should be placed as good a situation as if the contract had been performed. In other words, it is to provide to damages for pe
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icket Club of India v. Commissioner of Service Tax [(2015) (40) STR 973], the Hon'ble CESTAT (Mumbai Bench), observed as under: "11……………….. Consideration is undoubtedly, an essential ingredient of all economic transactions and it is certainly consideration that forms the basis for computation of service tax. However, existence of consideration cannot be presumed in every money flow. The factual matrix of the existence of a monetary flow combined with convergence of two entities for such flow cannot be moulded by tax authorities into a taxable event without identifying the specific activity that links the provider to the recipient. 12. Unless the existence of provision of a service can be established, the question of taxing an attendant monetary transaction will not arise. Contributions for the discharge of liabilities or for meeting common expenses of a group of persons aggregating for identified common objectivities will not meet the criteria of taxation under Fin
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t a specific amount has been agreed upon as a quid pro quo for undertaking any particular activity by a partner, it cannot be assumed that there was a consideration agreed upon for any specific activity so as to constitute a service." In a JaipurJewellery Show v. CCE & ST, jaipur-1, 2017 (49) STR 313 (TRI), dealing with service tax liability on cancellation charges the Hon'ble Tribunal held as follows: "6 ………. that the same are being retained, as regards the cancellation charges, we note by the appellant from the initial amounts given to them for booking a booth, when the same is subsequently cancelled by the customer and the amount is refunded to them. Admitted position, which emerges is, that no booths are ultimately rented out by the appellant to their customers. As explained, such cancellation charges are for putting the appellant into inconvenience by initially booking the booths and subsequently cancelled. Inasmuch as no service stand provided by the appel
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lected by the assessee as such charges i) cannot be considered as charges towards provision of services of management of an investment, ii) are in the nature of penalty or liquidated damages and iii) ULIP is primarily a contract between the insurer and the insured and when seen in the context of sections 73 and 74 of the Indian Contract Act, 1972, surrender of policy is nothing but ending of contract for which damages are paid and the same cannot be termed as charges towards management. In the words of the Hon'ble Tribunal: " ………….The fact which emerges from the above shows that the charges are either in the nature of 'penalty' or liquidated damages or a combination of both. Thus in no way it can be considered as charges towards providing of any services of management of investment under Unit Linked Insurance Plan ……. We find that ULIP is primarily a contract between the insurer and insured and thus when seen in the context of Section 73 and 74 of the Contr
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overed by the Applicant to make goods the loss suffered by it and the said amount, it is re-iterated is not towards provision of any service. 36. On application of the above definitions and the above case laws to the Applicant's case, it is submitted that the flow of money from the service recipient is not for any provision of supply of service of tolerating any default in payment by the service recipient. 37. Instead, the claim of liquidated damages is against the loss suffered by the Applicant on account of the default committed by the service recipient. Any payment received as genuine damages or loss flowing from early termination as a result of a default one party, can not be regarded as a consideration for a supply. Therefore, it is submitted that there can be no taxable supply in the instant case as the payment for genuine damages is no consideration for any earlier or current supply. 38. The submission of the Applicant that damages received by it is not consideration for any
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m an act, and iii) to tolerate an act or situation as supply. Further, much like under the Indian law, the Australian GST law required that a supply should be made for consideration and for this requirement to be met, there i) had to be payment/any act or forbearance consideration for supply and ii) the said payment/any act or forbearance or consideration is 'in connection with', 'in response to' or 'inducement of a supply'. Therefore, there had to be any payment/act/forbearance and the said act/payment/forbearance ought to have sufficient nexus with the supply in question. In the said background, the Australian Tax Office ruled that payments made on early termination of a lease by the lessor does not constitute a supply as the same is nothing but genuine damages for the loss suffered by the lessor. In support of its conclusion, it observed as below: "70. Where a lease is terminated early because of the lessor exercising a right to terminate early arising o
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oner of Customs and Excise, (1995) VAT Dec. No. 13795:- The case involved early termination of an agreement and payment of certain damages amount by the lessee to the lessor , following the appointment of a receiver to the lessee. Where the sum received by the lessor was sought to be taxed on the ground that the same amounted to supply, the UK VAT Tribunal observed as below: "In summary and looking at the entire transaction' the position is this. While the lease is running, the lessee provides consideration in the form of rent for the quarter and in return the lessor supplies or continues to supply possession of the equipment. If the lessee fails to pay his quarter's rent (or commits any other act of' default'…) the lease may be terminated and the lessor may recoup possession. If So, the lessor's obligation to provide the service is spent and any termination payment compensates the lessor for the latter's loss of opportunity to provide that service … th
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prudence on certain expressions employed under the Act and taxability of damages under the indirect tax law, particularly the GST law, is still uncertain and unclear. In such circumstances, recourse ought to be had to international cases and rulings understand the meaning and import of certain expressions. 41. The Supreme Court of India and High Courts across the country routinely follow international rulings and commentaries, where there is little or almost no jurisprudence on a given subject, for sufficient guidance. As a result, where the rulings in aforesaid foreign rulings cited by the Applicant shed sufficient light on the taxability of damages in the context of the expression 'tolerate an act', such rulings ought to be taken into consideration before deciding the issue at hand before this Authority considering the fact that the expression examined by the foreign authorities in the decisions relied upon by the applicant exactly the same as the expression used under the GS
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amages against loss/injury. These clauses act as a deterrence against breach of terms by the other party. 44. Mere fact that such a clause is included in the contract for protection of the aggrieved party would not result in creation of an obligation to tolerate a breach of the agreement. On the contrary, it gives the aggrieved party a right to suel enforce the terms and claim damages. 45. Similarly, mere quantification of liquidated damages payable to the service provider on termination of the Association Agreement should not, and would not, alter the nature of transaction and transform into a supply of a service in as much as what is paid to the service provider is nothing but damages for the loss/injury suffered. 46. The Applicant exercised its right/entitlement to terminate the Association Agreement on account of the service recipient's default in complying with its obligations to make payment to the Applicant for services rendered. Due to such default by the service recipient,
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ect of the injury/ loss caused. The mechanism for determination of the damages cannot have any bearing on the nature of the transaction. Even in the instant case, it may so happen, that the arbitral tribunal may alter the amount of liquidated damages claimed. 48. It is submitted that, in principle, there is no qualitative difference in a claim of liquidated damages and a claim of unliquidated damages as there would be arbitral proceedings (in lieu of long-drawn court proceedings) between the parties to adjudicate and assess the amount of liquidated damages payable to the Applicant and the Applicant would still be required to adduce adequate proof of the loss suffered as the requirement of proving the loss suffered by the applicant is not dispensed with' by merely incorporating a clause with liquidated damages. 49. The aforesaid argument of the Applicant has sufficient backing under Indian law and had been constantly apperciated by Indian Courts. Amongst others, the Supreme Court, a
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other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. That is not an actionable claim and this position is made amply clear by the amendment in section 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred". 50. Based on the above, it is clear that the Applicant's right to receive liquidated damages is not guaranteed and crystallized by a mere reference to the payment of liquidated damages in the contract. The receipt of liquidated damages is dependent on the finality of the proceedings before the highest appellate forum. 51. The Applicant receives damages to make good its injury even it approaches any court of law in ordinary course and the mere fact that the Applicant chose to incorporate clause stipulating a genuine pre-estimate of the damages to make goods its injury by fighting out its claim before an arbitral tribunal instead of a court of law shou
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count of an illegal act of the service recipient. When the service recipient fails to pay the service provider in time as required under the Association Agreement, the Applicant is put to irreparable loss/injury as a result of such non-payment. Comments on submissions made by the jurisdictional officer: 54. The jurisdictional officer had opined in its written submissions that non-performance of a contract is an activity or transaction which is treated as supply of service and the person is deemed to have received the consideration in the form of liquidated damages and is accordingly required to pay tax on such amount. 55. In this regard, the Applicant submits that mere non-performance of a contract by the service recipient would not trigger the levy of GST on liquidated damages paid by the service recipient. The jurisdictional officer had not appreciated the true import of clause 5(e), which requires an agreement to discharge an obligation to refrain from an act or tolerate an act or a
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amages for the purpose of payment of GST 58. Even assuming arguendo that GST is payable on liquidated damages claimed by the Applicant, the Applicant submits that no GST is payable on liquidated damages unless the same is actually received by the Applicant once the arbitral award attains finality. 59. This view of the Applicant is supported by the jurisdictional officer who observed in its written submissions to this Authority' that time of supply for the liquidated damages may be the date on which the liquidated will be credited in the bank account of the Applicant or the date on which Applicant shows the receipt of liquidated damages in its books of accounts, whichever is earlier. 60. The fact that receipt of liquidated damages is uncertain is also acknowledged by the Authority for Advance Ruling (AAR) under the erstwhile service tax law, which had observed that it would not give a finding on an event that has not occurred as yet and regarding which there is no certainty. Therefo
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mages or for unliquidated damages……….It, therefore, makes no difference in the present case that the claim of the Appellant is for liquidated damages. It stands on the same footing as a claim for unliquidated damages. Noiv the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is a breach of contract, the party who commits the breach does not so instanti incur any pecuniary obligation, nor does the party complaining of the breach becomes entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has is the right to sue for damages. That is not an actionable claim and this position is made amply clear by the amendment in section 6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred". 63. In light o
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39;ble Authority : Relevant Provisions of the Central Goods and Service Tax Act, 2017 and the Applicant's interpretation of the same 29.Under the GST law, all "supplies' of goods and services should attract GST (unless specifically exempted). Section 9 of the Central Goods and Services Tax Act, 2017 (CGST Act) is the charging Section which provides that there shall be a levy of a tax called the central goods and services tax on all intra-state supplies of goods or services or both on the value determined under section 15 of the CGST Act, 2017 at such rates not exceeding twenty percent as may be notified by the Government. As is clear from the aforesaid Section, the key pre-condition for the levy of GST is presence of a "supply" of services. 30. Section 7 of the CGST Act, 2017 defines the term "supply" and the relevant portion of the same is reproduced hereunder as follows: "7. (1) For the purposes of this Act, the expression "supply" incl
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ct provides that agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to an act shall be treated as a supply of services. The relevant portion of the Schedule II is extracted hereunder for your ready reference: SCHEDULE II (Section 7) 5. Supply of services The following shall be treated as supply of services, namely: (a) ………………….. (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and " 32. Further, although there is no comprehensive definition of the term "service" (as it existed under the erstwhile service tax regime), the term "service" is defined as follows under section 2(102) of the CGST Act, 2017: "services means anything other than goods, money and securities but includes activities relating to the use of money or conversion by cash or by any other mode, from one form, currency or denomination, to another form currency or denomination for
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red by Applicant stems from occurrence of an 'Event of default' in terms of Section 8.1 of the Association Agreement, which includes breach of payment obligations by SPL liuidated damages are in the nature of compensation for losses incurred on account of termination of the contract in other words loss of source of business/ revenue). 37. In the light of the aforesaid submissions, it is submitted that any claim and subsequent receipt for liquidated ,damages preferred by the Applicant against SPL should not qualify as a 'supply of service performed by one person for another for a consideration. Accordingly, it should not qualify as "supply of service for the purpose of levy of GST. 38 It is further submitted that section 7 of the CGST Act, 2017 specifically includes within its ambit activities which are deemed to be treated as supply of services under Schedule II of the CGST Act, 2017. Inter alia, clause 5(e) of Schedule II of the CGST Act, 2017 is the relevant clause f
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only when there is an 'obligation' or 'consensus' amongst the parties 'to tolerate an act or a situation. 42. In the case at hand, it is submitted that there is no obligation on part of the Applicant to tolerate any breach of payment obligations by SPL. The liquidated damages contemplated under the Association Agreement were incorporated to safeguard the interest of the Applicant against an adverse contingency which may or may not occur. 43. Considering the aforesaid factual matrix and legal position, as explained above: The liquidated damages claimed by the Applicant are not in lieu of any activity/obligation which it has agreed to perform at the behest of the service recipient. Such liquidated damages are claimable on account of breach of contract (default in payment obligation) by SPL. The Applicant cannot be considered to have performed any activity for a consideration for SPL with regard to liquidated damages claimed. Also, there is no contractual reciprocity o
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shall be triggered do not arise. 47. The Applicant, therefore, humbly submits that, although the arbitration proceedings will commence in the month of April 2018, the award by ICC may be pronounced only in later part of this year or early months of next year. Hence, even if the liquidated damages were held to be liable to GST, the question with regard to the value exigible to GST and the time of supply can only be ascertained once the Applicant's eligibility to receive the liquidated damages attains finality before the appellate forum/ Court of law. PRAYER In the light of the above, it is prayed that the Hon'ble Authority may be pleased to rule that: A. Liquidated damages which may be awarded by ICC shall not qualify as 'supply of any goods or services and hence would not be exigible to the levy of GST; and B. Since liquidated damages are not exigible to the levy of GST, the questions regarding valuation of supply and point of time of supply for the purpose of levy of GST
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mount which is actually received by the applicant after conclusion of the matter before the final appellate authority?. Classification of service Chapter /Section /Heading Description of Service CGST Rate (%) SGST/UTGST Rate (%) IGST Rate (%) Condition Heading 9997 Other services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified). 9 9 18 – 1. Scope of Supply : Section 7 of the Central Goods and Services Tax Act 2017 (CGST 2017) defines scope of supply. As per Section 7(1) (d) the activities to be treated as a supply of good or supply of services as referred in the sch. 2 As per schedule 2 para 5 clause (e) "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" As per above provision liquidated damages may be awarded to applicant NACC India for non-performance of a contract by SPL. Non-performance of a contract is an act
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ered person supplying taxable services shall, before or after the provision of service but within a prescribed period, issue a tax invoice, showing the description, value, tax charged thereon and such other particulars as may be prescribed. As per Rule 47 of CGST Rules 2017 the invoice referred to in rule 46, in the case of the taxable supply of services, invoice shall be issued within a period of thirty days from the date of the supply of service. NACC India issued an Invoice Dt. 23rd July 2014 for claiming Liquidated Damages from SPL along with notice of Termination of Association Agreement after the completion of 60 days from the date of notice of default. The issue date of invoice is before the effective date of GST Act 2017. As per section 13 Time of Supply may be the date on which Liquidated Damages will be credited in the Bank account of NACC India or the date on which NACC India will show the receipt of Liquidated damages in his books of account whichever is earlier. Or As per
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oods or the cost of provision of such services. NACC India issued an invoice Dt. 23rd July 2014 amounting 17 million USD to SPL for liquidated damages. The decision on dispute regarding liquidated damages is pending before ICC, London. Invoice date is before the effective date of GST Act 2017. As per Arbitration clause of Association Agreement decision of ICC, London is final & binding remedy between the parties. In such situation value of supply of services will be determined on the basis of actual receipt of liquidated damages by NACC India from SPL after award of ICC, London. 04. HEARING The case was taken up for preliminary hearing on dt. 12.06.2018, with respect to admission or rejection of the application when Sh. N. Venkatraman Sr. Advocate alongwith Sh. Govardhan Purohit, Advocate, Sh Amit Bhagat Advocate and Sh. Aditya Khanna, Advocate appeared and made request for admission of ARA application as per their written and oral submissions. They specifically point out that they
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hrough the facts of the case and the submissions made by the applicant and the department. We find that the applicant M/s North American Coal Corporation India Pvt.Ltd., (NACC India) is a Private Limited Company incorporated under the Companies Act, 1956 to carry on the business of providing Technical Consultancy relating to Coal Mining and related activities. It is a wholly owned subsidiary of M/s North American Coal Corporation, USA (NACC US). We find that NACC, US has entered into an association agreement for mine development and operations with M/s Sasan Power Ltd. (SPL or Reliance) a company which is a part of Reliance Anil Dhirubhai Ambani Group which is in the business of developing, designing, operating, maintaining owning an Ultra Mega Power Project in Sasan, Madhya Pradesh, India. The Association Agreement as referred above is effective from 1st January, 2009 in order to provide technical know how to SPL in relation to mine development and operations. We further find that lat
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ber, 2013 and it stopped making payment against invoices of the applicant pertaining to services performed after the period 1st October, 2013. The applicant further stated that they were constrained to terminate the Association Agreement with SPL as per the relevant articles of the Association Agreement. The applicant states that several suits and counter suits were filed by the applicant and SPL against each other and it was finally ordered by the Hon'ble Supreme Court that the parties could participate in arbitration proceedings outside India despite being companies incorporated under the Companies Act, 1956, in India. The applicant further stated that accordingly the applicant and SPL have initiated arbitration proceedings before the International Chamber of Commerce (ICC) which are pending finalization. We find that in view of the above details, the applicant has raised three questions for decision of this authority which are as under:- 1. Whether liquidated damages that may be
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obligations under the Association Agreement do not constitute as supply of services. They contended that the claim of liquidated damages does not qualify as a 'service' itself as it lacks the element of reciprocating which forms the sine qua non for a transaction to qualify as a service. (II) Secondly they have contended that even if one were to argue that the claim of liquidated damages amounts to a service such claim cannot be regarded as being in course or furtherance of business. The termination of the Association Agreement puts an end to the business relationship of the applicant with the service recipient. It results in complete and absolute cessation of the business of the applicant and not its furtherance. That the act of termination cannot be called in course of any business as the usage of the term 'in course' indicates continuity' of an activity. (III) Thirdly they have contended that the situation in view of the facts of the present case would not get co
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eferred above. We find that in view of the above detailed facts and contentions of the case, we need to examine the issue at hand as under:- We find that as per Section 9(1) of the CGST Act regarding levy and collection Section 9(1) Subject to the provisions of sub-section 2 there shall be levied a tax called the Central Goods and Services Tax on all Intrastate supplies of goods or services or both except on the supply of Alcoholic Liquor for human consumption, on the value determined under Section 15, at such rates not exceeding twenty percent, as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by taxable person. From the above we find that CGST is leviable on Intra-State supplies of goods or services or both. We find that Section 7 of the CGST Act gives scope of 'supply'. Section 7 of the CGST Act reads as under:- 7. (1) For the purposes of this Act, the expression "supply"
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visions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as – (a) a supply of goods and not as a supply of services; or (b) a supply of services and not as a supply of goods. We find that Section 7(1) provides that 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, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (b) import of services for a consideration whether or not in the course or furtherance of business; (c) the activities specified in Schedule I, made or agreed to be made without a consideration; and the (d) activities to be treated as supply of goods or supply of services as referred to in Schedule. Where the word 'include' is of specific importance which implies that
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) Agreeing to the obligation to refrain from an Act or to tolerate an Act or a situation or to do an act. Thus in view of the provisions as above we are required to examine the facts of the present case and details of the Association Agreement as submitted, to ascertain whether tax liability would be there or not on the applicant in context of detailed transactions/acts presented before us. We find that first of all there was an Association Agreement first between NACC, US and SPL with effect from 1st January, 2009 and with effect from March, 2011, the rights and obligations of NACC, US as per the original Association Agreement were transferred and assigned to the applicant with the consent of SPL and we clearly find that this agreement was in respect of providing technical knowhow to SPL in relation to mine development and operations. We find that as per the Association Agreement referred above, the provision of services in the Sasan project was to be carried out in three phases as pe
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ociation Agreement between the applicant and SPL. We find that Article VI of the Association Agreement as referred above provides for term and termination which is as under:- ARTICLE VI TERM AND TERMINATION "Section 6.1 Term. Under earlier terminated in accordance with Section 6.2, the term of this Agreement shall commence on the Effective Date an shall continue until the end of the Production Phase (the " Initial Term"). Following the Initial Term, the parties may extend this Agreement by written agreement for any number of one (1) year terms (each, an "Extended Term" and, together with the Initial Term, the "Term") until the Agreement is terminated pursuant to Section 6.2. Section 6.2 Termination. This Agreement may be terminated : a) At any time by mutual agreement of the parties; b) By either parties in accordance with Article VII (Force Majeure); or c) By either parties in accordance with Article VIII (Events of Default). Section 6.3 Effect of Te
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nates this Agreement pursuant to Section 6.2(c), Reliance shall pay to NAC, as liquidated damages and not as a penalty or other punitive amount, the amount specified below: If Termination Occurs During: Then the Termination Payment is U.S.: Year 1 of the Development Phase $17 million Year 2 of the Development Phase $13 million Year 3 of the Development Phase $15 million Year 4 or later of the Development $17 million Phase Any year in the production phase $17 million, less the aggregate amount of the Production Phase Royalties received by NAC prior to the termination date" ARTICLE VIII EVENTS OF DEFAULT Section 8.1 Default by Reliance. If Reliance shall at any time be in breach of its (a) payment obligations, (b) other obligations pursuant to this Agreement, including failure to provide reasonable access to the Mine, the Preparation Plant or any o Mining Project that are relevant to the duties and obligations of NAC hereunder and the failure to timely provide presentations in Secti
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NAC shall at any time be in breach of its obligation to provide Services hereunder, Reliance may give written notice of such default to NAC, in which case NAC shall have ten (10) days within which to cure the default. If, at the end of the ten (10) day period, NAC has not cured the default Reliance shall have the right (i) to cease reimbursing NAC for services not actually provided until such time as the event of default is cured or (ii) if the default is not cuired within sixty (60) days and Reliance is not then in breach of this Agreement, to terminate this Agreement. Reliance shall not be responsible for the On-Site Costs during the period of default and prior to the termination of this Agreement, other than the repatriation and tax equalization costs identified in Annex C and, if any, on the On-Site Consultants Schedule" Further, in view of default as above we find that Article XII of the Association Agreement clearly provides for Governing law and dispute resolutions as unde
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ance, on the one hand, or NAC, on the other hand, fail to appoint their respective arbitrator within thirty (30) days after receipt by respondent(s) of the demand for arbitration or if the two 2) party-appointed arbitrators are unable to appoint the chairperson of the arbitral tribunal within thirty (30) days of the appointment of the second arbitrator, then the ICC shall appoint such arbitrator or the chairperson, as the case may be, in accordance with the listing, ranking and striking provisions of the rules. Save and except the provision under Section 9, the provisions of the Part 1 of (Indian) Arbitration and Conciliation Act, 1996, as amended (the "Arbitration Act") shall not apply to the arbitrations. The arbitrators shall not award punitive, exemplary, multiple or consequential damages. In connection with the arbitration proceedings, the parties hereby agree to cooperate in good faith with each other and the arbitral tribunal and to use the respective best efforts to r
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portion of the prevailing party's expenses should be borne by the other party. Unless the Award provides for nonmonetary remedies, any such Award shall be made and shall be promptly payable in (i) U.S. Dollars if payable to NAC or (ii) Rupees if paid to Reliance net of any tax or other deduction. The Award shall include interest from the date of any breach or other violation of this Agreement and the rate of such interest shall be specified by the arbitral tribunal and shall be calculated from the date of any such breach or other violation to the date when the Award is paid in full. (e) All notices and other communications by any party to the other party or by the arbitral tribunal to any disputing party in connection with the arbitration hereunder shall be in accordance with the provisions of Section 14.1. (f) Each of the Parties expressly understands and agrees that the Award shall be the final and binding remedy between them regarding any and all Disputes presented to the arbit
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ue and to receive suitable amounts as claims cum consideration in view of the violations on the part of the party violating or defaulting on the Association Agreement. Further as per the Association Agreement presented before the Authority it is very clear that the amount or consideration to be received by one party i.e. the applicant if any after arbitration from the defaulting party are suitable compensation only for tolerating the act of default or situation of default by one party on the part of the other party as per the terms and conditions of the Association Agreement and are not liquidated damages as claimed by the applicant as would be clear from the specific mentioned under Section 12.2 Dispute Resolution: Arbitration which clearly states as under:- "The Arbitrators shall not award punitive, exemplary, multiple or consequential damages" Thus we find that the consideration if any as received by the applicant after arbitration by the ICC would clearly qualify as '
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Act, 2018. Further we find that the case laws relied upon by them are not relevant in respect of the present facts of the case and Association Agreement as submitted in respect of the present case and therefore cannot be considered. Now we take one by one the questions posed by the applicant before this authority 1. Whether liquidated damages that may be awarded to the Applicant by the International Chamber of Commerce ("ICC") qualifies as a 'supply' under the Goods and Services Tax ("GST") law, thereby attracting the levy of GST ? Answer The consideration that may be awarded to the applicant by the ICC would qualify as supply of service as per Section 5(e) of Schedule II of Section 7(1) of the CGST Act as per detailed discussions above in this regard. 2. If the answer to Question No. 1 is in the affirmative, what should be the time of supply, that is to say, the point of time in which NACC's liability to pay GST arises ? Answer The provisions of Section
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actual liquidated damages cum consideration as decided and pronounced in the award administered by ICC. 06. In view of the extensive deliberations as held hereinabove, we pass an order as follows : ORDER (under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017) NO.GST-ARA- 07/2018-19/B- 63 Mumbai, dt. 11/07/2018 For reasons as discussed in the body of the order, the questions are answered thus – 1. Whether liquidated damages that may he awarded to the Applicant by the International Chamber of Commerce ("ICC") qualifies as a 'supply' under the Goods and Services Tax ("GST") law, thereby attracting the levy of GST ? Answer : Answered in the affirmative. 2. If the answer to Question No. 1 is in the affirmative, what should be the time of supply, that is to say, the point of time in which NACC's liability to pay GST arises ? Answer: The time of supply would be determined as per the provisions of S
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