2018 (5) TMI 1332 - AAR - GST

Levy of GST - liquidated damages - applicant contends that these damages being towards deficiency of services and reduce the original consideration and will not be considered as separate service covered by the term 'Obligation to tolerate an act or a situation'. 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? Held that - the contract price and the liquidated damages are two different aspects. Deduction of one from the other is a mere facilitation towards settlement of the accounts. This manner of giving effect to the obligations under the contract should not be deceptive of the actual intent. Presence of liquidation clause in the agreement - Applicant has argued that it was never the intention of the company to get its supplies/project delayed nor the contractors want to make delay and thereby causing company to tolerate it. - If an agreement has such a clause and if the eventuality actually happens then the GST Act has provided for such an eventuality. The activity is falling within the scope of clause(e) of para 5 of the Schedule II of GST Act, which is read as, agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; In terms of the aforesaid agreement, GST would be applicable on the Liquidated Damages. Classification of service - It would fall within the Heading 9997 - Liable to be taxed @18%. Time of supply of services - Scope of agreement - In terms of the aforesaid agreement, the clauses reveal that the levy of liquidated damages is not when the delay is occurring but the liability of payment of these liquidated damages by the Contractor will be established once the delay in successful completion of trial operation is established on the part of the Contractor. This would define the time of supply. Where the part of liquidated damages pertains to per-GST, would GST be applicable - Held that - The question is based on some incorrect presumption owing to which the applicant seems to have adopted some method of deduction of liquidated damages from the payments to be made to the contractor. We are afraid that no such strategy of deducting or of capping can be inferred from the agreement clauses. Eligibility of credit of GST on such LT in the hands of Contractor / vendor - Held that - The above question is not answered as the proper person to ask the above question would be the contractor /Vendor and not applicant.

Summary

Issues Involved:
1. Applicability of GST on Liquidated Damages.
2. Classification and rate of GST on Liquidated Damages.
3. Determination of the time of supply for Liquidated Damages.
4. Applicability of GST on delays occurring before and after GST roll-out.
5. Eligibility for Input Tax Credit on Liquidated Damages.

Detailed Analysis:

1. Applicability of GST on Liquidated Damages:
The primary issue is whether GST is applicable on Liquidated Damages (LD) in cases of Operation & Maintenance activities and Construction or renovation of power plants. The ruling concludes that GST is applicable on LD in both cases. The contract between the parties explicitly mentions the levy of LD for delays, which is considered a supply of service under Schedule II, entry 5(2)(e) of the GST Act.

2. Classification and Rate of GST on Liquidated Damages:
The ruling clarifies that GST on LD falls under Schedule II, entry 5(2)(e) with HSN code 9997 - Other Services, attracting a rate of 18%. The classification is based on the service of tolerating an act or situation, which is covered under the specified entry.

3. Determination of Time of Supply for Liquidated Damages:
The time of supply for LD is when the liability for payment is established, not when the delay occurs. The contract specifies that the liability is established once the delay in successful completion of the project is confirmed. Therefore, the time of supply is the point at which the decision to impose LD is made.

4. Applicability of GST on Delays Before and After GST Roll-out:
GST is applicable only for the period falling after the GST roll-out. For delays spanning both pre- and post-GST periods, GST applies to the LD imposed for the period after GST implementation. Section 14 of the GST Act would guide the exact determination of tax liability for such transitional periods.

5. Eligibility for Input Tax Credit on Liquidated Damages:
The ruling does not answer whether the contractor/vendor can utilize the LD amount as Input Tax Credit (ITC), stating that the proper person to raise this question would be the contractor/vendor, not the applicant.

Conclusion:
The ruling provides a comprehensive analysis of the applicability and implications of GST on Liquidated Damages, covering classification, rate, time of supply, and transitional provisions. It emphasizes the contractual terms and the specific provisions of the GST Act to determine the tax liability.