IN RE : MAHARASHTRA STATE POWER GENERATION COMPANY LIMITED
GST
2018 (5) TMI 1332 – AUTHORITY FOR ADVANCE RULING – MAHARASHTRA – 2018 (13) G. S. T. L. 177 (A. A. R. – GST), [2020] 75 G S.T.R. 180 (AAR)
AUTHORITY FOR ADVANCE RULING – MAHARASHTRA – AAR
Dated:- 8-5-2018
GST-ARA-15/2017-18/B-30
GST
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 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 MAHARASHTRA STATE POWER GENERATION COMPANY LIMITED, the applicant, seeking an advance ruling in respect of the following :-
1) Whether GST is applicable on Liquidated Damages in case of,-
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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 Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Adva
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ties. 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
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terming the LD as a 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 purpo
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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 @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 po
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ct completion schedule to achieve the trial operation units 8 & 9 by 41 and 44 months respectively. In case the Contractor fails to achieve successful completion of Trial Operation within specified time period as per the project completion Schedule 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 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 succ
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uding 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.”
7.7 For the purpose of deciding the amount of Liquidated Damages on the erection price, 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 ent
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lassified under the category in which the services of the contractor are classified?
c) Whether the GST on liquidated damages is covered under Schedule II entry no.5(e) vide HSN code 9997-Other Services rate 18% is correct or any other entry is relevant?
d) 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?
e) If some part of delay has occurred before GST roll-out and some part of delay has occurred after GST roll-out, whether GST will be 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 liquidated damages, the amount of liquidated damages is calculated at given percentage inst
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d by the applicant. The applicant relies upon the following judgments:-
a) Commissioner of Chandigarh v/s. M/s. HFCL 2015(11)-TMI-893-CESTAT
b) M/s. Victory Electricals Ltd. 2013-(298)-ELT-534
Reliance is placed on Australian Ruling issued under the Australian Goods & Service Tax Act, 1999:
The Australian Goods & Service Tax Act, 1999 defines 'supply' u/s. 9-10(1) as follows:
A supply is any form of supply whatsoever.
The Sub-Section 9-10(2) further provides as follows:
Without limiting sub-section (1), supply includes any of these:-
(a) a supply of goods;
&nbs
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i) 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 clar
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damage, negligence causing loss of profits, breach of copyright, wrongful use of trade 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 pr
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tractor. The CBEC vide Circular No. 144/13/2011 dated 18/07/2011 has clarified that the services are completed only when the auxiliary activities for the purpose of raising invoice has also been completed. The para 2 of the Circular is reproduced below:
“2. These representations have been examined. The Service Tax Rules, 1994 require that invoice should be issued 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 t
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or deduction of Liquidated Damages.
f) The contractor and vendor will be entitled to the credit if any, payable on the Liquidated Damages as the expense is incurred in the course or furtherance of business. Therefore, it is an input service used by him in the course of supplying the services. The interpretation given for para (b) to (f) is without prejudice to our interpretation that no GST is payable, as the deduction of Liquidated Damages does not amount to supply of any services.
Additional 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. Cl
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e duty was payable after considering the amount of Liquidated Damages:
1. COMMR. OF C EX.. CHANDIGARH-l Versus H.F.C. L . (WIRELESS DIVISION) 2015 (11) TMI 893 – CESTAT NEW DELHI
2. VICTORY ELECTRICALS LTD 2013 (290) E.L.T. 534 (Tri. – LB) = 2013 (12) TMI 81 – CESTAT CHENNAI
3. MRS. Priyaraj Electronics Ltd Versus Commissioner of Central Excise Bangalore 2016 (6) TMI 873 – CESTAT BANGALORE
4. UNITED TELECOM LTD 2006 (204) E.L.T. 626 (Tri. – Bang.) = 2006 (9) TMI 321 – CESTAT, BANGALORE
b. Under GST law section 15(1) of the CGST act,
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 wher
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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, contracts state that lime is the essence of contract, and any delay invites say, 1/2% or 1% of the value of the contract for every week of delay and the like. Similarly, it is common to forfeit earnest money deposit (EMD) from a bidder in case he wins the bid but fails to act thereafter. This forfeiture clause is a deterrent for non-serious bidders entering the fray. Other examples may be rent for delay in lifting goods; agreeing to shoulder testing charges for samples to meet standards; cost of removing rejected goods, etc
Payment of damages, deducting the liquidated damages or the forfeiture of deposit does not restitute the person to whom loss or damage is caused. Liquidated damages are in nature of a measure of d
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y 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 transactions was liable to tax under the Act. The hon'ble High Court of Orissa held that;
'Mere passing of property in an article or commodity during the course of the performance of the transaction in question does not render it a transaction of sale. For, even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work and property in such articles or materials may pass to the other party. That would not necessarily convert the contract info one of sale of those materials. In
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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 the amount of consideration in terms of the contract, then the service tax will be payable on such revised amount, subject to the fact that the excess amount is either refunded or a suitable credit note is issued to the service receiver the relevant extract reads as follows:
11. Changes
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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 Rs. 56,29,471/- has been deducted as retention This amount is deducted on invoice value of Rs. 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 su
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tion is transferred to LD Account and LD amount is then transferred to project cost and as such Project cost is reduced to that extent.
This explains the manner in which the recovery of liquidated damages is made by the 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 bee
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ion and apportionment, having two or more parts, in respect to matters and things contemplated and embraced by it, not necessarily dependent upon each other, or intended by parties as being dependent Gross v Maytex Knitting Mills of Cal.. 116 C.A. 2d 705, 254 P. 2d 163, 167 See separability clause.
When a contract is severable, a breach may be found to constitute a default as to only the specific part breached, thus relieving the defaulting party from liability for damages for breach of the entire contract
Hence, 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 perf
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nalty will be added to the consideration of the supply. They will not be considered as a separate supply of toleration of an act. The penalty will be leviable for breach of any condition of contract. The penalty as per statutory provision is therefore has been considered as a part of value of supply and not as amount received for toleration of an act. Similarly, interest will be charged for delay in making payment by the recipient. The interest therefore cannot be considered as part of amount received for toleration of an act or delay in making payment.
In view of the above, it is submitted that the liquidated damages cannot be considered as amount received for tolerating an act.
2. Liquidated damages are recovered for compensating the loss suffered by the recipient. The section 73 and section 74 of the Indian Contract Act, 1872 provides for recovery of liquidated damages in case of breach of contra
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has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
Explanation. A stipulation for increased interest from the date of default may be a stipulation by way of penalty.
Exception. When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the 2[Central Government] or of any [State Government], gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.
Explanation. A person who enters into a contract with Government does not necessarily thereby undertake any public duty or promise to do an act in which the public are interested.
It has been consistently held that liquidated damage is to compensate the person for loss
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ract will not be in the form of compensation of a loss suffered by recipient of service. In this case, the amount deducted is only for compensate and not for toleration of an act. Therefore, not a separate supply liable for tax. Hence, no GST is payable. The above submission shall be considered while deciding the application.
03. CONTENTION – AS PER THE CONCERNED OFFICER
The submission of the jurisdictional authority is as follows-
“Comments against questions/issues on which Advance Ruling Required:
1) Whether GST is applicable to LD in case of
Type 1 i.e. : Operation & Maintenance activities
Type 2 i.e. : Construction of new power plants or renovation of old plants
GST is applicable to liquidated Damages (LD) in both type of cases As LD is treated as consideration by Appellant which is supply under Schedule II entry no. 5(2)(e)of MGST Act.
2) If GST
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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 as per the contract on which LD is imposed.
b)Time of Supply of Services in GST is when any 2 of following conditions are fulfilled;
i. Date of Service invoice raised
ii. Dale of Service performed
iii. Date of payment received Section 13(2) of MGST Act.
c) As above
d) Contractor/Vendor may get input Tax Credit subject to satisfying all other conditions.
04. HEARING
The case was taken up for preliminary hearing on dt.06.02.2018 when Sh. S. S. Gupta, Sh. Karan Awtani, Sh. Ashutosh Shukla (all Chartered Accountants) attended alongwith Sh. Pankaj Sharma, Chief General Manager (Accounts) and Sh. Vijay Chitlange, General Manager (Accounts) and submitted that their Advance Ruling (AR) application is for query covered in section 97(2) of the AR provisions. However, they were informed that their application was
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ted 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 written submission.
05. OBERVATTONS
We have gone through the facts of the case. The questions posed are in respect of 'liquidated damages'. We find that the 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'. To understand the appropriateness of this contention, we would have to go through the facts. There is also a sample agreement provided but before that let us revisit the brief introduction as given by the applicant as under –
* Maharashtra State Power Generation Company Limited (Mahagenco) is a State Power Utility engaged in generation of power with objective to make Power available to all at affordable rates.
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he 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 imposed is reduced from the total project cost while capitalising the asset. Because of delay in the execution of work, the cost of project increases on account of Interest During Construction (IDC) and other administrative overheads. In such situation, LD helps in mitigating the impact of higher costs in form of IDC and administrative charges. Moreover, the contract entered into is for the purpose of construction of plant. There is no explicit agreement between the company and the contractor wherein the company is intending to supply service of tolerance of delay. The delay is neither desired b
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r 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 Generator, C&I, Electrical equipments and other Auxiliary Equipments for Chandrapur T.P.S. Expansion Project – 2×500 MW and in furtherance of above, the Owner has issued a Letter of Award No. DG/Chandrapur Expn. Proj./MP/Erection & Commg./3415 dated 25.07.2008 and Letter No. DG/CHN 2x500MW./MP/Erection/0452 dated 21.01.09 (Amendment-1) to the Contractor for Erection, Testing & Commissioning of Main Plant equipments consisting of Steam Generator, Steam Turbine and Generator, C&l, Electrical equipments and other Packages for Chandrapur T.P.S. Expansion Project – 2×500 MW for the sum of Rs. 2 ,75,28,20,000.00 (Rupees Two Hundred Seventy Five Crore Twenty Eight Lakh Twenty Thousand only) (hereinafter called “the Contract Price”) which is accepted by the Contractor vide their Letter No. MS-4-08-00
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s 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 contract vide LOA under ref. 13. The scope of works against this LOA shall also include unloading and handling over of Mandatory Spares to MahaGenco's stores after receipt in good condition & joint verification at site by the contractor and the owner.
2.2 All consumables, paints, chemicals,, equipments, piping and all temporary works required for hydraulic test, boiler light up, alkali boil out, acid cleaning, steam blow off etc. for carrying out erection, testing & commissioning of the unit at site are to be arranged by the Contractor within the scope. The Contractor shall also be responsible for arranging auxiliary steam required during unit commissioning within the scope.
3.0 CONTRACT PRICE
3.1 The contract price for Erection, Testing & Commissioning of Main Plant equipments is Rs. 2784280800.00 (
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be examined beyond the cut off dates for reasons attributable to the Contractor, for making payments towards price variation, the Owner shall select the indices in the P.V. formula either by restricting their value to contractual cut off date or the actual indices prevailing at that time whichever is lower. In case the contractual period is extended for the reasons attributable to the Owner in such an event the price variation shall be payable on the extended period of contractual cut off dates, based on the prevailing price indices.
8.0 PROJECT COMPLETION SCHEDULE
8.1 The Contractor shall so organize his resources and perform his works as per the Project Completion Schedule enclosed herewith so as to achieve synchronization and Trial Operation of the Unit as below.
Period in months from the zero date
Unit-1
Unit-2
Unit Synchronization :
38 (Thirty-eight)
41 (Forty-one)
Trial Operation
41 (Forty-one)
44 (Forty-four)
9.0 ZERO DATE
9.1 The zero date
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ent 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 Corporation (REC), Mumbai. The Invoices along with the documents listed in the relevant clauses of terms of payment shall be submitted by the Contractor to the General Manager (Gen. Project), Maharashtra State Power Generation Co. Ltd. (MahaGenco) Chandrapur TPS. Expansion Project, Post- Urja Nagar, Chandrapur – 442 404, Dist. Chandrapur for all the payments against this IOA, except for the payment of advance and comprehensive insurance charges.
11.1.2 Service Tax shall be paid on submission of Invoices along with an undertaking from BHEL Unit that the amount of Service Tax claimed in the said Invoice shall be deposited with Government Authorities as per Service Tax Act. M/s. BHEL shall also furnish the certificate on quarterly basis from Head of Finance from the respective Unit certifying that the Service Tax cla
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ng 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 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.
16.0 DEDUCTIONS FROM TOTAL CONTRACT PRICE
16.1 The Owner shall claim all costs, damages or expenses that the Owner may have paid, for which under the contract the Contractor is liable.
The Owner to the Contractor shall bill all such
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r 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 thereof, then and m all such cases, the owner shall he at liberty to employ other workmen and forthwith execute such part of the works as the contractor may have neglected to do or. it the owner shall deem fit, it shall be lawful for him, without prejudice to any other right he may have under the contract, to take the works wholly or in part out of the contactor's hand and re-contract w till any other person or persons to complete the works or any part thereof.
The owner 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 bala
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RECTION, 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 respectively. In case the Contractor fails to achieve successful completion of Trial Operation within specified time period as per the project completion Schedule 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 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 e
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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.”
7.7 For the purpose of deciding the amount of Liquidated Damages on the erection price, 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.
13.5 PAYMENT TOWARDS ERECTION, TESTING AND COMMISSIONING
13.5.1 10% (ten percent) advance on the price for Erection, Testing & Commissioning of Equipments alongwith applicable service tax & education cess but excluding insurance charges shall be paid within 30 (thirty) days of fulfillment of the foll
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uments 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 Erection insurance charges alongwith applicable service tax and education cess, shall be released on submission of following documents …………………
i) Invoice 1 Original + 2 copies
A perusal of the above provisions make us observe 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. We observe so for reasons thus –
1. The agreement says that 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 pr
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coverable 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 Contractor will he established once the delay in successful completion of trial operation is established on the part of the Contractor.
3. Both the events have their consequences. The first event calls for the payment of a contract price to the Contractor. The second event calls for payment of liquidated damages to the Owner.
4. The manner employed for recovery of the contract price or the liquidated damages would not define what a contract price or the liquidated damages mean.
5. The deduction from the amount as payable to the Contractor is for the purposes of adjustment of the accounts.
6. Though the situation is so, even if the agreement had clauses regarding deductions form the contract price, we are convinced that we wouldn't have had a different opinion than the one as taken above. Both the contra
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alue 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 contract price due to the levy of liquidated damages.
b. The price variations also have been set out in the agreement thus –
4.0 CONTRACT PRICE ADJUSTMENT / VARIATION
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.l 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.
As can be seen, the price variations to which the contract price would be subjected to makes no reference to the effect of levy of liquidated damages.
c. There is also a clause about deductions from the contract price thus –
16.0 DEDUCTIONS FROM TOT AI CONTRA
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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
21.1 If the contactor shall neglect to execute the works us 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 thereof, then and in all such cases, the owner shall be at liberty to employ other workmen and forthwith execute such part of the works as the contractor may have neglected to do or. if the owner shall deem fit, it shall be lawful for him. without prejudice to any other right he may have under th
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wards advance or payment for execution, testing, commissioning also does not require invoices to be considered taking into consideration the liability towards liquidated damages. The invoices to be prepared are in terms of the contract price. And we see that the bills as submitted for our perusal also do not show a bill being raised after considering liquidated damages. The bills are for work done during a particular period and are accompanied by a Certificate which says in a pointwise manner as to how the amounts have been arrived at. On this Certificate, there are some rough workings as made by the applicant which show calculations involving subtractions, one such subtraction being for liquidated damages. However, if we minutely look at the deductions, it is seen thus –
Invoice as raised by the Contractor
Rough working by the Owner (applicant)
1 Boiler & Aux – Unit-9
For the work done during March'13
As per the Annex Enclosed
375, 29,811
37529810
4174816
41704626
&nbs
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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 perspective but a matter between the contracting parties.
The above treatment by both the parties reveals two things –
* It negates the contention that since recovery of Liquidated Damages is a part of the contract, the value of the main supply reduces to the extent of Liquidated Damages deducted by the applicant.
* It confirms the position as brought out in the agreement clauses that recovery of Liquidated Damages is an independent liability.
* The manner of deducting the amount of Liquidated Damages from the amount payable to the Contractor does not alter the valuation of the deliverables or the supplies made under the agreement.
8. We have to observe that the applicant is not the supplier in terms of the amounts received as contract price or cont
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esent 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 received by the applicant does not include the liquidated damages. There are measures identified in the agreement to arrive at the contract value or the invoice value. The words ” price actually paid or payable” in respect of the value of the goods or services supplied do not come into play in the present set of facts of deduction of the amount towards liquidated damages. We have seen above that this deduction does not mean that the price actually paid is less. The income of the applicant is recovered by deducting from the outgoings of the applicant. This would not translate into making the income of the applicant as being the other party's lesser income or the applicant's lesser expenditure. We have seen above that the contract pri
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he 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 provision of this clause shall not relieve the Contractor from his obligations to complete the works or from his other obligations under the contract. This provision just ensures that the obligations under the contract are fulfilled. The facts are much obvious that the empowerment to levy liquidated damages is for the reason that there has been a delay and the same would be tolerated, but for a price or damages. The impugned income though presented in the form of a deduction from the payments to be made to the Contractor is the income of the applicant and would be a supply of 'service' by the applicant in terms of clause (e) of para 5 of Schedule II appended to the GST Act.
10. The applicant has referred to a few case laws and
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h 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, does not provide for variation on account of liquidated damages. And above all, we have seen the intent as being reflected in the treatment of the parties as not to alter the value of the work done and the tax liability on such value while making deductions therefrom. The reliance on case laws is, therefore, not helpful to the applicant. The facts of the instant case before us being distinct, we would refrain from discussing the other points in support of the contention.
Having seen as above, we refer to the questions as posed for our decision.
Question 1
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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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 schedule entry in the Notification no.11/2017 – Central / State Tax (Rate) [as amended from time to time] for taxable services and the Notification no.12/2017 – Central / State Tax (Rate) [as amended from time to time] for services exempt from GST. A reference to the Annexure about Scheme of Classification of Services as appended to the Notification no.11/2017 – Central / State Tax (Rate) [as amended from time to time] reveals thus –
S. No.
Chapter, Section, Heading, Group
Service Code (Tariff)
Service Description
700
Heading 9997
Other services
716
Group 99979
Other miscellaneous services
720
999794
Agreeing to tolerate an act
722
999799
Other services nowhere else classified
In view of the above, following schedu
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ails 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.
* 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 respectively. In case the Contractor fails to achieve successful completion of Tria
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es.
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 commissioning (excluding insurance charges, taxes and duties) along with a
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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 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. We would be constrained to restrict the answer to this question in terms of only the agreement placed before us. Sub-section (1) of section 13 of the GST Act provides that the liability to pay tax on services shall arise at the time of supply. If the Contractor fails to achieve the Trial Operation of the unit within a specified time period which falls under the GST regime then levy of liquidated damages would be attr
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ows:
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 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 –
Q.1 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?
A.1 In terms of the aforesaid agreement, GST would be applicable on the Liquidated Damages.
Q.2 If GST is applicable, kindly clarify the following related aspects also –
Q.2(a) Whether the GST on Liquidated Damages is covered under Schedule
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ome 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.
A.2(b) Sub-section (1) of section 13 of the GST Act provides that the liability to pay tax on services shall arise at the time of supply. In view thereof, as discussed in the answer to the Q.2(b), the agreement clauses would have to be referred to. Since no precise facts are before us, the section 14 of the GST Act would have to be referred to by the applicant.
Q.2(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.2(d) The
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