2022 (2) TMI 715 - AAR - GST

Levy of GST - Supply or not - liquidated damages recoverable by the applicant from Belectric India on account of delay in commissioning - time of supply when liability to pay GST is triggered - HELD THAT - Liquidated damages are demanded by the applicant from the contractor due to the delay in commissioning of the project and postponement in the taking over date beyond the milestones fixed for completion of project - A combined reading of the provisions (1) (3) of Section 55 of the Indian Contract Act, 1872 reveals that a failure to perform the contract at the agreed time renders it voidable at the option of the opposite party and alternatively such party can recover compensation for such loss occasioned by non-performance. In the case of the applicant, liquidated damages are imposed for covering the loss of revenue and costs borne by a project SPED due to delay according to a formula. Thus liquidated damages are claimed by the applicant from the contractor due to the delay in commissioning of the project and the taking over date by the contractor beyond the milestones fixed for completion of project. These damages are consideration for tolerating an act or a situation arising out of the contractual obligation - Further Section 2(31)(b) of the CGST Act mentions that consideration in relation to the supply of goods or services or both includes the monetary value of an act of forbearance. Therefore such a toleration of an act or a situation under an agreement constitutes supply of service and the consideration or monetary value of such toleration is exigible to tax. The contract itself prescribes the date on which the damage has to be determined and paid. The date on which the liquidated damage is determined as per the formula prescribed in the clause 6 of the contract is the time of supply of service entry in 5(e) of Schedule II by the applicant. The Consideration received for such forbearace is taxable under CGST and SGST @9% each under the chapter head 9997 at serial no. 35 of Notification No.11/2017- Central/State tax rate.

Summary

Issues:
1. Whether liquidated damages qualify as a 'supply' under GST law, attracting GST levy?
2. What is the time of supply triggering the liability to pay GST for liquidated damages?

Analysis:

Issue 1:
The applicant sought clarification on whether liquidated damages recoverable for delay in commissioning qualify as a 'supply' under GST law. The Authority for Advance Ruling (AAR) examined the contractual scenario where liquidated damages were imposed due to delays in project completion. Referring to Section 55 of the Indian Contract Act, 1872, the AAR highlighted that failure to perform a contract at the agreed time renders it voidable at the option of the opposite party, allowing for compensation for losses incurred. In this case, the liquidated damages were claimed by the applicant for tolerating delays in project completion, falling under the category of forbearance as per Schedule II to the CGST Act. The AAR concluded that such forbearance constitutes a supply of service, and the consideration for toleration is subject to GST.

Issue 2:
Regarding the time of supply triggering the liability to pay GST for liquidated damages, the AAR referred to the coordination agreement filed by the applicant. The agreement specified different liquidated damages for varying periods of delay in commissioning, with a prescribed formula for determining and paying the damages within three days after the actual commissioning date. The AAR determined that the date on which the liquidated damages are determined as per the formula in the contract (clause 6) represents the time of supply of service as per entry 5(e) of Schedule II. Consequently, the consideration received for such forbearance is taxable under CGST and SGST at 9% each under the relevant tax notification.

Conclusion:
The AAR clarified that liquidated damages recoverable for delays in commissioning constitute a 'supply' under GST law, attracting GST levy. Additionally, the time of supply triggering the liability to pay GST for such damages is the date when the damages are determined as per the contract's formula. The ruling provided by the AAR addressed the applicant's queries comprehensively, offering clarity on the GST implications of liquidated damages in the context of project delays.