2018 (5) TMI 1332 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRA – 2018 (13) G. S. T. L. 177 (A. A. R. – GST) – Levy of GST – liquidated damages – applicant contends that these damages being towards deficiency of services and reduce the original consideration and will not be considered as separate service covered by the term 'Obligation to tolerate an act or a situation'.
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Whether GST is applicable on Liquidated Damages in case of: Type 1 i.e. Operation & Maintenance activities; Type 2 i.e. Construction of new power plants or renovation of old plants; Or is applicable in both cases?
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Held that: – the contract price and the liquidated damages are two different aspects. Deduction of one from the other is a mere facilitation towards settlement of the accounts. This manner of giving effect to the obligations under the contract should not be deceptive of the actual intent.
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Presence of liquidation clause in the agreement:- Applicant has argued that it was never the intention o
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n of trial operation is established on the part of the Contractor. This would define the time of supply.
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Where the part of liquidated damages pertains to per-GST, would GST be applicable – Held that:- The question is based on some incorrect presumption owing to which the applicant seems to have adopted some method of deduction of liquidated damages from the payments to be made to the contractor. We are afraid that no such strategy of deducting or of capping can be inferred from the agreement clauses.
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Eligibility of credit of GST on such LT in the hands of Contractor / vendor – Held that:- The above question is not answered as the proper person to ask the above question would be the contractor /Vendor and not applicant. – GST-ARA-15/2017-18/B-30 Dated:- 8-5-2018 – Shri B. V. Borhade, Joint Commissioner of State Tax and Shri Pankaj Kumar, Joint Commissioner of Central Tax PROCEEDINGS (under section 98 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods
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Will it be the period in which delay is occurring or it is the time when decision to impose Liquidated Damages is taken? c) If some part of delay has occurred before GST roll-out and some part of delay has occurred after GST roll but, whether GST will be applicable to the Liquidated Damages imposed for entire period of delay or to the period falling after GST roll-out? In case when GST is to be imposed for period after date of GST rollout but due to maximum capping of LD, the amount of LD is calculated at given percentage instead of being period-based, then how GST needs to be levied. d) Whether the contractor/vendor will be able to utilize the amount of LD imposed over him as Input Tax Credit subject to satisfying all other conditions? At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST A
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and services for operational activities. In this case, if there is delay on the part of the contractor to provide materials / services; Liquidated damages (LD) are deducted from the amount payable to vendor. The L.D so deducted is treated as income Type 2 : Construction of new power plants or renovation of old plants In this regard, normally the contract is awarded to vendors to build the plant on Turnkey basis. Normally the contracts are awarded in three parts, supply of materials, erection & commissioning and Civil work. As per terms and conditions, the period of completing the contract is fixed. When plant construction is completed, the actual time taken for completion of contract is calculated. If there is delay in completing the contract, the assessment regarding party responsible for delay is made. If the delay is on account of contractor, then Liquidated damages (LD) are calculated as per contract terms and levied upon the contractor. In accounting, the LD imposedis reduced
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consideration towards a service provided by the company to the contractor requires clarification. For the sake of better understanding, clauses relating liquidated damages from one of the contracts pertaining to erection, testing and commissioning is reproduced below – "7.0 LIQUIDATED DAMAGES FOR DELAY IN ERECTION, TESTING AND COMMISSIONING 7. 1 The Contractor shall strictly adhere to the Protect completion schedule to achieve the trial operation in accordance with the project completion schedule. In case the Contractor fails to achieve successful completion of Trial Operation due to delay on his part, then the Owner shall levy liquidated damages. 7.2 Time Schedules indicated for various activities are for the purpose of monitoring to ensure work completion as per Project Completion Schedule. Only the successful completion of Trial Operation of the unit shall be considered for the purpose of levy of Liquidated Damages. 7.3 The payment by Contractor or deduction by Owner of any sum
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within the time period specified in the Project Completion Schedule due to reasons attributable to him then the owner shall levy Liquidated damages on the Contractor @12% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation per week of delay or part thereof subject to the maximum 10% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation." Similar clauses are there in supply, civil and structural work of the contract. Submission dt. 08.02.2018 I. STATEMENT OF FACTS 1. The Maharashtra State Power Generation Company Ltd (hereinafter referred to as applicants) is engaged in generation of power with object of making power available on affordable rates. 2 The applicant enters into contract with various contractors for the purpose of construction of new power plants or renovation of old plants or for o
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wner shall levy liquidated damages. 7.2 Time Schedules indicated for various activities are for the purpose of monitoring to ensure work completion as per Project Completion Schedule. Only the successful completion of Trial Operation of the unit shall be considered for the purpose of levy of Liquidated Damages. 7.3 The payment by Contractor or deduction by Owner of any sums under the provision of this clause shall not relieve the Contractor from his obligations to complete the works or from his other obligations under the contract. 7.4 The liability of payment of these liquidated damages by the Contractor will be established once the delay in successful completion of trial operation is established on the part of the Contractor and the Owner shall not be required to lake any further action like arbitration or approaching the Court of Law for levying the Liquidated damages. 7.5 Since the Liquidated damages are limited and the same cannot compensate the consequential loss of the Owner due
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contract price along with the applicable price variation (excluding taxes, duties and insurances charges.) as per contact price adjustment shall be considered. Further Liquidated Damages for each unit shall be levied separately and for this purpose, price of one unit shall be half of the price of both the units. Similar clauses are there in supply of balance of plant package, erection testing and commissioning of balance of plant package, supply of main plant package, civil and structural works of balance of plant package and various another contract entered into with various parties. The applicant enters into contract with various suppliers which inter-alia includes:- BHARAT HEAVY ELECTRICALS LIMITED. BGR ENERGY SYSTEMS LIMITED TATA PROJECT LIMITED. LANCO INFRATECH LIMITED The contract is more or less similarly worded. Each such contract has time line for completion of the project and levy of Liquidated Damages, if not completed within time. The specimen clause reproduced above repres
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ted damages imposed for entire period of delay or to the period falling after GST roll-out? In case when GST is to be imposed for period after date of GST rollout but due to maximum capping of liquidated damages, the amount of liquidated damages is calculated at given percentage instead of being period-based, then how GST needs to be levied. f) Whether the contractor / vendor will be able to utilize the amount of liquidated damages imposed over him as Input Tax Credit subject to satisfying all other conditions? III. APPLICANT'S INTERPRETATION : a) Liquidated Damages reduces the value of main supply: The contract entered into with the contractor gives the nature of services, the value of services and the time frame within which the services are required to be completed. The contractor undertaking the supply of service is aware of the fact that in case the services are not completed within the stipulated period, the value of contract will reduce. Since the recovery of Liquidated Dama
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(ii) to refrain from an act; (iii) to tolerate an act or situation; (h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g). Rulings are issued by Australian Tax Authority to interpret and clarify the provisions of GST law prevailing in that country. The ruling is an expression of the Commissioners opinion about the way in which the relevant provision applies or would apply to the entities, generally to a class of entities in relevant to a particular scheme. The Commissioner issued the public ruling on the payment of damages on early termination of lease of goods, cancellation of contracts and out of court settlements where in they had discussed the taxability of the liquidated damages. The same along with cases and books has been discussed as follows:- In GSTR 2003/11 of Goods and service tax ruling relating to payment on early termination of lease of goods, it was clarified that if clause relating to early termination has been specified in the origina
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name, personal injury, termination or breach of contract In such cases, there is therefore no GST liability. " Thus, Australian GST has treated the payment of liquidation damages as part of the same supply and mere re-determination of the consideration of the same supply if the has been specified in the original contract i.e. if liquidation of damages are to be borne by the service provider then same will be considered as towards deficiency of services and thereby reduces the original consideration and it will not be considered as separate service and hence it is not covered by the term Obligation to tolerate an act or a situation' The deficiency of service may arise on account of poor quality of service or delay in rendering the service and therefore it is our interpretation that deduction of the contract price on account of delay in contract will be considered towards deficiency of service and therefore will not liable to GST in the hands of the applicant, b) Since as per t
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within a period of 14 days from the completion of the taxable service. The invoice needs to indicate inter alia the value of service so completed. Thus, it is important to identify the service so completed. This would include not only the physical part of providing the service but also the completion of all other auxiliary activities that enable the service provider to be in a position to issue the invoice. Such auxiliary activities could include activities like measurement, quality testing, etc. which may be essential pre-requisites for identification of completion of service. The test for the determination whether a service has been completed would be the completion of all the related activities that place the service provider in a situation to be able to issue an invoice. However, such activities do not include flimsy or irrelevant grounds for delay in issuance of invoice. " Thus, the Ancillary work is required to be completed for the completion of service. In this case, the a
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tional submission by the applicant on 27.02.2018 In addition to the re-submissions made on certain portion of our application for advance ruling, the applicant would like to submit the following additional submissions in support of its view: – 1) Determination of Transaction value. a. Clause (d) of Section 4(3) Central Excise Act, 1944 defines the expression "transaction value " as follows; "means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or un connection with the sale, whether payable at the lime of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excis
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t related and the price is the sole consideration for the supply. Section 15 of the CGST Act 2017, which is similarly worded i.e. The transaction value is which actually paid or payable hence we can say that the ratio of the above cited judgements can also be applied to the section 15(1) of the CGST Act, 2017 and it can be concluded that resultant price after Liquidated Damages would be the transaction value under section 15(1) of the CGST Act, 2017. 2) Further it is also submitted that primary intention is not to 'tolerate' an act or a 'situation'. Performance is the essence of a contract and hence parties to contract generally incorporate their expectation in terms of damage caused by failure of either party to perform its obligations completely or as per the agreed terms. The contract may prescribe damages for deficiency in the performance of contract known as 'liquidated damages'. It is to dissuade unsatisfactory performance or non-performance. For instance,
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on of loss suffered by recipient 3) Intention of contracting parties are essential to determine nature of transaction. Further, Various courts in India have time and again held that for determining the Tax implications with regard to a transaction, reliance needs to be placed on the intention of the contracting parties as gathered from the contract or conduct of the parties. In case of Dr Golak Bihari Mohanty vs. state of Orissa, [1974] 33 STC 514 (Orissa) = 1974 (1) TMI 91 – ORISSA HIGH COURT , the assessee was carrying on private practice as a radiologist and for that purpose had installed an X-ray plant He used to purchase X-ray plates and other chemicals and take X-ray photographs of patients according to requisitions from physicians as also of his own patients. After taking the X-ray, he used to give technical advice to his patients and was charging a flat rate towards his remuneration and cost of materials. Sales Tax Officer was of the view that the turnover arising from such tra
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ties or such settlement though attributed to the execution of the contract is merely incidental and does not represent the primary intent and objective of the parties which obviously logically and legally continues to construct and deliver a power plant At best these settlements could be considered to be an adjustment or a reduction in the contractual consideration or compensation to be received by the contractor. However, considering these settlements as a separate and distinct supply' from that of the LSTK's scope and ambit seems to be a bit too far stretched. If this argument is found to have some merit, then what could possibly attract levy of GST under the impugned clause could be an arrangement where primary intention is to tolerate an act or a situation. 4) Revised amount in case of renegotiation will be the amount of consideration Further, the CBEC, vide their circular dated 31.03.2011, clarified the service tax rule, 1994, explaining that in case of renegotiation of th
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s evident from the above circular, that in case the consideration for any other service is changed as per the term and conditions laid down in the contract, then service tax/GST will be payable on the renegotiated amount. Additional submission on 07.03.2018 1. We thank you very much for patient hearing on 28.02.2018 on the above application. As submitted during the hearing following additional submission/documents are submitted: – i) Manner of Recovery. As directed, a specimen running bill raised by M/s Bharat Heavy Electricals Limited, bearing no. MS/PW/9515/13/1027(89) is attached as Annexure -l. ln this case 15% of the invoice amounting to ₹ 56,29,471/- has been deducted as retention This amount is deducted on invoice value of ₹ 3,75,29,810/- For the sake of clarification as to retention @ 15% towards LD, when the maximum limit of LD is prescribed at 10%, it is to submit that in case of bills which were received and passed for payment before the scheduled completion date
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the manner in which the recovery of liquidated damages is made by the applicant. ii) amount not retained for toleration of Act. During the hearing the query regarding taxability under the toleration of an act was discussed. It was submitted that the liquidated damage is part of the contract for supply of equipment and service. It is not a separate contract of toleration of an act for which payment is made. The applicant had attached one of the contracts with M/s BHEL as specimen. It was submitted that it was one single contract for supply of goods and services and not two contracts for supply of goods services and toleration of an act. The Divisible contract has been defined in Black's Law' Dictionary, Sixth Edition, Page no. 479, as follows: Divisible contract "One which is in its nature and purposes susceptible of division and apportionment, having two or more parts in respect to mailers and things contemplated and embraced by it, not necessarily dependent on each other
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e, the execution of the contract and deduction cannot be enforced separately. The delay in supply will always precede deduction of liquidated damages, thus, deduction of liquidated damages cannot be independently enforced. Hence it is submitted that the contract is for single supply and not for the two supplies. In any contract if the activities are depended on each other and it cannot be performed individually, then there will not to be two separate supplies. In a contract two supplies can be considered only when two supplies are independent and not depending on each other. In this case, the deduction of the amount is determined on delay in making supply of goods or services by the contractor. Unless, there is delay the clause of liquidated damage will not apply Therefore, it is submitted that contract is single supply and not for two separate supply. iii) The fact is also evident from the provision of Section 15(2) of the CGST Act, 2017. The Section 15 provides for determination of v
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e section 73 and section 74 of the Indian Contract Act, 1872 provides for recovery of liquidated damages in case of breach of contract. The provision of the section 73 and section 74 of the Indian Contract Act, 1872 reads as follows: – 73. Compensation for loss or damage caused by breach of contract When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. 74. Compensation for breach of contract where penalty stipulated for.- When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual dam
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o compensate the person for loss suffered by him. The amount of loss suffered by appellant due to delay as mentioned in the contract. Therefore, it is submitted that the damages are not received by the person for the toleration of an act, but it is made for compensate the loss suffered by the appellant. Therefore, it is submitted that recovery of liquidated damage is not for any supply of service for toleration of an act. 3. The entry in 5(e) of CGST Act, reads as follows: (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act; It was mentioned during hearing that there should be a separate contract to tolerate an act and receive payment for the same The word "obligation" used in clause clearly means that the person should undertake to tolerate an act. There should be a contract for the said purpose and the consideration should be received for such an act of toleration. The contract will not be in the form of compensation o
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ate 18% is correct or any other entry is relevant? (b) LD is determined and imposed upon the contractor after in-depth study. In such case, what will be construed as the time of supply? Will it be the period in which delay is occurring or it is the time when decision to impose LD is taken'' (c) If some part of delay has occurred before GST roll-out and some part of delay has occurred after GST roll-out, whether GST will be applicable to the LD imposed for entire period of delay or to the period falling after GST roll-out? In case when GST when GST is to be imposed for period after date of GST rollout but due to maximum capping of LD, the amount of LD is calculated at given percentage instead of being period-based, then how GST needs to be levied. (d) Whether the contractor/vendor will be able to utilize the amount of LD imposed over him as Input Tax Credit subject to satisfying all other conditions? a) GST on LD is covered under Schedule II entry no 5(2) (e), GST rate will be a
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.2018 otherwise their application is liable for rejection without further notice. Jurisdictional Officer, Sh. S.D. Page, Dy. Commissioner of State Tax (E-630), Large Tax Unit-3, Mumbai also appeared and stated that they do not have objection to admission of application of Advance Ruling and would be submitting details as required at the time of final hearing. Fresh application of Advance Ruling was received on dt.08.02.2018 and the applicant was called for a final hearing on dt.28.02.2018. Sh. S. S. Gupta, Sh. Karan Awtani, Ashutosh Shukla attended alongwith Sh. Vijay Chitlange and Ms. Madhuri Mundlye, (Assistant General Manager) and made revised submission which are taken on record. They orally reiterated their contention as made in the revised application submitted on dt.08.02.2018. They also submitted that they would be submitting, latest by dt.08.03.2018, copies of invoices evidencing recovery of liquidated damages. Jurisdictional Officer Sh. S.D. Page also appeared and made writte
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is deducted in two cases. Type 1 : Operation & Maintenance activities In the normal course of business of generation and sale of power, Mahagenco enters in to various contracts with vendor for providing materials and services for operational activities. In this case, if there is delay on the part of the contractor to provide materials / services; Liquidated damages (LD) are deducted from the amount payable to vendor. The LD so deducted is treated as income Type 2 : Construction of new power plants or renovation of old plants In this regard, normally the contract is awarded to vendors to build the plant on Turnkey basis. Normally the contracts are awarded in three parts, supply of materials, erection and commissioning and Civil work. As per terms and conditions, the period of completing the contract is fixed. When plant construction is completed, the actual time taken for completion of contract is calculated. If there is delay in completing the contract, the assessment regarding par
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be supported by the agreement. We see that a Contract Agreement between Maharashtra State Power Generation Company Limited (Owner) and Bharat Heavy Electricals Limited (Contractor) for Erection & Commissioning of Main Plant Package at Chandrapur T.P.S. Expansion Project 2 x 500 MW has been provided. The agreement consists of a set of various documents such as Letter of Award, Letter of Acceptance, etc. However, the first thing that we notice is that the agreement pertains to the period before the GST Act came into force. The applicant has submitted that the agreements are usually entered on the lines similar to the agreement submitted for our perusal. The clauses as are relevant for determination of the issue at hand could be had a look at – Agreement dt.30.03.2010 Whereas the Owner is desirous that certain ancillary services should be provided by the Contractor, viz. Erection, Testing & Commissioning of Main Plant equipments consisting of Steam Generator, Steam Turbine and Gen
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ade by the Owner to the Contractor as hereinafter mentioned, the Contractor hereby covenants with the Owner to provide the goods and to remedy defects therein in conforming in all respects with the provisions of the Contract. 4. The Owner hereby covenants to pay the Contractor in consideration of the provision of the goods and the remedying of defect therein, the Contract Price or such other sum as may become payable under the provisions of the Contract at the times and in the manner prescribed by the Contract Letter of Award dt.25.07.2008 2.0 SCOPE OF CONTRACT 2.1 The scope of contract shall include receipt of materials/ equipment, unloading and handling at site, transportation to stores, storage, checking of materials in stores, transportation of material to erection site, carrying out preparatory works prior to erection of material, insurance, erection, testing and commissioning, final painting and putting into operation of the Main Plant Equipments supplied by BHEL under supply con
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luding Comprehensive Insurance charges. : ₹ 2478000000/- ii) Service tax on E & C at 12.36% : ₹ 306280800/- Total Price for Erection, Testing & Commissioning of Main Plant Equipments including Comprehensive Insurance (Rupees Two Hundred Seventy eight Crores Forty two Lakhs Eighty Thousand Eight Hundred only) Rs.2784280800/- 4.0 CONTRACT PRICE ADJUSTMENT / VARIATION 4.1 The price for erection, testing & commissioning excluding insurance charges and taxes & duties, shall be subjected to price variation as per the Terms of Bid Specification under ref.1 with Base Indices as on March 08. The price variation shall be subjected to a ceiling of (+/-) 20% of the contract price for Erection, Testing & Commissioning excluding taxes & duties and insurance charges. 4.2 In case the contract period is required to be examined beyond the cut off dates for reasons attributable to the Contractor, for making payments towards price variation, the Owner shall select the i
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LIQUIDATED DAMAGES 10.1 If the Contractor fails to achieve the trial operation of the unit within the stipulated time period as indicated above from the zero date then the Owner shall levy Liquidated Damages on the contractor @1/2% of the contract price for Erection, Testing & Commissioning along with applicable price variation price per week of delay or part thereof subject to a maximum of 10% of the price for Erection, Testing & Commissioning along with applicable price variation. For the purpose of levy of liquidated damages, the contract price for Erection, Testing & Commissioning excluding Insurance charges and taxes & duties and the same for one unit shall be half of the total price. 11.0 TERMS OF PAYMENT 11.1 The Owner shall make progressive payment as and when they are due as per the payment schedule / Billing Break-up approved by the Owner. The Contractor should note that financing of this project shall be covered under loan from Rural Electrification Corporat
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is amended as below. The contract price for Erection, Testing & Commissioning of Main Plant equipments is Rs. ₹ 2,75,28,20,000/- (Rupees Two Hundred Seventy Five Crore Twenty Eight Lakh Twenty Thousand only) as detailed below. Sr No. Particulars Amount in Rs. i) Price for Erection, Testing & Commissioning including Comprehensive Insurance charges ₹ 2,45,00,00,000/- ii) Service tax Including applicable Cess @ 12.36% ₹ 30,28,20,000/- Total Price for Erection, Testing & Commissioning of Main Plant Equipments including Comprehensive Insurance (Rupees Two Hundred Seventy eight Crores Twenty Eight Lakh Twenty Thousand only) Rs.2784280800/- Section 2 – General Conditions of Contract 3.0 DEFINITION OF TERMS 3.9 "works" shall mean labour and services and complete erection, testing and commissioning of the equipment handling, unloading, storage etc. as per contract. 3.13 (A) Contract Price shall mean the total lump-sum price named in the contract for provi
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ms, Such claims shall be paid by the Contractor within 15 (fifteen) days of (he receipt of the corresponding bills and if not paid by the Contractor within the said period, the Owner may then deduct the amount from any monies due or becoming due by him to the Contractor under this contract or any other contract. These amounts may be recovered by actions of law or otherwise, if the Contractor fails to satisfy the Owner of such claims. 21.0 CONTRACTOR'S DEFAULT 21.1 If the contactor shall neglect to execute the works as defined in the contract with due diligence and expedition or shall refuse or neglect to comply with any reasonable orders given to him in writing by the Engineer in connection with the works or shall contravene the provisions of the contract, the Owner may give a notice in writing to the contractor to make good the failure, neglect or contravention complained off Should the contactor fail to comply with the notice within 30 (thirty ) days from the date of service ther
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hall have to pay if the completion of works is delayed. In addition, such action by the owner as aforesaid shall not relieve the Contactor of his responsibility to pay liquidated damages for delay in completion of the works as defined in this contract. 51.0 OWNERSHIP OF PLANT 51.1 The plant and equipment supplied by the Contractor pursuant to the contract shall become the property of the Owner at whichever is the earlier of the following limes viz. i) When the plant and equipment is delivered/despatched pursuant to the contract ii) When the contractor has been paid any sum to which he may become entitles in accordance with the provisions of this contract. iii) Plant is otherwise taken over by the owner in terms of contract. Section 3 – Special Conditions of Contract 7.0 LIQUIDATED DAMAGES FOR DELAY IN ERECTION, TESTING AND COMMISSIONING 7. 1 The Contractor shall strictly adhere to the Protect completion schedule to achieve the trial operation units 8 & 9 by 41 and 44 months respect
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itration or approaching the Court of Law for levying the Liquidated damages. 7.5 Since the Liquidated damages are limited and the same cannot compensate the consequential loss of the Owner due to delay on the part of the Contractor, the Owner reserves the right to get the work done at the risk and cost of the Contractor. in case delay on the part of the Contractor has been established after giving notice to the Contractor. as may be deemed fit in the interest of completing the balance works. 7.6 If the contractor fails to achieve the Trial Operation of the unit within the time period specified in the Project Completion Schedule due to reasons attributable to him then the owner shall levy Liquidated damages on the Contractor @1/2% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation per week of delay or part thereof subject to the maximum 10% of the contract price for erection, testing and com
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% advance adjustment) of the price for erection, testing & commissioning along with applicable 100% Service tax & education cess as per agreed billing break up shall be paid on prorata basis. ……………………………… The following documents shall be submitted ………….. i) Invoice 1 Original + 2 copies 13.5.3 The next 5% (five percent) of the price for erection, testing & commissioning shall be released within 30 days on Successful Completion of Performance Guarantee test. In case Performance Guarantee test is delayed beyond the contractual completion schedule, (to meet the needs of the Owner) the last 5% shall be released on the scheduled date of performance guarantee test against an equivalent bank guarantee valid upto actual satisfactory completion of PG test. The following documents shall be submitted. …………. i) Invoice 1 Original + 2 copies 13.5.4 PAYMENT TOWARDS MARINE CUM ERECTION INSURANCE CHARGES 13.6.1 100% payment towards Marine-cum Erectio
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g along with applicable price variation. For the purpose of levy of liquidated damages, the contract price for Erection, Testing & Commissioning excluding Insurance charges and taxes & duties and the same for one unit shall be half of the total price. 2. The obligations on the Contractor calling for supply of the deliverables thereunder is one event. This event consisting of a supply occurs first. After occurrence of this event, there is evaluation in terms of whether the supply of the deliverables under the agreement were supplied within the time frame as agreed upon by the Contractor. This evaluation results in either a timely or delayed or a premature performance. The finding of this evaluation when there being a delay, the contingent liability of liquidated damages translates into an actual recoverable liability. This is the second event. What we say has been incorporated in the agreement in the words thus – The liability of payment of these liquidated damages by the Contra
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n be seen thus – a. The clause relating to contract price and contract value say thus – 3.13 (A) Contract Price shall mean the total lump-sum price named in the contract for providing all services as per the scope of the contract including all applicable taxes, duties & insurance charges. (B) Total Contract Price means the contract price plus the price variations, if any. 3.14 "Contract value" shall mean that part of the contract price which is properly apportionable to the plant or work in question having regard to the state, conditions and topographical location of the plant, the amount of work done and all other relevant circumstances and disregarding any changes that may have occurred since the date of contract in the cost of executing the works. Neither the contract price nor the contract value refer to the eventuality of liquidated damages. Contract price is the total lumpsum price plus the price variations. There is no specific indication as to reduction in the con
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ontractor shall bill all such claims regularly as and when they fall due. Such bills shall be supported by appropriate documents or explanations, to enable the Contractor to properly identify such claims. Such claims shall be paid by the Contractor within 15 (fifteen) days of the receipt of the corresponding bills and if not paid by the Contractor within the said period, the Owner may then deduct the amount from any monies due or becoming due by him to the Contractor under this contract or any other contract. These amounts may be recovered by actions of law or otherwise, if the Contractor fails to satisfy the Owner of such claims. A perusal of the above clause suggests that when the Owner incurs certain expenses which should have been borne by the Contractor, there is a separate mechanism of recovery also other than recovery by way of adjustment from the payments to be made to the Contractor. d. There is also a clause about Contractor's default thus – 21.0 CONTRACTOR'S DEFAULT
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shall be entitled to retain and apply any balance which may otherwise be due to the contactor or such part thereof, as may be necessary, to the payment of cost of executing the said part of the works or of completing the works. If the cost of executing the said part of the works or of completing the works thereof as aforesaid shall exceed the balance due to the contractor, the contractor shall pay such excesses. Such payment of excess amount shall be independent of the liquidated damages for delay which the contactor shall have to pay if the completion of works is delayed. It can be seen from the above that payment of liquidated damages is treated as an independent liability under the contract. It is not to be mixed with other payments due to the Owner from the Contractor, e. The clause relating to payment towards advance or payment for execution, testing, commissioning also does not require invoices to be considered taking into consideration the liability towards liquidated damages.
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billing 41,74, 816 5629471 against L. D – 15% 6. Net billing with Service Tax (6) = (4)+(5) 360,75,155 12017976 Deductions 29686680 N pay What the above rough calculations as shown by the applicant reveal is that the amount shown as Net and Tax is acceptable to the applicant. It is only while making the payment of the above acceptable amount that the applicant deducts some amount towards liquidated damages. Thus, the value of the work done and which is to be paid is not affected by the amount deducted therefrom towards liquidated damages. Thus, the consideration for the work done remains unaltered. How the amount for the work done is discharged between the parties should not bother the Taxmen as these are the adjustments between the parties. For the Taxman, what would matter is the value for the work done. And once this valuation is properly done and tax liability thereon discharged, whether this value is paid partially or not paid at all would not be a concern from the taxation perspe
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ract value becomes necessary as the applicant has relied on the following provision in sub-section (1) of section 15 of the GST Act to claim that the reduction of the amount towards Liquidated Damages amounts to reducing the value of the supply. It also becomes necessary as the applicant informs that the Liquidated Damages so deducted are treated as income of the applicant. The provision reads thus- Value of taxable supply. 15. (1) 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. In the present case, the agreement clauses as reproduced above, the invoice as prepared card the calculations, as reproduced above, as made by the applicant reveal that there are no two opinions between the contracting parties that the value of the supply as receiv
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o tolerate it. In this regard, we have to observe that if an agreement has such a clause and if the eventuality actually happens then the GST Act has provided for such an eventuality in terms of the provision as follows : SCHEDULE II [See section 7] ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES 5. Supply of services The following shall be treated as supply of services, namely:- (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, the agreement provides that the liability of payment of these liquidated damages by the Contractor will be established once the delay in successful completion of trial operation is established on the part of the Contractor. Thus, the act of delayed supply has happened. The same is being tolerated by an additional levy in the nature of liquidated damages. The agreement has also provided that the payment by Contractor or deduction by Owner of any sums under the prov
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er Bench in Victory Electricals (cited supra) that that wherever the assesse, as per terms of the contract between the parties and on account of delay in delivery of manufactured goods, is liable to pay a lesser amount than the generally agreed price as a result of a clause stipulating variation in the price, on account of liability to "liquidated damages" irrespective of whether the clause is titled "penalty" or "liquidated damages", the resultant price would be the "transaction value" and such value shall be alone liable to levy of excise duty, at the applicable rate. In the present case, there are no such clauses as would tantamount to reducing the contract price or the contract value of the supplies of goods or services or both as made by the Contractor. In fact in the present case, the levy of liquidated damages is specifically identified as an independent levy. We have seen that the Contract Price Variation clause in the impugned agreement,
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ms of the agreement between Maharashtra State Power Generation Company Limited (Owner) and Bharat Heavy Electricals Limited (Contractor) for Erection & Commissioning of Main Plant Package at Chandrapur T.P.S. Expansion Project 2 x 500 MW that has been provided for our perusal. In terms of the aforesaid agreement, GST would be applicable on the Liquidated Damages. Question 2 If GST applicable, kindly clarify the following related aspects also a) Whether the GST on Liquidated Damages is covered under Schedule II entry No 5(2)(e) vide HSN code 9997-Other Services rate 18% is correct or any other entry is relevant? We would be constrained to restrict the answer to this question in terms of only the agreement placed before us. We have observed above that the impugned levy of liquidated damages would be covered by clause (e) of para 5 of Schedule II appended to the GST Act. To answer the question as regards the schedule entry and the tax rate applicable, we find that there is no specific
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Heading 9997 Other services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified). 18% [9% + 9%] b) Liquidated Damages is determined and imposed upon the contractor after in-depth study. In such case, what will be construed as the time of supply. Will it be the period in which delay is occurring or it is the time when decision to impose Liquidated Damages is taken? We would be constrained to restrict the answer to this question in terms of only the agreement placed before us. The question would stand answered by the following clauses in the agreement – 10.0 LIQUIDATED DAMAGES 10.1 If the Contractor fails to achieve the trial operation of the unit within the stipulated time period as indicated above from the zero date then the Owner shall levy Liquidated Damages on the contractor @1/2% of the contract price for Erection, Testing & Commissioning along with applicable price variatio
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ect Completion Schedule. Only the successful completion of Trial Operation of the unit shall be considered for the purpose of levy of Liquidated Damages. 7.3 The payment by Contractor or deduction by Owner of any sums under the provision of this clause shall not relieve the Contractor from his obligations to complete the works or from his other obligations under the contract. 7.4 The liability of payment of these liquidated damages by the Contractor will be established once the delay in successful completion of trial operation is established on the part of the Contractor and the Owner shall not be required to lake any further action like arbitration or approaching the Court of Law for levying the Liquidated damages. 7.5 Since the Liquidated damages are limited and the same cannot compensate the consequential loss of the Owner due to delay on the part of the Contractor, the Owner reserves the right to get the work done at the risk and cost of the Contractor. in case delay on the part of
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Further Liquidated Damages for each unit shall be levied separately and for this purpose, price of one unit shall be half of the price of both the units. All the above clauses reveal that the levy of liquidated damages is not when the delay is occurring. The Agreement expressly provides that liability of payment of these liquidated damages by the Contractor will be established once the delay in successful completion of trial operation is established on the part of the Contractor. This would define the time of supply. c) If some part of delay has occurred before GST roll-out and some part of delay has occurred after GST roll-out, whether GST will be applicable to the Liquidated Damages imposed for entire period of delay or to the period falling after GST roll-out? In case when GST is to be imposed for period after date of GST rollout but due to maximum capping of LD, the amount of LD is calculated at given percentage instead of being period-based, then how GST needs to be levied. The q
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r in respect of the liquidated damages if any collected/received under the previously applicable service tax regime before coming into effect of GST, would be dealt with in accordance with the then existant provisions under applicable laws and we do not offer any view with regard to the previous service tax regime being out of the scope of present authority. d) Whether the contractor/vendor will be able to utilize the amount of LD imposed over him as Input Tax Credit subject to satisfying all other conditions? The above question is not answered as the proper person to ask the above question would be the contractor /Vendor and not applicant. 06. In view of the deliberations held hereinabove, we 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-15/2017-18/B-30 Mumbai dt. 08/05/2018 For reasons as discussed in the body of the order, the questions are answered, as under, in terms of th
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ned levy of liquidated damages. Q.2(b) Liquidated Damages is determined and imposed upon the contractor after in-depth study. In such case, what will be construed as the time of supply. Will it be the period in which delay is occurring or it is the time when decision to impose Liquidated Damages is taken? A.2(b) In terms of the aforesaid agreement, the clauses reveal that the levy of liquidated damages is not when the delay is occurring but the liability of payment of these liquidated damages by the Contractor will be established once the delay in successful completion of trial operation is established on the part of the Contractor. This would define the time of supply. Q. 2 (c) If some part of delay has occurred before GST roll-out and some part of delay has occurred after GST roll-out, whether GST will be applicable to the Liquidated Damages imposed for entire period of delay or to the period falling after GST roll-out? In case when GST is to be imposed for period after date of GST r
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