In Re : M/s North American Coal Corporation India Private Limited
GST
2018 (10) TMI 1339 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRA – 2018 (18) G. S. T. L. 525 (A. A. R. – GST)
AUTHORITY FOR ADVANCE RULING – MAHARASHTRA – AAR
Dated:- 11-7-2018
GST-ARA-07/2018-19/B-63
GST
SHRI B.V. BORHADE, AND SHRI PANKAJ KUMAR, MEMBER
PROCEEDINGS
(under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)
The present application has been filed under section 97 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 M/s. North American Coal Corporation India Private limited, the applicant, (hereinafter also referred to as, 'NACC) seeking an advance ruling in respect of the following question.
1. Whether liquidated damages that may be awarded to the Applicant by the International Chamber of Commerce (“ICC”) qu
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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 mentioned as being under the “GST Act”.
02. FACTS AND CONTENTION – AS PER THE APPLICANT
The submission (Brief facts of the case), as reproduced verbatim, could be seen thus –
I. Statement of the relevant facts having a bearing on the advance ruling sought by the Applicant
1. The Applicant, North American Coal Corporation India Private Limited (“NACC India”) is a private limited company incorporated under the provisions of the Companies Act, 1956 having its registered office at 1st Floor, Deepgriha, S.No. 50/1/2, Chhaya Society, Bhakti Marg, Off Law College Road, Erandavane, Pune – 411004, India. NACC India has been incorporated to carry on the business of providing technical consultancy relating to coal mining and related activities.
2. The Applicant is a wholly owned subsidiary of the North American Coal Corporat
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sibility study, development of annual mining and life of mine plans, mine planning design, assistance in training the SPL personnel, monitoring and reviewing, training to employees, providing NACCs practices related to operating procedure, health and safety for mining operations etc. The Association Agreement defind the roles/responsibilities of both the parties, scope of work, fees structure, periodicity, manner of payment, As per the Association Agreement, specific payment for off-shore services was to be made to NACC US on a quarterly basis and expenses pertaining to the onsite services were to be reimbursed separately. The off-shore services for mining operations consisting of geological, mining, environmental, and seismic and overall mine management methodology were provided by expert teams from the United States of America.
5. The Association Agreement was first amended vide the First amendment to Association Agreement dated September 30, 2009 for amending the payment mechanics
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the Applicant's provision of mining services to SPL and any other customer in India.
* Provision of US based services by NACC US to Applicant that will assist the Applicant in performing its obligations to SPL.
8. As per the Association Agreement, the Sasan Project was divided into three phases as detailed below depending on the stage of development of the mine
(i) Pre-Development Phase included the preliminary offsite activities ranging from preliminary data collection and evaluation, development of mine plans to the provision of bidding support and representation for mine plan approval.
This phase broadly covered the period from August 2007 to March 2009. As per the Association Agreement, SPL was required to pay a pre-development phase fee of USD 75,000 per quarter for each calendar quarter in the period from 01 January 2008 through 01 January 2009.
(ii) Development Phase – The development phase included on-site and offsite activities viz. implementation of mine plans and d
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n of policies and recommending systems for mining operations, equipment maintenance and environmental compliance; audit of mining operations. This phase would broadly cover the period from January 2015 till December 2027 (the estimated life of the mine) and will commence following a period of thirty consecutive days once 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 production phase royalty of an amount equivalent to higher of a) USD 250,000 per annum or b) USD 0.1125 for each ton of coal produced from the mine each quarter.
9. In terms of the Association Agreement, SPL was obligated to remunerate NACC US/Applicant in the following manner:
“Section 5.4 Automatic Payments/Invoicing.
(a) Pre-Effective Date U.S. Services. Within five (5) days after the
Effective Date, NAC shall invoice Reliance for (i) any unpaid amounts described in Secti
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NAC shall invoice Reliance for the U.S. Dollar amount of the applicable Development Phase Fee and the estimated Cross-Up Payment not later than the first (1st) day of the quarter for which the Development Phase Fee is due.
(d) Production Phase Royalty. Within Five (5) days after the end of each quarter during the Production Phase, Reliance shall provide NAC with written documentation reasonably evidencing the number of Tonnes of coal produced from the Mine during such quarter within ten (10) days after NAC receives such written documentation, it shall invoice Reliance for the U.S. Dollar amount of the production Phase Royalty on the basis of such receipts, together with the estimated Gross-Up Payment. Payment of the invoice amount shall be due within thirty (30) days of Reliance's receipt of such invoice.”
10. NACC US, in the initial phase of mine development and later the Applicant, rendered significant services to SPL under the above mentioned agreements which contributed imme
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t
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
2014/15-009
Q2 2014 exp.
10-Jul-14
Receipt
10-Jul-14
4,949,343
2014/15-010
Q2 2014 exp.
10-Jul-14
Receipt
10-Jul-14
104,303.95
2014/15-11
Interest
23-Jul-14
Receipt
23-Jul-14
8,227.81
2014/15-12
Interest
23-Jul-14
Receipt
23-Jul-14
95,095
2014/15-13
Q3 2014 Dev Fee upto July 23, 2014
23-Jul-14
Receipt
Z3-Jul-14
78,900.59
Total Amounts due
1,259,310.16
17,087,113
11. The Applicant has charged Service tax on the invoices raised by it for the services rendered under the Association agreement and has also duly deposited the same with the Government exchequer even for the invoices where the payment has not been received fro
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ection 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 shall furnish to Reliance (a) within sixty (60) days after the effective date of termination, an initial invoice for settlement of all costs incurred prior to the termination date and (b) within twenty (20) days of incurring such costs, additional invoices for (i) the On-Site Costs incurred as a result of the repatriation of the On-Site Consultants and (ii) the On-Site Costs relating to the tax-equalization payments for the On-Site Consultants. Reliance's payments of such invoices shall be subject to the provisions of Sections 5.3 and 5.6.
(b) If Reliance terminates this Agreement pursuant to Section 6.2(c), any damages recoverable b
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ligations, (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, in which case Reliance shall have twenty-one (21) days within which to cure the default. If, at the end of the twenty-one (21) day period, Reliance has not cured the default NAC shall have the right, (i) if the default is of the type described in subclause (a) above, to immediately cease providing the Services until such time as the event of default is cured, (ii) if the default is of the type described in subclause (b) above, to cease providing such Services as NAC determines, in its reasonable discretion, cannot be performed due to Reliance's default until such time as the event of default is cured, or (iii) if any such default is n
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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 5 of the Association Agreement. The notice of default provided SPL with 21 days to cure the default as stipulated in the aforesaid agreement.
14. 0n June 13, 2014, after 21 days lapsed without SPL curing its payment default, the Applicant became entitled to cease provision of services to SPL pursuant to Section 8.1 and the same was done by way of correspondence dated June 19, 2014. The Applicant continued to engage in a good faith dialogue to enable SPL to cure its default and avoid termination of agreement. However, SPL failed to make the due payments and continued the default.
15. Following the completion of 60 days from the notice of d
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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 involving Reliance on the one hand and NAC on the other hand arising out of or in connection with this Agreement (collectively, “Disputes”) which cannot be finally resolved by such parties within 60 (sixty) days of arising by amicable negotiation shall be resolved by final and binding arbitration to be administered by the International Chamber of Commerce (the “ICC”) in accordance with its commercial arbitration rules then in effect (the “Rules''). The place of arbitration shall be London, England. Each party shall appoint one (1) arbitrator and the two (2) arbitrators so appointed shall together select and appoint a third arbitrator.
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ts 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 as otherwise provided by the Rules, unless otherwise extended by the arbitral tribunal for no more than an additional six (6) months for reasons that are just and equitable.
(c) Except as otherwise required by Applicable Laws of India, the arbitration proceedings and the Award shall not be made public without the joint consent of each party and each party shall maintain the confidentiality of such proceedings and the Award.
(d) Each party shall bear its own arbitration expenses and Reliance on the one hand, and NAC, on the other hand, shall pay one-half of the ICCs and the chairperson's fees and expenses, unless the arbitrators determine that it would be equitable if all or a p
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ral 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 civil suit against the Applicant in the District Court in Singrauli at Waidhan contending that both the parties to the dispute, SPL and the Applicant, being companies incorporated under the Companies Act, 1956 in India, cannot participate in the arbitration proceedings which have seat of arbitration outside India. The Singrauli District Court granted an ad-interim ex-parte injunction restraining the Applicant from proceeding any further with the arbitration proceedings before ICC in London. The Applicant got a relief from the Hon'ble Madhya Pradesh High Court vide order dated March 9, 2015 directing the Singrauli District Court to dispose of the suit filed by SPL. Pursuant to the or
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e 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.
24. The Applicant mentions that, when the Applicant had approached the Hon'ble Authority for Advance Ruling (“Authority”) that functioned under the erstwhile service tax regime, the Authority had rejected the Application of the Applicant vide its Ruling dated 6 May 2017 observing, inter alia, as follows:
* The question of whether or not the Applicant ought to pay service tax on liquidated damages is not liable to be entertained as it is not certain today whether the liquidated damages would be granted at all in the arbitration proceedings.
* The question posed to Authority is not a valid question since it depends on uncertain event of the Applicant succeeding in arbitration proce
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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, Tribunal or Court.
Additional Submissions for NACC India Private Limited on 13.07.2018
1. Under the GST law, all supplies of goods and services attract GST and section 9 of the CGST Act, 2017 is the charging section. The said section 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.
2. In this regard, section 7 of the CGST Act, 2017 defines the term 'supply' and the relevant portion of the same is reproduced hereunder as follows for the sake of brevity:
“7. (1) For the purposes of this Act, the expression “supply” includes
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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 ”
4. Detailed submissions in respect of the aforesaid are presented below.
Applicant's obligation under the Association Agreement doesn't constitute as supply of service:
5. As submitted in its application, the Applicant would like to reiterate that the claim of liquidated damages doesn't qualify as a 'service' itself, as it lacks the element of reciprocity which forms sine qua non for a transaction to qualify as a service. Therefore, there is no question of the claim of liquidated damages leading to any 'supply of service.'
6. Without prejudice to the aforesaid, even if one were to argue that the claim of liquidated damages amounts to a 'service'
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, 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 Clause 5(e) of Schedule II to the CGST Act, 2017. The Applicant doesn't agree with such interpretation of the Ld. Sales Tax Officer. The Applicant's submissions in this regard are detailed below.
Conditions for levy of GST under Clause 5(e) of Schedule II
8. To qualify as a 'supply of services' as envisaged under clause 5(e) of Schedule II appended to the CGST Act, 2017, the following conditions ought to be satisfied:
* There should be agreement between parties towards discharging a contractual/agreement-linked obligation by the supplier of service;
* The obligation should be to either 'refrain from an act' or to 'tolerate an act or a situation':
* The
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ral 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 of the previously mentioned definitions, it is clear that an “Obligation” is imposition of duty to perform an agreed act or a covenant, which is enforceable under law
16. The occurrence of the term 'obligation' under Clause 5(e) of Schedule II of the CGST Act, 2017, mandates that the tolerance must be of an act or a situation and such tolerance must be enforceable.
17. Based on the terms of the Association Agreement, it is clear that the “Obligation” on part of the Applicant is to provide technological know-how to the service recipient based in India. There is no other obligation on the Applicant per se apart from provision of technological knowhow to the service recipient based in India,
18. The obligation to provide technological know-h
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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 occurrence of any of the specified Events of Default. In fact, upon occurrence of a specified event of Default, the Applicant has actually terminated the Association Agreement. Therefore, any obligation under the contract ceases thereafter for the Applicant.
22. In the instant case, when the Applicant had terminated the Association Agreement, it was relieved from its entire obligations thereunder to supply services to the service recipient. The claim of liquidated damages is an act subsequent to the act of termination of the Association Agreement.
23. Had there been any tolerance of an act or a situation by the Applicant in the instant case when the service recipient default in making payments, the Applicant would have continued to provide its services despite a d
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bearance, 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:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;”
31. From the definition of the term 'consideration', it is apparent that consideration can be monetary or non-monetary and that same should be 'in respect of, 'in response to', 'or for the inducement of the supply of goods or services or both, meaning thereby that it should be identified with a supply of service and have nexus with the said supply of service
32. The Applicant submits that liquidated damages paid by the service recipient is neither in 'in respect of 'nor 'in response to any s
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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 pecuniary loss, which naturally flows from the breach. The Court placed its reliance on an earlier decision of the Apex Court in Union of India v. Sugauli Sugar Works (P) Ltd v., (1976) 3 SCC 32: “Once it is established that the party was justified in terminating the contract on account of fundamental breach thereof, then the said innocent party is entitled to claim damages for the entire contract i.e.for the part which is performed and also for the part of the contract which it was prevented from performing”.
34. Under the service tax law, which had identical requirements, it was settled law that mere flow of money cannot be subject matter of service tax and consideration/money should have 'nexus' with an identified supply of service. It was also equally settled that
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ot 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 Finance Act, 1994 in the absence of identifiable service that benefits an identified individual or individuals who make the contribution in return for the benefit so derived.
13. ………….Neither can monetary contribution of the individuals that is not attributable to an identifiable activity be deemed to be a consideration that is liable to be taxed merely because club” or association is the recipient of that contribution.”
(Emphasis supplied)
* Mormugao Port Trust v. Commissioner of Customs, Central Excise and Service Tax, Goa; 2016 TIOL 2843 CESTAT Mum, highlighting the importance of nexus of a service with the element of consideration to render a transaction liable for service tax, the Hon'ble Jurisdictional CEST AT (Mumbai) observed as follows:
“18. In our view, in ord
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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 appellant to their customers and for which purpose no consideration was ever received by them, we are of the view that the cancellation charges recovered by the appellant cannot be held to be the Consideration for providing business exhibition services. The same are thus not liable to service tax,”
“In Reliance Life Insurance Company Ltd. v. Commissioner of Service Tax, Mumbai ll, Appeal No. ST/85584/2015, the Hon'ble Mumbai Tribunal had dealt with the question of payment of service tax on surrender or partial withdrawal charges under the category of 'Management of Investment under ULIP services' for the period 01.04.2009 to 30.06.2012. These charges were collected by the assessee when a policy holder dilutes the policy completely or partially and had no nexus with the provision of main service
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t 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 Contract Act, 1872 what transpires is that surrender of policy is nothing but ending of contract for which compensation in the form of damages which cannot be termed as charges towards management.
In view of our above discussion and on perusal of the facts of the case we are of the view that the surrender charges are not part of taxable service of management of funds. Rather it is in the nature of penalty of liquidated damages which is not a service and hence cannot be made liable for tax during the period involved..
35. Further, it is important to keep in mind that the sum received by the Applicant is liquidated damages for the loss suffered by it as a result of premature termination of the contract. Recovery and payment of liquidated damages is a post termination event having no connection with the main supply of pro
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e 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 supply is also substantiated from the following foreign case laws dealing with similar issues and having provisions with identical language:
* In GSTR 2003-2011, the Australian Taxation Office (ATO) had to consider the applicability of GST on payments made on an early termination of a lease of goods by a lessor on account of a lessee's default. Under the Australian GST law, section 9-5 provides that a taxable supply is made if a) the supply is for a consideration, ii) the supply is made in the course of furtherance of an enterprise that one carries on, iii) the supply is connected with Australia and iv) the person making the supply is registered or required to be registered.
* As for the definition of the term 'supply, section 9(10) (2) of the Australian GST law provided a non-exhaustive list of ac
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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 out of a default by the lessess the termination does not occur as a consequence of any mutual agreement between the lessor and the lessee. It is the action of the lessor in exercising the lessor's right to terminate which brings the lease to an end.
71. The lease may require payment to be made by the lessee to the lessor to compensate the lessor for any damage or loss suffered because of the early termination. Genuine damage or loss cannot be characterized as a supply made by the lessor, because the damage or loss does not in itself constitute a supply under section 9-10.
72. A payment received to compensate the lessor for genuine damage or loss flowing from early termination as a result of a default by the lessee is not consideration for a supply……. There is no taxable supply because a payment
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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
…
the lessor's termination of the lease was not a supply of services. It was simply a unilateral act of the lessor. It terminated the lease and so terminated all further supplies of the services of granting possession of the equipment to the lessee … There was no relevant service to which the compensation payment could be directly linked. The termination cannot, therefore, be properly described as a supply of services effected for consideration …”.
39. From the terms of the agreement, is evident that there is no obligation cast upon the Applicant to tolerate the act of breach of the contract and receive consideration for such tolerance. Therefore, the conditions required for invoking the levy under section 5(e) of the Schedule of the CGST Act, 2017 are not satisfied. Accordingly, the liquidated dama
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uthority 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 GST law.
42. The aforesaid ruling of the ATO specifically considered and decided on taxability of damages in the context of the expression 'tolerating an act'. Such a ruling, therefore, ought not to be disregarded without sufficient reasons for doing so. Likewise, the decision in case of Financial and General Print Ltd (supra) holds sufficient persuasive value and ought not to be disregarded without providing explicit and sufficient reasons.
Mere inclusion of specific clause for payment of damages and quantification thereof should not change the nature of transaction to transform a lawful right of termination into an 'obligation to tolerate'
43. It is a business prudence that contracting parties foresee an act of breach by the other party and take measures to safeguard themselves against
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ment 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, the Applicant has suffered an injury/ loss. The Indian law recognises the Applicant's right to be compensated for such injury/ loss. To safeguard Applicant's interest under the Association Agreement, the parties had agreed to stipulate and incorporate specified amount which shall be payable as damages by the recipient to the Applicant. The rationale behind insertion of a clause stipulating payment of liquidated damages is only to avoid long-drawn litigation between contracting parties.
47. Mere mention of a clause stipulating quantum of damages payable would not in any way alter the underlying reasons for payment of the damages, which remains to be the injury/ loss caused to the Applicant. Had there been no mention of the quantum of such damages, the only difference would have been that th
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quidated 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, appreciating the aforesaid aspect, observed as below in Union of India v. Raman Iron Foundry and Ors., (1974) 2 SCC 231:
'Now it is true that the damages which are claimed are liquidated damages under clause 14, but so far as the law in India is concerned, there is no qualitative difference in the nature of the claim whether it be for liquidated damages 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. Now 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
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ant 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 should not alter the nature of the transaction entered into by the Applicant and make the damages received by it amenable to the levy of GST.
There cannot be an agreement to tolerate a breach, which is illegal as per the terms of the Association Agreement
52. The Applicant submits an agreement to tolerate an illegal act is not a valid agreement under the Indian law. Assuming without admitting that the Applicant is tolerating a default by the service recipient in discharging its obligations under the Association Agreement, it is submitted that such an agreement to tolerate an illegal act of non-payment can have no enforceability under law. This being so, the Association Agreement entered into by the parties cannot be construed to cast an obligation on the Applicant to tolerate an illegal act or situat
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rvice 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 situation. The jurisdictional officer does not explain how the Association Agreement in question is for discharge of an obligation towards refraining or tolerating any act or a situation.
56. The Applicant submits that there is no agreement to discharge an obligation for tolerating any act of default by the service recipient between the parties. The payment of liquidated damages is nothing but damages for the loss suffered by the Applicant and the same does not qualify as 'consideration' for the purpose of GST law.
57. Unless it is demonstrated that there is an obligation under the agreement to refrain from an act or tolerate an act or a situation and this obligation is coupled with the presence of consideration, there can be no levy of GST. In any event, the Applicant submits that
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r 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. Therefore, even assuming arguendo that there would be levy of GST on the liquidated damages due to the Applicant, it ought to be only on the actual receipt of liquidated damages by the Applicant.
61. The jurisdictional officer has provided similar views in respect of the valuation of the liquidated damages, observing that the value of supply of services will be determined based on the actual receipt of the liquidated damages by the applicant.
62. Without prejudice our submissions on applicability of GST on liquidated damages, it is highlighted that the comment of the jurisdictional officer are in line with the observations of the Apex Court in Union of India v. Raman Iron Foundation and Ors., (1974) 2 SCC 231, where the Hon'ble Apex Court observed as below:
” Now it is true that the dam
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m 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 of the above observations, it is clear that the question for time of supply and valuation cannot arise for adjudication till the claim of liquidated damages is finally adjudicated in the favor of the Applicant by the highest appellate forum and the Applicant actually receives the liquidated damages.
Statement containing the applicant's interpretation of law and/or facts, as the case may be, in respect of the questions(s) on which advance ruling is required
Statement containing the applicant's interpretation of law and/or facts, as the case may be, in respect of the aforesaid question(s) (i.e. applicant's view point and submissions on issues on which the advance ruling is sought):
The position of law and our understanding of the same
28.lt is important to note various statutory
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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” 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
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
(emphasis supplied)
31. Section 7 of the CGST Act, 2017 defines the term “supply” to include all forms of supply of goods or services or both. Also, it expressly seeks to include all activities treated as supply of goods or supply of services as referred to in Schedule II of the CGST Ac
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of money or conversion by cash or by any other mode, from one form, currency or denomination, to another form currency or denomination for which a separate consideration is charged.”
33. A plain reading of the aforesaid provisions indicate that for a transaction to qualify as a supply of service', it is necessary there is an underlying 'activity performed by one person for another for consideration.
34. In order to qualify as a 'supply of service for a consideration there has to be a service provider and a service recipient who have agreed to perform/receive specified services. The contract/agreement should involve contractual reciprocity.
35. For an activity to qualify as a 'service', the same has to be performed at the behest of the service recipient. An act done without corresponding desire or without reciprocate contractual obligation of the service recipient cannot be considered as an activity for a consideration.
36. In the case at hand, the claims of liq
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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 for the purpose of the instant application.
39. It is submitted that for a transaction to be covered under the list of clause 5(e) of Schedule II as agreeing to the obligation to tolerate an act, there has to be a concurrence to assume an obligation to refrain from an act or tolerate an act or a situation etc. In the absence of such an obligation between the parties, it is submitted that the said clause cannot be invoked and there can be no levy of GST.
40. It is submitted that the claim of liquidated damages is made towards making good the damages, losses or injuries arising from unintended' events and does not emanate from any 'obligation' on the part of any of the parties to tolerate an act or a situation.
41. It is submitted that suffering a damage or incurring a loss cannot be equated or considered to be making a supply of taxable ser
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o have performed any activity for a consideration for SPL with regard to liquidated damages claimed.
* Also, there is no contractual reciprocity or concurrence to assume an obligation to refrain from an act or tolerate an act between the Applicant and SPL, which are indispensable and essential for a transaction to qualify as a “supply of service'.
* Accordingly, the transaction in question does not qualify as a 'supply of service and hence is not subject to levy of GST.
44. In light of the above, it is clear that the liquidated damages which may be awarded by ICC to the Applicant do not qualify as a 'supply of service for purpose of levy of GST under the CGST Act, 2017 and would, therefore, not attract the levy of CGST Act, 2017.
45. It is further submitted that the receipt of liquidated damages by the Applicant would depend on the final award of the ICC which would be pronounced only post conclusion of the arbitration proceedings on April 8, 2018.
46. It is submitte
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idated 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 do not arise.
C. Pass any other order your good self may deem fit in the interests of justice.
03. CONTENTION – AS PER THE CONCERNED OFFICER
The submission, as reproduced verbatim, could be seen thus-
Comments and submission regarding above referred application as fallows.
Questions asked by the applicant for advance ruling
1. Whether liquidated damages that may be awarded to the applicant by International Chamber of Commerce (ICC) qualifies as a 'supply ' under Goods and Services Tax (GST) law, thereby attracting the levy of GST?
2. If the answer to the question No. 1 is in affirmative, what should be the time of supply, that is to say, the point of time in which NACC's liability to pay GST arise?
If the answer to the question No. 1 is in affirmative, what should be the value of supply on which GST is payable, th
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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 activity or transaction which is treated as a supply of service and the person is deemed to have received the consideration in the form of liquidated damages, fine or penalty and is accordingly, required to pay tax on such amount.
2. Time of Supply :
Section 13(2) of the Central Goods and Services Tax Act 2017 (CGST 2017) defines time of supply of services shall be the earliest of the following dates.
a) The date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier: or
b) the date of provision of service, if the invoice is not issued within the period
prescribed under sub-section (2) of section 31 or the date of receipt of payment whichever is earlier, or The date on which the recipient s
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ll 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 sub-section 5 of section 13 Where it is not possible to determine the time of supply under the provisions of subsection (2) or sub-section (3) or sub-section (4), the time of supply shall-(a) in a case where a periodical return has to be filed, be the date on which such return is to be filed; or (b) in any other case, be the date on which the tax is paid. 3) Value of Supply:
As per sub-section 4 of section 15 the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
Or
As per Rule 30 of CGST Rules 2017 Where the value of a supply of goods or services or both is not d
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agat 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 had earlier approached Service Tax Advance Ruling Authority at Delhi and the authority had rejected their application as premature at that time. They stated that presently also final arbitration award is awaited by October, 2018 only. From the company's side Sh. Hans Weber Sr. Tax Director appeared. Jurisdictional Officer, Ms. V. M. Wadkute, State Tax Officer (PUN-VAT-C-118) Pune appeared and made written submissions.
The application was admitted and final hearing was held on 03.07.2018 , Sh. N. Venkatraman Sr. Advocate alongwith Sh. Govardhan Purohit, Advocate, Sh Amit Bhagat Advocate and Sh. Aditya Khanna, Advocate, Sh. Prashant Agarwal and Sh. They appeared and made oral & written submissions. They also requested for time to make further submissions latest by 10.07.2018 which was granted. The ju
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ion 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 later on in March, 2011, NACC, US incorporated a subsidiary, NACC, India and 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.
The Sasan Project as per the Association Agreement was divided into three phases being, (1) Predevelopment phase, (2) Development phase and (3) Production phase. The details of terms and conditions of the agreement during these phases are as mentioned at relevant places in the Applicant's submission above.
We find that NACC, US in the initial phase and later NACC, India had rendered significant services to SPL as per terms and conditions of Association Agreement referred above. However it is alleged by the applicant that after some time SPL curtailed the activities of the a
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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 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 ?
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 ?
4. 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.
We find that in respect of the above, t
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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 covered under clause 5 (e) of Schedule II of the CGST Act, as there is no obligation to refrain from an act or to tolerate an act or a situation or to do an act.
(IV) Fourthly, they have contended that liquidated damages received for breach/termination of a contract cannot qualify as consideration, stating that liquidated damages paid by the service recipient is neither in respect of nor in response to any supply made by the applicant, instead it is paid to make good, loss/injury suffered by the applicant as a result of premature termination of the Association Agreement.
(V) They stated that mere inclusion of specific clause for payment of damages and quantification thereof should not change the nature of transaction to transform a lawful right of termination into an 'obligation to tolerate'.
We find
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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” 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
(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
(2) Notwithstanding anything contained in sub-section (1),
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as publi
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eration; 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 all the activities that are given in Section 7 (1) (a), (b), (c), and (d) would be included in 'supply'. For the purposes of this Act which implies that otherwise than the scope as covered in this Section and Act, the word 'supply' may even have a broader connotation and scope.
Thus as per the scope of the word 'supply' in the Act and the present facts of the case, we find that supply includes:-
(6) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal
(i) made or agreed to be made for a consideration by a person
(ii) in the course or furtherance of business.
Apart from the above provisions we also need to refer to Sr. No. 5(e) of Schedule II as given in Section 7(1)(d) of the CGST Act which is
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L 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 per agreed terms and conditions of payment and services provided and referred as under:-
(i) Pre-development phase.
(ii) Development phase.
(iii) Production phase.
We find that there is no dispute with respect to provision of services and applicability of levy of taxes in respect of the above services provided between the applicant and the service recipient SPL as it clearly falls within the scope of supply as given in Section 7(1)(a) of the CGST Act.
However we find that the Association Agreement as referred above did not last for the whole period as envisaged in the Association Agreement and the agreement is claimed to be terminated for breaches on the part of the service recipient SPL by the applicant in view of the existent provisions as were already there in the Association Agree
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arties;
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 shall furnish to Reliance (a) within sixty (60) days after the effective date of termination, an initial invoice for settlement of all costs incurred prior to the termination date and (b) within twenty (20) days of incurring such costs, additional invoices for (i) the On-Site Costs incurred as a result of the repatriation of the On-Site Consultants and (ii) the On-Site Costs relating to the tax-equalization payments for the On-Site Consultants. Reliance's payments of such invoices shall be subject to the provisions of Sections 5.3 and 5.6.
(b) If Reliance terminates this Agreement pursuant to Section 6.2(c), any damages recoverable by Reliance shall be limited to the amount of the Development Fees and/or Production Phase Royalties act
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ess 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 Section 13.2 (1, NAC may give written notice of such default to Reliance, in which case Reliance shall have twenty-one (21) days within which to cure the default. If, at the end of the twenty-one (21) day period, Reliance has not cuired the default NAC shall have the right, (i) if the default is of the type described in subclause (a) above, to immediately cease providing the Services until such time as the event of default is cured, (ii) if the default is of the type described in subclause (b) above, to cease providing such Services as NAC determines, in its reasonable discretion, cannot be performed due to Reliance's default until such time as the event of default is cured, or (iii) if any such default is not cured within sixty (60) days and NAC is not then in breach of this Agreement, to terminate this A
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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 under:-
Section 12.1 – Governing Law : This agreement shall be governed by, and construed and interpreted in accordance with, the laws of the United Kingdom with regard to its conflicts of laws principles
“Section 12.2 Dispute Resolution: Arbitration
(a) Any and all claims, disputes, questions or controversies involving Reliance on the one hand and NAC on the other hand arising out of or in connection with this Agreement (collectively, “Disputes”) which cannot be finally resolved by such parties within 60 (sixty) days of arising by amicable negotiation shall be resolved by final and binding arbitration to be administered by the International Chamber of Commerce (the “ICC”) in accordance with its commercial arbitration rules then in effect (the “Rules”). .The place of arbitration shall be London, England. Each
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, the parties hereby agree to cooperate in good faith with each other and the arbitral tribunal and to use the respective best efforts to respond promptly to any reasonable discovery demand made by such party and the arbitral tribunal.
(b) Arbitration proceedings shall be conducted in the English language and the arbitral award (the “Award”) shall be rendered be latest than six (6) months from the commencement of the arbitration or as otherwise provided by the Rules, unless otherwise extended by the arbitral tribunal for no more than an additional six (6) months for reasons that are just and equitable.
(c) Except as otherwise required by Applicable Laws of India, the arbitration proceedings and the Award shall not be made public without the joint consent of each party and each party shall maintain the confidentiality of such proceedings and the Award.
(d) Each party shall bear its own arbitration expenses and Reliance on the one hand, and NAC, on the other hand, shall pay one-half o
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nds and agrees that the Award shall be the final and binding remedy between them regarding any and all Disputes presented to the arbitral tribunal.”
Thus we find clearly from the terms and conditions as referred above in respect of Article VI, Article VIII, and Article XII of the Association Agreement as refereed above that as per the terms and conditions of the agreement referred above 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 part
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find that the consideration if any as received by the applicant after arbitration by the ICC would clearly qualify as 'supply' as per Sr. No. 5(e) of Schedule II of the CGST Act which reads as under:-
(5) Supply of Services : The following shall be treated as supply of services:-
“(e) Agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act.
In the present case as per details presented before us, we clearly find that there is a clear understanding or agreement between the parties in the present case to foresee and tolerate an act or a situation of default on the part of either of them for a monetary consideration which is actually a consideration received by them, though in the agreement they may be giving this consideration, other names such as 'damages' or 'compensation' as thought proper by them, but these different nomenclatures in their Agreement would in no way change the actual nature of monetary “considera
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point of time in which NACC's liability to pay GST arises ?
Answer 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.
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 auth
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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 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.
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.
Answer : The value of supply will be the actual amount of damages received by the applicant from SPL after the award by ICC
PLACE – Mumbai
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