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2018 (10) TMI 1339 - AAR - GSTLevy of GST - Liquidated damages - Supply or not - point of taxation - valuation of supply. - liquidated damages claimed and awarded to the Applicant under the arbitral award - Held that - As per the terms and conditions of the agreement there was clearly an agreement between the applicant and SPL to tolerate an act or situation in case such act was done by the other or such a situation arose because of default on part of one or the other during the course of the project covered under the Association agreement and in case of default of terms of the agreement by one of the parties to this Association Agreement, the defaulting party was required to compensate the other party as per the terms and conditions of the Agreement - However we find that if there was further dispute in respect of the claims to be recovered/received by the one party from the other in view of violations or termination of the Agreement then they could approach the ICC for arbitration on the issue and to receive suitable amounts as claims cum consideration in view of the violations on the part of the party violating or defaulting on the Association Agreement. The consideration if any as received by the applicant after arbitration by the ICC would clearly qualify as supply as per Sr. No. 5(e) of Schedule II of the CGST Act. In the present case as per details presented, it was found that there is a clear understanding or agreement between the parties in the present case to foresee and tolerate an act or a situation of default on the part of either of them for a monetary consideration which is actually a consideration received by them, though in the agreement they may be giving this consideration, other names such as damages or compensation as thought proper by them, but these different nomenclatures in their Agreement would in no way change the actual nature of monetary consideration which would clearly be taxable for the supply of services as per Sr. No. 5(e) of Schedule II of the CGST Act, 2018. Ruling - The consideration that may be awarded to the applicant by the ICC would qualify as supply of service as per Section 5(e) of Schedule II of Section 7(1) of the CGST Act as per detailed discussions above in this regard. The provisions of Section 13 of the CGST ACT will determine the time of supply in cases of supply of services. In the subject case the liability of tax would arise on the applicant as per Sr.No.5(e) of Schedule II of Section 7(1) of the CGST Act and the time of supply would be determined as per the provisions of Section 13 of the CGST Act after the award of arbitration proceedings is given by the Arbitration Tribunal as administered by the ICC as per the Association Agreement by the parties to dispute, in the present proceedings. The value of supply of services will be actual liquidated damages cum consideration as decided and pronounced in the award administered by ICC.
Issues Involved:
1. Whether liquidated damages awarded by the International Chamber of Commerce (ICC) qualify as a 'supply' under the GST law, thereby attracting GST. 2. If affirmative, what should be the time of supply for GST liability? 3. If affirmative, what should be the value of supply for GST purposes? Issue-wise Detailed Analysis: 1. Qualification of Liquidated Damages as 'Supply' under GST Law: The applicant, North American Coal Corporation India Private Limited (NACC India), contended that liquidated damages do not qualify as a 'service' under GST law because they lack the element of reciprocity. They argued that liquidated damages are compensation for loss due to breach of contract and not in the course or furtherance of business. They further argued that there was no obligation in the Association Agreement to tolerate an act or situation, which is a prerequisite for GST under Clause 5(e) of Schedule II of the CGST Act. However, the Authority for Advance Ruling (AAR) found that the Association Agreement between NACC India and Sasan Power Limited (SPL) included clauses that foresee and tolerate an act or situation of default. The agreement stipulated compensation for such defaults, which the AAR interpreted as a monetary consideration for tolerating an act or situation. The AAR concluded that such compensation qualifies as a 'supply' under Sr. No. 5(e) of Schedule II of the CGST Act, which includes agreeing to the obligation to refrain from an act, to tolerate an act or a situation, or to do an act. 2. Time of Supply for GST Liability: The time of supply for the liquidated damages would be determined as per Section 13 of the CGST Act. The liability to pay GST arises when the arbitration award is given by the ICC. The relevant date would be when the liquidated damages are credited to NACC India's bank account or recorded in their books of account, whichever is earlier. 3. Value of Supply for GST Purposes: The value of the supply for GST purposes would be the actual amount of liquidated damages received by NACC India from SPL after the arbitration award by the ICC. The AAR clarified that the value of supply would be determined based on the actual receipt of liquidated damages, not the claimed amount. Conclusion: - Liquidated damages awarded by the ICC qualify as a 'supply' under GST law. - The time of supply is determined as per Section 13 of the CGST Act, based on the arbitration award. - The value of supply is the actual amount of liquidated damages received after the arbitration award. Order: 1. Liquidated damages qualify as a 'supply' under GST law. 2. The time of supply is determined post-arbitration award by the ICC. 3. The value of supply is the actual amount of liquidated damages received.
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