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2023 (8) TMI 1475 - AAR - GSTActivity is supply or not - Levy of GST - Liquidated Damages recovered from the vendors - collection in the form of Liquidated Damages (LD) is consideration or not - whether the amount collected by them is consideration for tolerating an act and taxable service as per the entry at serial 5(e) of Schedule II or it is a Penalty / Compensation for not tolerating the act? - HELD THAT - Upon going through the sample copy of the agreement submitted by the applicant, it is found that at SI. (viii) of the Point 4 GENERAL TERMS CONDITION, it has clearly been stipulated that the service provider must ensure to provide the service within stipulated time period otherwise liquidated damages and not by way of penalty the sum of 0.5% of the contract price of the undelivered store for each and every week and part of a week for which the stores have been delayed subject to maximum of 10% of the value of delayed stores. This show that the quantum of liquidated damages has been determined pre-hand and there is no element of uncertainty in the same, whereas, to actually qualify as damage, there has to be an element of uncertainty. Damages are not known beforehand and if they are known beforehand, steps can be taken to act in such a way they don't occur. It is clear that the amount recovered as liquidated damages is neither ad-hoc, unconditional nor at the discretion of the applicant or his vendors. The mathematical terms for calculation of such value clearly indicate that the act of breach is not inconvincible. It is also found that in the contract, it is clearly mentioned that amount recovered, is not a penalty/compensation and maximum limit is only 10%, which appears very much within tolerable limit, and amount received in the name of liquidated damages, actually is a consideration for tolerating the act of not supplying stores in the prescribed time limit and hence in the light of section 7 read with definition of consideration under section 2 (31), liquidated damages recovered by the applicant from their vendors is a consideration, for tolerating of an act or a situation under an agreement and hence such an activity constitutes supply of service as per entry at serial 5 (e) of Schedule II and are exigible to tax @18% as per serial no. 35 of Notification No. 11/2017-Central /State tax rate, under HSN 9997. GST is applicable on Liquidated Damages recovered from the vendors.
Issues Involved:
1. Determination of the liability to pay tax on services. 2. Taxability of Liquidated Damages (LD) under GST. Summary: Issue 1: Determination of the liability to pay tax on services The applicant, M/s India Optel Limited, sought an advance ruling u/s 97(2)(e) of the CGST/SGST Act, 2017 regarding the liability to pay tax on services, specifically on Liquidated Damages (LD) recovered from vendors for delayed delivery of goods. Issue 2: Taxability of Liquidated Damages (LD) under GST The applicant entered into contracts with vendors, including a clause for LD in case of delayed delivery. The ambiguity in Board Circular 178/10/2022-GST dated 03.08.2022 regarding the taxability of LD prompted the applicant to seek clarification. The circular presents two viewpoints: one suggesting LD is not taxable as it ensures performance, and the other suggesting LD is taxable if it constitutes consideration for a supply. Discussion and Findings: The Authority examined the definitions of "Supply" and "Consideration" u/s 7 and 2(31) of the CGST/SGST Act, 2017. It was noted that the contract pre-determined the LD amount, indicating a reasonable belief that such delays could occur. The Authority concluded that the LD amount is not ad-hoc or unconditional but a pre-agreed consideration for tolerating the act of delayed delivery. The Authority found that all conditions for taxability (agreement, consideration, and independent contractual arrangement) were present. The mention of specific rates for LD in the contract implied that the cost of damages was factored in, and there was no surprise element. Therefore, the LD amount is considered a consideration for tolerating an act and is taxable under the CGST/SGST Act, 2017. Ruling: GST is applicable on Liquidated Damages recovered from the vendors. The activity constitutes a supply of service as per entry at serial 5(e) of Schedule II and is exigible to tax at 18% under HSN 9997.
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