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2023 (6) TMI 1229 - AAR - GSTScope of assessment under GST Act, 2017 - contract completed during the Pre-GST period and demand based on the completed contract can be brought to assessment under GST Act, 2017 or not - liquidated damages, without any supply of materials and labor - arbitral award, in the nature of compensation, payable for delay in completion of the contract and agreed to be payable by the Applicant to DGAL without any supply of goods or services - ITC on the GST amount if any levied on the mutually agreed arbitral award amount received from the Applicant - taxability under GST on Interest payable on the liquidated damages?' Whether a mutually agreed amount for settling a dispute arising out of breach of contract constitute a supply within the scope of Entry 5(e) of Schedule-II to the CGST Act, 2017 and hence taxable? HELD THAT - Circular No. 178/10/2022-GST dated 03-08-2022 discusses the taxability of an activity on a transaction as supply of service of agreeing to the obligations to refrain from an act or to tolerate an act or a situation, or to do an act under the GST. This includes applicability of GST on payments in the nature of liquidated damage, compensation, penalty, cancellation charges, late payment surcharge, etc., arising out of breach of contract or otherwise and scope of entry at para-5(e) of schedule-II of Central Goods Service Tax Act, 2017. The flow of consideration in the instant case fall under para-7.1.3 and para-7.1.4 of circular No. 178/10/2022, dated 03-08-2022, therefore such consideration as stipulated in the said circular are not taxable as there is no supply of service under entry-5(e) of Schedule-II of the CGST Act, 2017. In the instant case, as no supply has happened during the GST regime as per Section 142(10) of the act ibid no GST shall be payable. Further the additional payment received by way of compensation through award by Hon ble Tribunal for Arbitration is not falling under Section 142(2)(a) and hence not chargeable to GST.
Issues Involved:
1. Taxability of contract completed during the Pre-GST period under GST Act, 2017. 2. Assessment of liquidated damages without any supply of materials and labor under GST Act, 2017. 3. Tax liability on mutually agreed and settled amount based on arbitral award as compensation for delay in contract completion. 4. Eligibility of DGAL to claim ITC on GST amount, if any, levied on the arbitral award amount. 5. Taxability under GST on interest payable on liquidated damages. Summary: Issue 1: Taxability of Pre-GST Contract The contract completed during the Pre-GST period cannot be brought to assessment under GST Act, 2017. Section 13 of CGST Act, 2017, determines the taxability based on the time of supply, and since no supply occurred during the GST regime, no GST is applicable. Issue 2: Liquidated Damages without Supply Liquidated damages, without any supply of materials and labor, are not assessed to GST under GST Act, 2017. The damages are considered compensation for breach of contract and not for tolerating an act or situation, thus not constituting a supply under entry 5(e) of Schedule-II of the CGST Act, 2017. Issue 3: Mutually Agreed Compensation The mutually agreed and settled amount based on the arbitral award, payable as compensation for delay in contract completion without any supply of goods or services, is not liable to be taxed under GST. The compensation is considered a flow of money due to breach of contract and does not fall under the definition of supply. Issue 4: ITC Eligibility for DGAL The question of DGAL's eligibility to claim ITC on the GST amount, if any, levied on the mutually agreed arbitral award amount does not arise, as no GST is applicable on the compensation. Issue 5: Taxability on Interest Payable There is no GST on the interest of 13% p.a. awarded by the Tribunal for Arbitration, as the principal supply itself is not taxable. Interest is assessed at the same rate as the principal supply, which in this case, is not subject to GST. Conclusion: The Authority for Advance Ruling concluded that the compensation and interest awarded are not subject to GST, as they do not constitute a supply under the CGST Act, 2017. The ruling aligns with Circular No. 178/10/2022, which clarifies the non-taxability of liquidated damages and related compensation.
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