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TMI Blog2018 (9) TMI 1185X X X X Extracts X X X X X X X X Extracts X X X X ..... t when there is delay in the completion of the project, the appellant is put to certain hardships which he tolerates in return of the payment of liquidated damages. What entry 5(e) provides that any supply of services of tolerating an act is a supply and therefore the impugned transaction is also a 'supply' under the provisions of the CGST Act. The definition clearly provides that if the parties agree for liquidated damages, the sum fixed is a measure of damages for a breach. In the impugned case, liquidated damages are contractually stipulated for delay in the completion of the project. The agreement provides that the contractor may pay a certain percentage for the delay - the appellant was well within his rights to provide for the termination of agreement in case of delay in completion of the project. But in the instant case both the parties agreed that such will not be the effect in case of delay. The appellant agrees to tolerate the delay done by the contractor in return for payment of liquidated damages. The appellant could have opted for harsh measures like termination of contract but instead it chooses to tolerate the delay in return of payment of money - the said act fal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts 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 the liquidated damages was explained, which is reproduced as follows: As directed, a specimen running bill raised by M/S Bharat Heavy Electricals Limited, bearing no. MS/PW/9515/13/1027(89) is attached in the submission. In this case, 15% of the invoice amounting to ₹ 56,29,471/- has been deducted as retention. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 speech, and also incorporated by Lord Dunedin in his list of rules in Dunlop Pneumatic Tyre Cop. v. New Garage and Motor Co. The intention behind such a provision is generally to prevent a breach of the contract by establishing a greater incentive for its performan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d., 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 underlying this approach to statutory construction is that the subsequent general words were only intended to guard against some accidental omission in the objects of the kind mentioned earlier and were not intended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uous..... [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 in State v. Hospital Mazdoor Sabha (1960-2 S.C.R. 866) = 1960 (1) TMI 32 - SUPREME COURT in the following words : This rule, according to Maxwell, m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 clause (5) of Schedule-Il which reads as follows: (e) agreeing to the obligation to refrain from an act, or to tolerate an ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pliers 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 furtherance of business; (b) import of services for a consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) Development, design etc. of information technology software Provider carries out any of the activity like development, design etc. for rendering taxable service 5 (e) Agreeing to the obligation Provider shall specifically agree to obligation 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 cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of which is susceptible of division and apportionment, having two or more parts, in respect to matters and things contemplated and embraced by it, not necessarily dependent upon each other, or intended by parties as being dependent. Gross v. Maytex Knitting Mills of Cal., 116 C.A.2d 705, 254 P.2d 163, 167. see separability clause. When a contract is severable, a breach may be found to constitute a default as to only the specific part breached, thus relieving the defaulting party 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 dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) interest or late fee or penalty for delayed payment of any consideration for any supply; and It is evident from the same that the interest, late fees or penalty will be added to the consideration of the original supply. They will not be considered as a separate supply of toleration of an act, If the intention of the legislature was to tax such penalties under the clause 'toleration of an act', then there was no need for adding this clause in section 15. They would have automatically got covered 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... worded i.e. under both the Acts, tax is levied on the transaction value which is the price actually paid or payable. Therefore, the ratio of the above cited judgements can also be applied to the section 15(1) of the GST Act, 2017 and it can be concluded that resultant price after Liquidated Damages would be the transaction value under section 15(1) of the GST Act,2017. 11. In the present case, the contract entered into with the contractor gives the nature of services, the value of services and the time frame within which the services are required to be completed. The contractor 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in terms of the contract, then the service tax will be payable on such revised amount, subject to the fact that the excess amount is either refunded or a suitable credit note is issued to the service receiver. The relevant extract reads as follows: 11. Changes have also been made in the Service Tax Rules, 1994 vide Notification No. 26/2011-S.T., dated 31-3-2011 and have a close relationship with the Point of Taxation Rules as follows: (i) The obligation to issue invoice shall be within 14 days of completion of service and not provision of service. (ii) If the amount of invoice is renegotiated due to deficient 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods, it was clarified that if clause relating to early termination has been specified in the original contract of lease and early termination has been in a accordance with the said contract than termination payment will be considered as change of consideration of earlier supply (i.e. re-determination of consideration). It will not be considered as separate supply, but will be considered as adjustment event in relation to that earlier supply. The book Australian Master GST Guide written by Philip McCouat (2014) 15 th Edition contains Australian GST Act and application of the same. The paragraph 4-085 deals with damage awards and out of court settlements. The said paragraph clearly provides 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 ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30. Performance is the essence of a contract and hence parties to contract generally incorporate their expectation in terms of damage caused by failure of either party to perform its obligations completely or as per the agreed terms. 31. The contract may prescribe damages for deficiency in the performance of contract known as 'liquidated damages'. It is to dissuade unsatisfactory performance or nonperformance. For instance, contracts state that time is the essence of contract, and any delay invites say, 1/2% or 1% of the value of the contract for every week of delay and the like. Similarly, it is common to forfeit earnest money deposit (EMD) from a bidder in case he wins the bid but fails to act thereafter. This forfeiture clause 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 parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not represent the primary intent and objective of the parties which obviously logically and legally continues to construct and deliver a power plant. 37. At best these settlements could be considered to be an adjustment or a reduction in the contractual consideration or compensation to be received by the contractor. However, considering these settlements as a separate and distinct 'supply' from that of the LSTK's scope and ambit seems to be a bit too far stretched. 38. If this argument is found to have some merit, then what could possibly attract levy of GST under the impugned clause could be an arrangement where primary intention is to tolerate an act or a situation. 39. Recovery of damages cannot be equated to supply of service: 39.1 Liquidated damages are 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n held that payments on account of damage do not constitute a supply. a) The contract may prescribe damages for deficiency in the performance of contract known as 'liquidated damages'. It is to dissuade unsatisfactory performance or non-performance. Payment of damages is to compensate loss suffered by a person. b) It is submitted that there was an issue under the Australian GST regarding payment of GST on damages awarded by a court order. It was held under that law that payment of damages alone does not constitute a supply and thus no GST shall be payable. It is submitted that the present issue also relates to taxability of damages payable by contractor to the appellant in terms of the contract. Thus, the ratio can apply to the present case. Therefore, the submissions are being made below. c) Section 9-10 of Australian GST 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 cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Case S77 (1996) 17 N ZTC 7483 a compromise of a cause of action was held not to be a supply. In that case farmers were burning off scrub on their farm when the fire got out of control and damaged some machinery belonging to contractors. The contractors commenced proceedings for damages but the action was settled out of court by the payment of a sum of money and the striking out of the proceedings by consent. Barber DJ held that the abandonment of their claim in return for payment of money did not involve a supply. He said, at 7487: All that has passed between the [farmers] and [the contractors] physically is the payment or handing over of a cheque. In the abstract, all that has passed between them is the surrendering by the [contractors] of their right to proceed with their claim against the [farmers]. That surrender is not a supply. 18. The obligation of the judgment debtor to pay the judgment 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)) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the GST Act On a combined reading of judgments and rulings, it is evident that award of damage by Court does not in itself constitute a supply by the person receiving such damage. Currently, there are no rulings from authority in India. However, very often, courts have followed rulings of other nation to decide similar issues. Therefore, in view of the above, no GST will be payable by the company on the amount payable to claimant by querist as per the award of Arbitrator Court. 42. The reply to question no.(e)of the appellant was based on incorrect fact: The question no. (e), reads as follows: - (e) If some part of delay has occurred before GST roll-out and some part of delay has occurred after GST roll-out, whether GST will be applicable to the liquidated damages imposed for entire period of delay or to the period falling after GST roll-out? In case when GST is to be imposed for period after date of GST rollout but due to maximum 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 cappin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but compensation for the loss suffered by the appellant. There is no contract between the parties and there is no supply of services for tolerance of an act. 46 . The Authority for Advance Ruling has held that the payment of liquidated damages by the contractor to the appellant is covered by the term 'Obligation' to tolerate an t act' or a 'situation' and is taxable under the provisions of the CGST Act. In order to understand the issue, let us refer to the relevant clauses of specimen contract: 10.0 LIQUIDATED DAMAGES 10.1 If the Contractor fails to achieve the trial operation of the unit within the stipulated time period as indicated above from the zero date then the Owner shall levy Liquidated Damages on the contractor @1/2% of the contract price for Erection, Testing Commissioning along with applicable price variation price per week of delay or part thereof subject to a maximum of 10% of the price for Erection, Testing Commissioning along with applicable price 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 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 . 7.7 For the purpose of deciding the amount of Liquidated Damages on the erection price, contract price along with applicable price variation (excluding taxes, duties and insurances charges.) as per contact price adjustment shall be considered. Further Liquidated Damages for each Unit shall be levied separately and for this purpose, price of one Unit shall be half of the price of both the units. 47. The above clauses are taken from the contract agreement between the appellant and BHEL (Contractor) for erection and commissioning of main Plant package at Chandrapur T PS expansion project 2 X 500 MW. It can be seen from the above clauses that specific provisions have been made for the payment of liquidated damages. It can be seen from clause 10.1 that the liquidated damages have been determined at 1.5% of the contract price for erection, testing and commissioning along with the other applicable price variation. This clause makes it cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of damages for a breach, whether it exceeds or falls short of the actual damages. The definition clearly provides that if the parties agree for liquidated damages, the sum fixed is a measure of damages for a breach. In the impugned case, liquidated damages are contractually stipulated for delay in the completion of the project. The agreement provides that the contractor may pay a certain percentage for the delay. In other words, the appellant was well within his rights to provide for the termination of agreement in case of delay in completion of the project. But in the instant case both the parties agreed that such will not be the effect in case of delay . The appellant agrees to tolerate the delay done by the contractor in return for payment of liquidated damages. The appellant could have opted for harsh measures like termination of contract but instead it chooses to tolerate the delay in return of payment of money. Therefore, we agree with the ARA that the said act falls under clause 5(e) of Schedule-Il of the Act. 49. It is a contention of the appellant that the liquidated damages reduce the value of the main supply by the contractor and the payment of the liqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant has referred to certain provisions of the Central Excise Act in support of his contention that liquidated damages reduce the value of original supply. The issue relates to the provision of existing law and not relevant here. The appellant has also referred to certain judgments in the case of Commissioner of Central Excise v. HFCL (Dt.05.02.2014), = 2015 (11) TMI 893 - CESTAT NEW DELHI , Victory Electricals 2013 (298) ELT 534 ( Tri-LB), = 2013 (12) TMI 81 - CESTAT CHENNAI M/s. Priyaraj Electronics 2016 (6) TMI 873 CESTAT Bangalore, United Telecom 2006 (204) ELT 626 ( Tri Bang) = 2006 (9) TMI 321 - CESTAT, BANGALORE wherein it was held that the lesser amount as a result of clause stipulating variation in the price on account of liability to pay liquidated damages would be transaction value liable to levy of excise duty. These judgements relate to the computation of the transaction value and do not deal with the issue of the taxability of liquidated damages. Also, in the impugned case there are specific clauses relating to the levy of liquidated damages, which clearly show the intent of both the parties. The invoices referred to by the AAR clearly shows that the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some part of delay has occurred before GST roll-out and some part of delay has occurred after GST roll-out, whether GST will be applicable to the Liquidated Damages imposed for entire period of delay or to the period falling after GST roll-out? In case when GST is to be imposed for period after date of GST rollout but due to maximum capping of LD, the amount of LD is calculated at given percentage instead of being period-based, then how GST needs to be levied. The AAR held that since no precise facts were before them, the section 14 of the GST Act would have to be referred to by the appellant. We agree with the same. d) Whether the contractor / vendor will be able to utilize the amount of LD imposed over him as Input Tax Credit subject to satisfying all other conditions? We agree with the AAR that the answer to the above is that input tax credit would be admissible subject to the conditions and restrictions as specified in the GST Act and the Rules made thereunder. In view of the discussion held hereinabove, we pass the following order: ORDER (under section 101 (1) of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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