In Re: Maharashtra State Power Generation Company Limited
GST
2018 (9) TMI 1185 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA – 2018 (17) G. S. T. L. 451 (App. A. A. R. – GST)
APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA – AAAR
Dated:- 11-9-2018
MAH\/AAAR\/SS-RJ\/09\/2018-19
GST
SMT. SUNGITA SHARMA, MEMBER, SHRI RAJIV JALOTA, MEMBER,
\nPROCEEDINGS
\n(under Section 101 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017)
\nAt 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 provisions under the MGST Act.
\nThe present appeal has been filed under Section 100 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter ref<\/p>\n
= = = = = = = =<\/p>\n
Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ct provides for payment of Liquidated Damages. The relevant clause requiring the payment of Liquidated Damages in case of delay is reproduced below: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n pletion 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 applicable price variation. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n iquidated damages was explained, which is reproduced as follows: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n \nGROUNDS OF THE APPEAL = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ulated sum if claimed. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n . Hence, the amount received is not for any services. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n words unnecessary; if, however, the specific words do not exhaust the class, then adoption of the rule may be favoured because its rejection would make the specific words unnecessary.” = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ollowing specific and particular words should be construed as limited to things which are of the same nature as those specified. But the rule is one which has to be “applied with caution and not pushed too far”……” [p. 73] = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n their normal import may be much wider. We are not impressed by this argument. It must be borne in mind that noscitur a sociis is merely a rule of construction and it cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined words correspondingly wider. It is only where the intention of the Legislature in associating wider words with words of narrower significance is doubtful, or otherwise not clear that the present rule of construction can be usefully applied. It can also be applied where the meaning of the words of wider import is doubtful; but, where the object of the Legislature in using wider words is clear and free of ambiguity, the rule of construction in question cannot be pressed into service.” = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n tute. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n an act of others. It is common knowledge that whenever repairs or major interior work is undertaken in the society, the society frames certain regulations to avoid inconvenience to the members of the society. Example, work is permitted between the given hours or material like cement, steel etc. are allowed to be carried in the lift during a particular time etc. The society also charges the person carrying out the repair for the inconvenience caused to other members. This, in commercial term, is known as “hardship amount”. In such situation, the members agree to tolerate the act carried out by other person. This benefit the society in the form of certain consideration. Such situation can be taxed under this category. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n rance of business; = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n uilder\/developer carries out construction = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n endent levy from the performance of contract. It has been further alleged that the supply of service occurs first and then delayed performance of contract is ascertained. This has been alleged on the ground that no clause in the contract relating to contract price or deduction mentions the deduction regarding of liquidated damages. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n y from liability for damages for breach of the entire contract. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ontract clause relating to contract price and deduction do not make a mention to LD and thus LD cannot be considered as varying the contract price is incorrect. Further, the authority have themselves mentioned in para 6 of the order that if there was specific clause under the relevant clauses for deduction of LD, the same would not affect the levy of GST on the same. It is evident that there is a serious contradiction in the views of the authority. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n received for toleration of an act or delay in making payment. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n s Ltd. Versus Commissioner of Central Excise Bangalore 2016 (6) TMI 873 – CESTAT BANGALORE. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n below: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n o tax. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ellant had submitted the below arguments before the authority also. However, the authority has not discussed the said submission of the appellant in the order. Therefore, the same is being reproduced. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n of consideration). It will not be considered as separate supply, but will be considered as adjustment event in relation to that earlier supply. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n he background of this provision also. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 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. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n rk 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 into one of sale of those materials. In every case the court would have to find out what was the primary object of the transaction and the intention of the parties while entering into it. ' = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n en 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. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 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. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n use 5(e) of schedule II to GST Act declares 'agreeing to an obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' as service. Similar provisions are made in clause (g) of Section 9-10 of The Australian GST Act. Therefore, ratio of cases laid down in Australia should apply to provisions of Indian GST Act. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ers were burning off scrub on their farm when the fire got out of control and damaged some machinery belonging to contractors. The contractors commenced proceedings for damages but the action was settled out of court by the payment of a sum of money and the striking out of the proceedings by consent. Barber DJ held that the abandonment of their claim in return for payment of money did not involve a supply. He said, at 7487: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n a payment (or act or forbearance) that is made in compliance with a court order or out-of-court settlement should be treated for the purposes of A New Tax System (Goods and Services Tax) Act 1999 (the GST Act). = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n correct fact: = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ppellant as well as respondents reiterated their written submissions during the said hearing. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ariation. 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. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 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. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ges are two different aspects completely separable from each other. It has been held by the ARA that liquidated damages would be covered by the entry (e) of clause 5 of Schedule Il which reads as follows:- = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n ties to a contract have agreed on liquidated damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of the actual damages.” = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n the nature of the supply. Also, neither the definition of 'contract price' nor 'contract value' as given in the Agreement refers to the contingency of liquidated damages. Contract price is defined in clause 3.13 (A) as the total lump sum price plus the price variations. This is an independent clause having no relation to the eventuality of liquidated damages, for which as we have said above, a separate clause has been given. The fact that the liquidated damages are recovered from the bill is only a method of payment- the fact that there are two agreements remains unaltered. = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n t.05.02.2014), = 2015 (11) TMI 893 – CESTAT NEW DELHI, Victory Electricals 2013 (298) ELT 534 ( Tri-LB), = 2013 (12) TMI 81 – CESTAT CHENNAI M\/s. Priyaraj Electronics 2016 (6) TMI 873 CESTAT Bangalore, United Telecom 2006 (204) ELT 626 ( Tri Bang) = 2006 (9) TMI 321 – CESTAT, BANGALORE wherein it was held that the lesser amount as a result of clause stipulating variation in the price on account of liability to pay liquidated damages would be transaction value liable to levy of excise duty. These judgements relate to the computation of the transaction value and do not deal with the issue of the taxability of liquidated damages. Also, in the impugned case there are specific clauses relating to the levy of liquidated damages, which clearly show the intent of both the parties. The invoices referred to by the AAR clearly shows that the value of the work done remains unaltered and there is no price variation because of the liquidated damages. For all the above reasons, these judgements are n<\/p>\n = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n 11\/2017 – Central \/ State Tax (Rate) [as amended from time to time] for taxable services would cover the impugned levy of liquidated damages – = = = = = = = =<\/p>\n Plain text (Extract) only<\/strong> = = = = = = = =<\/p>\n","protected":false},"excerpt":{"rendered":" In Re: Maharashtra State Power Generation Company LimitedGST2018 (9) TMI 1185 – APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA – 2018 (17) G. S. T. L. 451 (App. A. A. R. – GST)APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA – AAARDated:- 11-9-2018MAH\/AAAR\/SS-RJ\/09\/2018-19 GSTSMT. SUNGITA SHARMA, MEMBER, SHRI RAJIV JALOTA, MEMBER, PROCEEDINGS (under Section 101 of the Central … Continue reading “In Re: Maharashtra State Power Generation Company Limited”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-13849","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts\/13849","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=13849"}],"version-history":[{"count":0,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=\/wp\/v2\/posts\/13849\/revisions"}],"wp:attachment":[{"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=13849"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=13849"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/goodsandservicetax.in\/GST\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=13849"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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\n7.0 LIQUIDATED DAMAGES FOR DELAY IN ERECTION, TESTING AND COMMISSIONING
\n7.1 The Contractor shall strictly adhere to the Project completion schedule to achieve the trial operations of the units 1 & 2 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.
\n7.2 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.
\n7.3 The payment by Contractor or deduction by Owner of any sums under the provision of this clause shall not relieve<\/p>\n
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\n7.7 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.
\n7.8 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.
\nSimilar clauses are there in supply of balance of plant package, erection testing and commissioning of balance<\/p>\n
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\nAs directed, a specimen running bill raised by M\/S Bharat Heavy Electricals Limited, bearing no. MS\/PW\/9515\/13\/1027(89) is attached in the submission. In 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\/-
\nFor 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, no deduction is made on account of retention towards LD. After the expiry of scheduled work completion period, if the work is still not completed, the Appellant starts making deduction towards LD as retention amount Since, the probable LD @ 10% will be imposed upon the entire contract value, the retention from each bill received after scheduled completion period is to be made at accelerat<\/p>\n
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\n1. Damages are paid for compensating the loss and not for any supply:
\nThe Hon. Tribunal in the case of United Telecom Ltd. reported in 2006(204)-ELT-626 (Tri. Bangalore) = 2006 (9) TMI 321 – CESTAT, BANGALORE has referred to the extract from the book “McGregor's Damages”. The relevant extract is reproduced below:
\n“442. Where the parties to a contract, as part of the agreement between them, fix the amount which is to be paid by way of damages in the event of breach, a sum stipulated in this way is classed as liquidated damages where it is in the nature of a genuine pre-estimate of the damage which would probably arise from breach of the contract. This is the modern phrase used to define liquidated damages, first appearing in Lord Robertson's speech in Clydebank Engineering Co. v. Don Jose Ramos Yzquierdo Y Castaneda and later incorporated by Lord Dunedine in his list of “rules” in Duniop Pneumatice Tyre Co. v. New Garage and Motor Co. since when, as part o<\/p>\n
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\n444. The same sum cannot, in the same agreement, be treated as a penalty for some purposes and as liquidated damages for others. For if the same sum is extravagant and unconscionable in relation to one breach to which it applies it cannot be a genuine pre-estimate, and the sum becomes branded as having a penal nature which it cannot lose in relation to other more serious breaches to which it also applies. It adds nothing to say that it would not have been a penalty as to the other breach or breaches, or that it is the other breach or breaches that have in the event occurred. Nor will the court make any serverance for the parties, once they have tampered with penal stipulations.”
\nIt is evident from this that both the parties estimate the damages which will be caused for breach of contract and specify the same in the contract. Thus, this amount is not paid for any supply of service but paid for the compensation of the loss. This can be explained by an example. Sa<\/p>\n
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\n3. Entries in the clause (5) of Schedule-II shall be interpreted on the principle of eiusdem generis.
\n3.1 The Hon. Supreme Court in the case of Siddeshwari Cotton Mills (P) Ltd., Vs Union of India, 1989 (39) ELT 498 (SC) = 1989 (1) TMI 126 – SUPREME COURT OF INDIA has observed in para 7 as follows:
\n“7. The expression ejusdem-generis – 'of the same kind or nature' – signifies a principle of construction whereby words in a statute which are otherwise wide but are associated in the text with more limited words are, by implication, given a restricted operation and are limited to matters of the same class or genus as preceding them. If a list or string or family of genus-describing terms are followed by wider or residuary or sweeping-up words, then the verbal context and the linguistic implications of the preceding words limit the scope of such words.
\nIn 'Statutory Interpretation' Rupert Cross says :
\n “……The draf<\/p>\n
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\n[See : Construction of Statutes by E.A. Driedger p. 95 quoted by Francis Bennion in his Statutory Construction page 829 and 830].
\nFrancis Bennion in his Statutory Construction observed :
\n “For the ejus-dem-generis principle to apply there must be a sufficient indication of a category that can properly be described as a class or genus, even though not specified as such in the enactment. Furthermore the genus must be narrower than the words it is said to regulate. The nature of the genus is gathered by implication from the express words which suggest it……” [p. 830]
\n “It is necessary to be able to formulate the genus; for if it cannot be formulated it does not exist. 'Unless you can find a category”, said Farwell LJ, 'there is no room for the application of the ejus-dem-generis doctrine'<\/p>\n
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\nThe Supreme Court in case of M\/s. Rohit Pulp and Papers Ltd. 1990 (47) ELT 491 (SC) = 1990 (4) TMI 54 – SUPREME COURT OF INDIA in para 10 observed as follows: –
\n10. The principle of statutory interpretation by which a generic word receives a limited interpretation by reason of its context is well established. In the context with which we are concerned, we can legitimately draw upon the “noscitur a sociis” principle. This expression simply means that “the meaning of a word is to be judged by the company it keeps.” Gajendragadkar, J. explained the scope of the rule in State v. Hospital Mazdoor Sabha (1960-2 S.C.R. 866) = 1960 (1) TMI 32 – SUPREME COURT in the following words :
\n “This rule, according to Maxwell, means that, when two or more words which are suscept<\/p>\n
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\nThis principle has been applied in a number of contexts in judicial decisions where the Court is clear in its mind that the larger meaning of the word in question could not have been intended in the context in wh<\/p>\n
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\n4. The clause (5) of Schedule-Il needs to be interpreted on the basis that GST is destination-based consumption tax
\n4.1 The Goods and service Tax is contract-based levy and the nature of services rendered shall be determined on the basis of contract entered into between the provider of service and recipient of service. This principle shall be applied in interpreting the entry (e) of clause (5) of Schedule-Il which reads as follows:
\n(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;
\nThis clause can be divided into following 3 sub clauses:
\n(a) Agreeing to the obligation to refrain from an act,
\n(b) Agreeing to the obligation to tolerate an act or a situation,
\n(c) Agreeing to the obligation to do an act.
\n4.2 It is submitted that the words 'agreeing to the obligation' appearing in clause (e) applies to all the 3 activities. As per the contract, the provider of service here agrees to refrain or tolerate or to d<\/p>\n
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\n(c) To do an Act – Provider of service may sometimes agree for doing a particular act for which he receives payment. In the commercial world, very often, suppliers enter into agreement with purchaser for selling his product only. Very often, we see in theatre cold drink w<\/p>\n
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\n(b) import of services for a consideration whether or not in the course or furtherance of business;
\n(c) the activities specified in Schedule l, made or agreed to be made without a consideration; and
\n(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
\n(2) Notwithstanding anything contained in sub-section (1), –
\n (a) activities or transactions specified in Schedule III; or
\n (b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.
\n(3) Subject to the provisions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as-
\n (a) a supply of goods and not as a supply o<\/p>\n
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\n3
\n(c)
\nTemporary transfer or permitting use
\nProvider permit the recipient enjoyment of property
\n4
\n(d)
\nDevelopment, design etc. of information technology software
\nProvider carries out any of the activity like development, design etc. for rendering taxable service
\n5
\n(e)
\nAgreeing to the obligation
\nProvider shall specifically agree to obligation to carry out acts mentioned therein.
\n6
\n(f)
\nTransfer of goods by different means
\nProvider transfer right to use any goods for any purpose (whether or not specified for a specified period) for cash, deferred payment or other valuable consideration.
\n5.2 It is evident from the above submission that applicability of various services mentioned in the clause (5) of Schedule-Il pre-supposes performance of certain activity by the provider of service. The nature of activities to be performed by the provider is also specified in the above table. It is therefore submitted that based on the principle of <\/p>\n
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\nThe 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 Appellant had attached one of the contracts with M\/S BHEL as specimen. It is submitted that it is one single contract for supply of goods and services and not two contracts for supply of goods, services and toleration of an act.
\nThe Divisible contract has been defined in Black's Law Dictionary, Sixth Edition, Page no. 479, as follows:
\n6.2 Divisible contract
\n“One which is in its nature and purposes susceptible of division and apportionment, having two or more parts in respect to matters<\/p>\n
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\n6.4 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 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.
\n6.5 It is submitted that there are no two separate promises <\/p>\n
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\n6.7 It is submitted that the important point to be considered in the present case is that whether the claiming of LD is a supply of service or re-determination of the value of original supply. It does not matter under which clause of the agreement the provision of LD is mentioned. Further, the LD is not a separate supply will be evident from the submissions below. Therefore, the contention of the authority is not sustainable.
\n7. This fact is also evident from the provision of Section 15(2) of the GST Act,2017.
\n7.1 The Section 15 provides <\/p>\n
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\nIn view of the above, it is submitted that the liquidated damages cannot be considered as separate supply, or the amount received for tolerating an act.
\n8. Liquidated Damages reduces the value of main supply and the payment of liquidation damages as part of the same supply is mere re-determination of the consideration of the same supply if the has been specified in the original contract.
\n9. The relevant provision for determination of Transaction value under the GST law is similar to that in the Excise regime. It has been consistently held under the excise regime that liquidated damages has the effect of re-determining the transaction value. Clause (d) of Section 4(3) Central Excise Act, 1944 defines the expression “transaction value” as follows;
\n“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 <\/p>\n
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\nd) UNITED TELECOM LTD 2006 (204) E.L.T. 626 (Tri. – Bang.) = 2006 (9) TMI 321 – CESTAT, BANGALORE
\nUnder GST law, section 15(1) of the GST Act reads as follows:
\n15. (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.
\nSection 15 of the CGST, Act 2017, which is similarly worded i.e. under both the Acts, tax is levied on the transaction value which is the price actually paid or payable. Therefore, the ratio of the above cited judgements can also be applied to the section 15(1) of the GST Act, 2017 and it can be concluded that resultant price after Liquidated Damages would be the transaction value under section 15(1) of the GST Act,2017.
\n11. In the <\/p>\n
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\n7. The assessee was engaged in manufacture of electrical transformers. During the relevant period, respondent supplied transformers to various Distribution Companies (discoms) of the Andhra Pradesh State Electricity Board (APSEB). Clause (2) of the purchase order provides for variation in the price, by way of revision (upward or downward) ab initio, to accommodate variations in prices of raw materials in terms delineated in the said clause. Clause (12) of the purchase order stipulates that for supplies made beyond the agreed delivery schedule, penalty shall be levied for an amount equivalent to of the value of the material not delivered within the prescribed time limit for every week of delay or part thereof, subject to a maximum of 5% of the total contract value. This clause also contains a provision which enables the purchaser (APSEB) to purchase the balance quantity (undelivered within the delivery schedule) from the open market and recover the expenditure incurred thereof <\/p>\n
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\n17. 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:
\n11. Changes have also been made in the Service Tax Rules, 1994 vide Notification No. 26\/2011-S.T., dated 31-3-2011 and have a close relationship with the Point of Taxation Rules as follows:
\n (i) The obligation to issue invoice shall be within 14 days of completion of service and not provision of service.
\n (ii) If the amount of invoice is renegotiated due to deficient provision or in any other way changed in terms of conditions of the contract (e.g. contingent on the happening or non-happening of a future event), the tax will be payable on the revised amount provi<\/p>\n
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\nThe Australian Goods & Service Tax Act, 1999 defines 'supply' u\/s, 9-10(1) as follows:
\nA supply is any form of supply whatsoever.
\nThe Sub-Section 9-10(2) further provides as follows:
\nWithout limiting sub-section (1), supply includes any of these:
\n (a) a supply of goods;
\n (b) a supply of services;
\n (c) a provision of advice or information;
\n (d) a grant, assignment or surrender of real property;
\n (e) a creation, grant, transfer, assignment or surrender of any right; (f) a financial supply;
\n (g) an entry into, or release from, an obligation:
\n (i) to do anything;
\n (ii) to refrain from an act;
\n (iii) to tolerate an act or situation;
\n (h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).
\n21. Rulings are issued by Australian Tax Authorit<\/p>\n
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\n * The book Australian Master GST Guide written by Philip McCouat (2014) 15th Edition contains Australian GST Act and application of the same. The paragraph 4-085 deals with damage awards and out of court settlements. The said paragraph clearly provides that there is no supply when any charge is collected for termination of breach of contract. The extract of book is reproduced below:
\n“However, the Tax Office accepts that there is no supply where the order or settlement is wholly concerned with finalizing a claim for damages or compensation for previous property 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.
\n22. Thus, Australian GST has treated the payment of liquidation damages as part of<\/p>\n
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\n25. Liquidated damages cannot be said to be the payment for tolerating an act or a situation.
\n26. The entry in 5(e) of schedule Il of GST Act under which the authority has classified the service reads as follows:
\n(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or do an act;
\n27. It is submitted 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. For e.g. an event management company pays certain amount to the residents of a locality to tolerate the loud music for the full night for an event. In this case, the residents tolerate the act of the event management company.
\n28. In the present case, the amount deducted is only for compensate for l<\/p>\n
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\n32. 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 damages to which parties agree, rather than a remedy. By charging damages or forfeiture, one party does not accept or permit the deviation of the other party. It is an expression of displeasure. Liquidated damages cannot be said to be the desired income. It is for compensation of loss suffered by recipient.
\n33. 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 contr<\/p>\n
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\n36. Similarly, In case of Liquidated Damages settled in case of Lumpsum Turn-key ('LSTK') contracts, one really needs to appreciate whether settlement so made under LSTK contracts (say for constructing and delivering a Power plant) represents the primary intention of the contracting parties 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.
\n37. At best these settlements could b<\/p>\n
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\n * 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 damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.
\nExplanation -A stipulation for increased interest from the date of default may be a stipulation by way <\/p>\n
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\n41. Reliance is placed on rulings in the Australian Law wherein it has been held that payments on account of damage do not constitute a supply.
\na) 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. Payment of damages is to compensate loss suffered by a person.
\nb) It is submitted that there was an issue under the Australian GST regarding payment of GST on damages awarded by a court order. It was held under that law that payment of damages alone does not constitute a supply and thus no GST shall be payable. It is submitted that the present issue also relates to taxability of damages<\/p>\n
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\nd) In the case of Shaw v Director of Housing & Anor (No.2) 2001 ATC 4954, the party has reached settlement for payment of damages. However, the parties were unable to agree whether or not the plaintiff will incur liability to pay tax as a result of payment of judgment sum under the new Goods & Service Tax Act, 1999. Mr. McElwaine who appeared for plaintiff submitted that that when the Court finally assesses the damages and makes an order, that judgment be entered for the plaintiff against the defendants for a specified sum of money, the defendants will be under an obligation to pay the money. Mr. McElwaine then submitted that it was arguable<\/p>\n
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\n “All that has passed between the [farmers] and [the contractors] physically is the payment or handing over of a cheque. In the abstract, all that has passed between them is the surrendering by the [contractors] of their right to proceed with their claim against the [farmers]. That surrender is not a supply.”
\n18. The obligation of the judgment debtor to pay the judgment sum is extinguished by the act of payment. The extinguishment or release does not depend upon any action on the part of the judgment creditor. As White J said in Inter chase at par 54 [at 4554]:\n <\/p>\n
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\nIn para 71 to 73 it is observed as follows:
\nWhere the subject of a claim is not a supply
\n71. Disputes often arise over incidents that do not relate to a supply. Examples of such cases are claims for damages arising out of property damage, negligence causing loss of profits, wrongful use of trade name, breach of copyright, termination or breach of contract or personal injury.
\n72. When such a dispute arises, the aggrieved party will often assert its right to an appropriate remedy. Depending on the facts of each dispute a number of remedies may be pursued by the aggrieved party in order to ensure adequate compensation. Some of these remedies may be mutually exclusive but it is still open to the aggrieved party to plead them as separate heads of claim until such time as the mat<\/p>\n
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\nThe question no. (e), reads as follows: –
\n(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 instead of being period-based, then how GST needs to be levied.
\nIt was mentioned in the order that no strategy of deducting or of capping can be inferred from the agreement clause.
\nIn response to the same it is submitted that the strategy of deducting or the capping is given the clause 7.6 of the contract and the same was also mentioned in the statement of the fact of the application for advance ruling. The same is reproduced as follow: –
\n7.6 If the contractor fails to achieve the Trial Operati<\/p>\n
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\nDISCUSSION AND FINDINGS
\n45. We have gone through the facts of the case. The question put forth by the appellant is whether the levy of liquidated damages would be supply of services by the appellant u\/s. 7(1)(d) of the CGST Act, 2017 as referred at Sr.No.5(e) in Schedule 2 to the CGST Act. The appellant has contended the following:-
\n1. There is no explicit agreement between the Company and the contractor wherein the appellant is intending to supply services in the form of tolerance of the delay.
\n2. The delay is neither desired by the Company nor by the Contractor but it is done to impress upon the contractor to adhere timelines.
\n3. Payment of damages does not restitute the person to whom the loss or damages is caused.
\n4. Liquidated damages are in the nature of measure of damages to which parties agree rather than the remedy.
\n5. Liquidated damages is not the income of the appellant but c<\/p>\n
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\nSection 3 of the Contract which refers to the special conditions of the contract also lays down the provisions for payment of liquidated damages by the Contractor to the appellant.
\nSection 3 – Special Conditions of Contract
\n7.0 LIQUIDATED DAMAGES FOR DELAY IN ERECTION, TESTING AND COMMISSIONING
\n7.1 The Contractor shall strictly adhere to the Project Completion Schedule to achieve the trial operations of 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.
\n7.2 Time Schedules indicated for various activities are for the purpose of monitoring to ensure work<\/p>\n
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\n7.6 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 applicable price variation .
\n7.7 For the purpose of deciding the amount of Liquidated Damages on the erection price, contract price along with applicable price variation (excluding taxes, duties and insurances charges.) as per contact price adjustment sh<\/p>\n
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\n(e) Agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act.
\nA plain reading of the entry 5(e) reveals that an activity of a person can be categorized under the said entry if the following ingredients are present:-
\ni) There should be an agreement.
\nii) There should be an obligation.
\niii) The obligation would be to –
\n a) Refrain from an act;
\n b) tolerate an act or a situation;
\n c) to do an act.
\n48. We have already arrived at the conclusion that in section 3 of the contract the specific clause – 7 provides for the levy of liquidated damages if the project completion is delayed beyond the scheduled date. This clause leads us to the conclusion that the appellant is in a contractual agreement with the contractor to impose levy of l<\/p>\n
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\nThe definition clearly provides that if the parties agree for liquidated damages, the sum fixed is a measure of damages for a breach. In the impugned case, liquidated damages are contractually stipulated for delay in the completion of the project. The agreement provides that the contractor may pay a certain percentage for the delay. In other words, the appellant was well within his rights to provide for the termination of agreement in case of delay in completion of the project. But in the instant case both the parties agreed that such will not be the effect in case of delay. The appellant agrees to tolerate the delay done by the contractor in return for payment of liquidated damages. The appellant could have opted for harsh measures like termination of contract but instead it chooses to tolerate the delay in return of pay<\/p>\n
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\nIt is contended by the appellant that the liquidated damages cannot be treated as an independent supply. However we do not agree with same. When the contract specifically provides for the payment of the damages, it itself manifests that there is a separate contractual agreement between the two parties.
\n50. The appellant has referred to the principle of 'ejusdem generis' to claim that the w<\/p>\n
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\nSl.No.
\nChapter, Section or Heading
\nDescription of Service
\nRate (per cent.) [CGST + MGST]
\n35
\nHeading 9997
\nOther services (washing, cleaning and dyeing services; beauty and physical well-being services; and other miscellaneous services including services nowhere else classified).
\n18% [9% +9%]
\nb) 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?
\nWe confirm the observations of the AAR that as 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 the said<\/p>\n
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