2019 (1) TMI 1668 - AAR - GST

Time of supply - Some or part of the events occurred before implementation of GST laws - Levy of Liquidated Damages and other penalties like milestone penalties levied on suppliers/ contractors in the nature of making good the damages for any delays in supply of service or goods in the following cases - When some part of the delay in supply has occurred before the implementation of the GST and some part of delay in supply has occurred after GST came into force, whether GST will be applicable to the Liquidated damages imposed for entire period of delay or it would be applicable only to the period falling after introduction of GST? HELD THAT - In the normal course of business of steel manufacture and sale/ distribution of its products, RINL enters in to various contracts with vendors for providing materials and services for operational activities. In this case, if there is any delay on the part of the supplier/contractor to provide materials/ services, Liquidated damages (LD) are deducted from the amount payable to such vendor. The LD so deducted is treated as other miscellaneous income. In respect of contracts relating to Construction of new plant in expansion project or renovation of old plant, normally the contract is awarded to vendors to build the sub plant or a part of it on Turnkey basis - If there is any delay in completing the contract, the factual position would be ascertained, particularly to know the fact whether the contractor/vendor is responsible for the delay or not. If the delay is on account of the contractor, then Liquidated Damages would be calculated as per the contractual terms and same will be charged from the contractor. Time of supply - HELD THAT - The liquidated damages are determined and imposed upon the contractor after in-depth study. In terms of the agreement, the clauses revealed that the levy of liquidated damages is not when the delay is occurring but the liability of payment of these liquidated damages by the Contractor will be established once the delay in successful execution of work is established on the part of the Contractor. This would define the time of supply. Liquidated damages if any collected/received under previously applicable Service Tax regime before coming into effect of GST, would be dealt with in accordance with the then existent provisions under applicable laws.

Summary

Issues Involved:
1. Applicability of GST on Liquidated Damages and other penalties.
2. Classification and GST rate for Liquidated Damages.
3. Time of supply for GST on Liquidated Damages.
4. Applicability of GST on Liquidated Damages for delays spanning pre- and post-GST implementation.

Detailed Analysis:

1. Applicability of GST on Liquidated Damages and Other Penalties:
The applicant, a Central Public Sector Undertaking, sought clarity on whether Liquidated Damages (LD) and other penalties like milestone penalties levied on suppliers/contractors for delays in supply of services or goods are subject to GST. The ruling clarified that such penalties, whether arising from supply and maintenance contracts or project construction contracts, are subject to GST. The Authority found that LDs are treated as other miscellaneous income and are considered as a supply of service under clause (e) of Para 5 of Schedule II of the CGST Act, 2017. This classification is based on the premise that the applicant tolerates the delay for a price, which constitutes a service.

2. Classification and GST Rate for Liquidated Damages:
The ruling determined that GST on Liquidated Damages falls under Schedule II entry No. 5(2)(e) with HSN code 9997, classified as "Other services." The applicable GST rate for such services is 18% (9% CGST + 9% SGST) as per Notification No. 11/2017-Central/State Tax (Rate), as amended from time to time.

3. Time of Supply for GST on Liquidated Damages:
The ruling addressed the time of supply for GST on Liquidated Damages, stating that the liability to pay GST arises when the delay is established and the LD is determined. This is in accordance with section 13(1) of the CGST Act, which stipulates that the liability to pay tax on services arises at the time of supply. The time of supply is defined as the point when the delay in successful execution of work is established on the part of the contractor, not when the delay occurs or when the accounting entry for recovery is passed.

4. Applicability of GST on Liquidated Damages for Delays Spanning Pre- and Post-GST Implementation:
For delays that occurred both before and after the implementation of GST, the ruling clarified that GST would be applicable only to the period falling under the GST regime. Liquidated damages collected for periods before the introduction of GST would be governed by the provisions existing under the applicable laws at that time. The ruling emphasized referring to section 14 of the CGST Act for precise determination in such cases.

Conclusion:
The ruling provided clear answers to the questions posed by the applicant:
1. GST is applicable on Liquidated Damages and other penalties in both supply and maintenance contracts and project construction contracts.
2. The applicable GST on Liquidated Damages falls under HSN code 9997 at an 18% rate.
3. The time of supply for GST on Liquidated Damages is when the delay is established and the LD is determined.
4. GST is applicable only to the portion of Liquidated Damages corresponding to the period after the implementation of GST, with section 14 of the CGST Act providing guidance for such determinations.