9911796707
TMI Blog2018 (9) TMI 1185X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 08.05.2018 = 2018 (5) TMI 1332 - AUTHORITY FOR ADVANCE RULING - MAHARASHTRA BRIEF FACTS OF THE CASE A. The appellant is engaged in generation of power with object of making power available on affordable rates. B. The appellant enters into contract with various contractors for the purpose of construction of new power plants or renovation of old plants or for operation of maintenance activities, etc. For example, the Appellant has awarded the contract to M/S. BHARAT HEAVY ELECTRICALS LIMITED for the purpose of erection, testing & commissioning of main plant package. C. As per the contract, the contractor is required to commence the trial operation of unit-I and unit-2 by 41 and 44 months respectively from zero date i.e. the date of letter of award, in normal cases. Otherwise the contract provides for payment of Liquidated Damages. The relevant clause requiring the payment of Liquidated Damages in case of delay is reproduced below: 7.0 LIQUIDATED DAMAGES FOR DELAY IN ERECTION, TESTING AND COMMISSIONING 7.1 The Contractor shall strictly adhere to the Project completion schedule to achieve the trial operations of the units 1 & 2 by 41 and 44 months respectively. In case the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately and for this purpose, price of one unit shall be half of the price of both the units. Similar clauses are there in supply of balance of plant package, erection testing and commissioning of balance of plant package, supply of main plant package, civil and structural works of balance of plant package and various other contracts entered into with various parties. The Appellant enters into contract with various suppliers which inter-alia includes: * BHARAT HEAVY ELECTRICALS LIMITED. * BGR ENERGY SYSTEMS LIMITED. * TATA PROJECT LIMITED. * LANCO INFRATECH LIMITED The contract is more or less similarly worded. Each such contract has time line for completion of the project and levy of Liquidated Damages, if not completed within time. The specimen clause reproduced above represents the manner and purpose of levying the Liquidated Damages for all the contracts. D. The appellant filed the Advance ruling application dated 30.12.2017 under section 97 of the CGST Act, 2017 before the advance ruling authority. E. The appellant also submitted the additional submission subsequent to the final hearing vide letter dated 07.03.2018. In the same submission the manner of recovery of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement between them, fix the amount which is to be paid by way of damages in the event of breach, a sum stipulated in this way is classed as liquidated damages where it is in the nature of a genuine pre-estimate of the damage which would probably arise from breach of the contract. This is the modern phrase used to define liquidated damages, first appearing in Lord Robertson's speech in Clydebank Engineering Co. v. Don Jose Ramos Yzquierdo Y Castaneda and later incorporated by Lord Dunedine in his list of "rules" in Duniop Pneumatice Tyre Co. v. New Garage and Motor Co. since when, as part of these "rules", it has often been resorted to. The intention behind such a provision is generally to avoid, wherever the amount of the damage which would probably result from breach is likely to be uncertain, the difficulty of proving the extent of the actual damage at the trial of the action for breach. 443. A stipulated sum will, however, be classed as a penalty where it is in the nature of a threat fixed in terrorem of the other party. This is again the modern phrase, also to be found in Clydebank Engineering Co. v. Don Jose Ramos Yzquierdo Y Castaneda, this time in Lord Halsbury's spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. Hence, the amount received is not for any services. 3. Entries in the clause (5) of Schedule-II shall be interpreted on the principle of eiusdem generis. 3.1 The Hon. Supreme Court in the case of Siddeshwari Cotton Mills (P) Ltd., Vs Union of India, 1989 (39) ELT 498 (SC) = 1989 (1) TMI 126 - SUPREME COURT OF INDIA has observed in para 7 as follows: "7. The expression ejusdem-generis - 'of the same kind or nature' - signifies a principle of construction whereby words in a statute which are otherwise wide but are associated in the text with more limited words are, by implication, given a restricted operation and are limited to matters of the same class or genus as preceding them. If a list or string or family of genus-describing terms are followed by wider or residuary or sweeping-up words, then the verbal context and the linguistic implications of the preceding words limit the scope of such words. In 'Statutory Interpretation' Rupert Cross says : "......The draftsman must be taken to have inserted the general words in case something which ought to have been included among the specifically enumerated items had been omitted......" [page 116] The principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of interpretation, that all words in a statute are given effect if possible, that a statute is to be construed as a whole and that no words in a statute are presumed to be superfluous....." [p. 740] In U.P.S. C. Board v. Hari Shanker [A.I.R. 1979 SC 65] = 1978 (8) TMI 227 - SUPREME COURT it was observed : "......The true scope of the rule of "ejusdem generis" is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. But the rule is one which has to be "applied with caution and not pushed too far"......" [p. 73] The Supreme Court in case of M/s. Rohit Pulp and Papers Ltd. 1990 (47) ELT 491 (SC) = 1990 (4) TMI 54 - SUPREME COURT OF INDIA in para 10 observed as follows: - 10. The principle of statutory interpretation by which a generic word receives a limited interpretation by reason of its context is well established. In the context with which we are concerned, we can legitimately draw upon the "noscitur a sociis" principle. This expression simply means that "the meaning of a word is to be judged by the company it keeps." Gajendragadkar, J. explained the scope of the rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... = 1981 (1) TMI 213 - SUPREME COURT OF INDIA this Court had to understand the meaning of the word `old' in the context of an entry in a taxing tariff which read thus : "Old, discarded, unserviceable or absolete machinery, stores or vehicles including waste products" Though the tariff item started with the use of the wide word `old', the Court came to the conclusion that "in order to fall within the expression `old machinery' occurring in the entry, the machinery must be old machinery in the sense that it has become non-functional or non-usable". In other words, not the mere age of the machinery, which would be relevant in the wider sense, but the condition of the machinery analogous to that indicated by the words following it, was considered relevant for the purposes of the statute. 4. The clause (5) of Schedule-Il needs to be interpreted on the basis that GST is destination-based consumption tax 4.1 The Goods and service Tax is contract-based levy and the nature of services rendered shall be determined on the basis of contract entered into between the provider of service and recipient of service. This principle shall be applied in interpreting the entry (e) of cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a particular act for which he receives payment. In the commercial world, very often, suppliers enter into agreement with purchaser for selling his product only. Very often, we see in theatre cold drink with brand name of particular company is only sold. The retailers enter into agreement with the company like Pepsi, Coca Cola, Parle, etc. that they will sell the cold drink of particular brand of the company and he will not sell the cold drink of other company. In such case, retailers agree to act in a particular manner for which he is paid the amount. 4.3 In all the above situation, there is specific agreement by the provider to carry out obligation specified in the contract. Therefore, this event is taxable. In the case of liquidated damages, there is no agreement to tolerate any situation or act. 5. Taxable supply arises on performance of activity 5.1 The section 7 defines 'supply' as follows: 7. (1) For the purposes of this Act, the expression "supply" includes (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to carry out acts mentioned therein. 6 (f) Transfer of goods by different means Provider transfer right to use any goods for any purpose (whether or not specified for a specified period) for cash, deferred payment or other valuable consideration. 5.2 It is evident from the above submission that applicability of various services mentioned in the clause (5) of Schedule-Il pre-supposes performance of certain activity by the provider of service. The nature of activities to be performed by the provider is also specified in the above table. It is therefore submitted that based on the principle of interpretation of ejusdem generis, the activity specified in clause 5 of schedule Il will become taxable only when the provider of service has performed certain activity. It is submitted that all these clauses shall be interpreted based on the principle of interpretation known as ejusdem generis. The meaning takes colour from the preceding or succeeding clauses. The word tolerating an act is preceded by the word 'Refrain from an Act" and succeeded by "To do an Act". Both these pre-supposes the voluntary act from the supplier to perform in a particular manner. Therefore, acceptance of da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty from liability for damages for breach of the entire contract. 6.4 Hence, the execution of the contract and deduction cannot be enforced separately. The delay in supply will always precede deduction of liquidated damages. Thus, deduction of liquidated damages cannot be independently enforced. Hence it is submitted that the contract is for single supply and not for the two supplies. In any contract if the activities are depended on each other and it cannot be performed individually, then there will not to be two separate supplies. In a contract two supplies can be considered only when two supplies are independent and not depending on each other. In this case, the deduction of the amount is determined on delay in making supply of goods or services by the contractor. Unless, there is delay the clause of liquidated damage will not apply. Therefore, it is submitted that contract is single supply and not for two separate supply. 6.5 It is submitted that there are no two separate promises in the contract. The appellant has entered into a contract as per which the contractor is required to perform the erection and commissioning of the plant within a given stipulated time period. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the entry 5(e) of schedule II. The penalty will be leviable for breach of any condition of contract. The penalty as per statutory provision, therefore has been considered as a part of value of supply and not as amount received for toleration of an act. Similarly, interest will be charged for delay in making payment by the recipient. The interest therefore cannot be considered as part of amount received for toleration of an act or delay in making payment. In view of the above, it is submitted that the liquidated damages cannot be considered as separate supply, or the amount received for tolerating an act. 8. Liquidated Damages reduces the value of main supply and the payment of liquidation damages as part of the same supply is mere re-determination of the consideration of the same supply if the has been specified in the original contract. 9. The relevant provision for determination of Transaction value under the GST law is similar to that in the Excise regime. It has been consistently held under the excise regime that liquidated damages has the effect of re-determining the transaction value. Clause (d) of Section 4(3) Central Excise Act, 1944 defines the expression "transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor undertaking the supply of service is aware of the fact that in case the services are not completed within the stipulated period, the value of contract will reduce. Since the recovery of Liquidated Damages is a part of the contract, it is submitted that the value of the main supply reduces to the extent of Liquidated Damages deducted by the Appellant. 12. The authority has distinguished the judgment relied upon by the appellant on the ground that those judgments, the contract clearly specified reduction of transaction value in the case of delayed delivery which is not there in the present case. 13. It is submitted that the contention of the authority is not correct. The relevant extract of the facts in the case of Victory Electricals Ltd (2013 (12) TMI 81 - CESTAT CHENNAI) is reproduced below: 7. The assessee was engaged in manufacture of electrical transformers. During the relevant period, respondent supplied transformers to various Distribution Companies (discoms) of the Andhra Pradesh State Electricity Board (APSEB). Clause (2) of the purchase order provides for variation in the price, by way of revision (upward or downward) ab initio, to accommodate variations in prices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent provision or in any other way changed in terms of conditions of the contract (e.g. contingent on the happening or non-happening of a future event), the tax will be payable on the revised amount provided the excess amount is either refunded or a suitable credit note is issued to the service receiver. However, concession is not available for bad debts. 18. It is evident from the above circular, that in case the consideration for any other service is changed as per the term and conditions laid down in the contract, then service tax will be payable on the renegotiated amount. These provisions in rule 6(3) were continued even after July 2012. The section 66E declared "agreeing to obligation to tolerate an act" as taxable supply even then the above clarification continued. 19. In the present case, there is deficient provision of service in as much as the contractor could not complete the service within the stipulated time period. Therefore, applying the ratio of the above circular, it can be said that tax will also be levied on the revised amount of consideration only. 20. Reliance is also placed on Australian Ruling issued under the Australian Goods & Service Tax Act, 1999: The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that there is no supply when any charge is collected for termination of breach of contract. The extract of book is reproduced below: "However, the Tax Office accepts that there is no supply where the order or settlement is wholly concerned with finalizing a claim for damages or compensation for previous property damage, negligence causing loss of profits, breach of copyright, wrongful use of trade name, personal injury, termination or breach of contract. In such cases there is therefore no GST liability. 22. Thus, Australian GST has treated the payment of liquidation damages as part of the same supply and mere re-determination of the consideration of the same supply if the has been specified in the original contract i.e. if liquidation of damages are to be borne by the service provider then same will be considered as towards deficiency of services and thereby reduces the original consideration and it will not be considered as separate service and hence it is not covered by the term 'Obligation to tolerate an act or a situation'. 23. The deficiency of service may arise on account of poor quality of service or delay in rendering the service and therefore it is our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a deterrent for non-serious bidders entering the fray. Other examples may be rent for delay in lifting goods; agreeing to shoulder testing charges for samples to meet standards; cost of removing rejected goods, etc. 32. Payment of damages, deducting the liquidated damages or the forfeiture of deposit does not restitute the person to whom loss or damage is caused. Liquidated damages are in nature of a measure of damages to which parties agree, rather than a remedy. By charging damages or forfeiture, one party does not accept or permit the deviation of the other party. It is an expression of displeasure. Liquidated damages cannot be said to be the desired income. It is for compensation of loss suffered by recipient. 33. Intention of contracting parties are essential to determine nature of transaction. Further, Various courts in India have time and again held that for determining the Tax implications with regard to a transaction, reliance needs to be placed on the intention of the contracting parties as gathered from the contract or conduct of the parties. 34. In case of Dr. Golak Bihari Mohanty vs. State of Orissa, [1974] 33 STC 514 (Orissa), = 1974 (1) TMI 91 - ORISSA HIGH COU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recovered for compensating the loss/damage suffered by the recipient. The section 73 and section 74 of the Indian Contract Act, 1872 provides for recovery of liquidated damages in case of breach of contract. The provision of the section 73 and section 74 of the Indian Contract Act, 1872 reads as follows: - * 73. Compensation for loss or damage caused by breach of contract. - When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. * 74. Compensation for breach of contract where penalty stipulated for. -When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defines 'supply' as follows: "(1) A supply is any form of supply whatsoever. (2) Without limiting subsection (1), supply includes any of these: (a) a supply of goods; (b) a supply of services; (c) a provision of advice or information; (d) a grant, assignment or surrender of real property; (e) a creation, grant, transfer, assignment or surrender of any right; (f) a financial supply; (g) an entry into, or release from, an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation; (h) any combination of any 2 or more of the matters referred to in paragraphs (o) to (g). The definition of supply in section 7 of GST Act is same as given in section 9-10 of Australian GST Act. Both include all forms of supply. Further clause 5(e) of schedule II to GST Act declares 'agreeing to an obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' as service. Similar provisions are made in clause (g) of Section 9-10 of The Australian GST Act. Therefore, ratio of cases laid down in Australia should apply to provisions of Indian GST Act. d) In the case of Shaw v Director of Housing & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment sum is extinguished by the act of payment. The extinguishment or release does not depend upon any action on the part of the judgment creditor. As White J said in Inter chase at par 54 [at 4554]: "A taxable supply is made if the supply is made for consideration (s 9-5(a)). Consideration includes matters done pursuant to orders of a court (s 9-15(2A)(a)) but that does not of itself constitute a supply. The receipt of payment by a judgment creditor does not obviously involve the creation, grant, transfer, assignment or surrender of any right or the entry or release from an obligation (s 9-10(2)(e)(f)). When the judgment is satisfied the debt created by the judgment is thereby extinguished and does not depend on the surrender of any rights or the release of the judgment debtor." e) Further, Australian Tax Office publishes Goods & Service Tax Rulings. They have published GST Ruling titled 'Goods & Service Tax on consequences of court orders and out-of-court settlements". The purpose of rulings has been explained in para 1 as follows: 1. This Ruling considers the goods and services tax (GST) consequences resulting from court orders and out-of-court settlements. It explains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um capping of liquidated damages, the amount of liquidated damages is calculated at given percentage instead of being period-based, then how GST needs to be levied. It was mentioned in the order that no strategy of deducting or of capping can be inferred from the agreement clause. In response to the same it is submitted that the strategy of deducting or the capping is given the clause 7.6 of the contract and the same was also mentioned in the statement of the fact of the application for advance ruling. The same is reproduced as follow: - 7.6 If the contractor fails to achieve the Trial Operation of the unit within the time period specified in the Project Completion Schedule due to reasons attributable to him then the owner shall levy Liquidated damages on the Contractor @ 1/2% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation per week of delay or part thereof subject to the maximum 10% of the contract price for erection, testing and commissioning (excluding insurance charges, taxes and duties) along with applicable price variation." 43. It is submitted that the Honourable Advance R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e variation. For the purpose of levy of liquidated damages, the contract price for Erection, Testing & Commissioning excluding Insurance charges and taxes & duties and the same for one unit shall be half of the total price. Section 3 of the Contract which refers to the special conditions of the contract also lays down the provisions for payment of liquidated damages by the Contractor to the appellant. Section 3 - Special Conditions of Contract 7.0 LIQUIDATED DAMAGES FOR DELAY IN ERECTION, TESTING AND COMMISSIONING 7.1 The Contractor shall strictly adhere to the Project Completion Schedule to achieve the trial operations of units 8 & 9 by 41 and 44 months respectively. In case the Contractor fails to achieve successful completion of Trial Operation within specified time period as per the Project Completion Schedule due to delay on his part, then the Owner shall levy liquidated damages. 7.2 Time Schedules indicated for various activities are for the purpose of monitoring to ensure work completion as per Project Completion Schedule. Only the successful completion of Trial Operation of the unit shall be considered for the purpose of levy of Liquidated Damages. 7.3 The payment by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract price for erection, testing and commissioning along with the other applicable price variation. This clause makes it clear that there is a separate provision in the agreement for payment of liquidated damages by the contractor to the appellant. We are in agreement with the ARA that as separate provisions have been made for the payment of liquidated damages, the contract price and liquidated damages are two different aspects completely separable from each other. It has been held by the ARA that liquidated damages would be covered by the entry (e) of clause 5 of Schedule Il which reads as follows:- (e) Agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act. A plain reading of the entry 5(e) reveals that an activity of a person can be categorized under the said entry if the following ingredients are present:- i) There should be an agreement. ii) There should be an obligation. iii) The obligation would be to - a) Refrain from an act; b) tolerate an act or a situation; c) to do an act. 48. We have already arrived at the conclusion that in section 3 of the contract the specific clause - 7 provides for the levy of liquida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the main supply by the contractor and the payment of the liquidated damages are a part of the same supplies and it is mere redetermination of the consideration of the same supply. The damages are recovered by the appellant by deducting them from the bill and therefore it is contended that the liquidated damages are a part of the same supplies and is a mere redetermination of the consideration. But the deduction is mere method of recovering the money but the fact remains that there is a separate agreement for payment of liquidated damages. We agree with the AAR when they say that value of the work done and which is to be paid is not affected by the amount deducted therefrom towards liquidated damages. The consideration remains unchanged and how the amount is recovered would not change the nature of the supply. Also, neither the definition of 'contract price' nor 'contract value' as given in the Agreement refers to the contingency of liquidated damages. Contract price is defined in clause 3.13 (A) as the total lump sum price plus the price variations. This is an independent clause having no relation to the eventuality of liquidated damages, for which as we ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to by the AAR clearly shows that the value of the work done remains unaltered and there is no price variation because of the liquidated damages. For all the above reasons, these judgements are not relevant here. Having discussed above, the reply of the questions is as under:- Question 1 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? Regarding the agreement between Maharashtra State Power Generation Company Limited (Owner) and Bharat Heavy Electricals Limited (Contractor) for Erection & Commissioning of Main Plant Package at Chandrapur T.P.S. Expansion Project 2 x 500 MW, we agree with the finding of the AAR that GST would be applicable on the Liquidated Damages. Question 2 If GST is applicable, kindly clarify the following related aspects also a) Whether the GST on Liquidated Damages is covered under Schedule Il entry No 5(e) vide HSN code 9997-0ther Services rate 18% is correct or any other entry is relevant? We confirm the finding of the AAR that the following schedule entry under the Notification ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
