9911796707
TMI Blog2019 (1) TMI 1668X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant, is a Central Public Sector Undertaking under the Ministry of Steel with Navaratna Status. They have an integrated steel plant at Visakhapatnam, Andhra Pradesh, and are in the business of manufacture and selling of steel products. The steel plant consists of many sub plants, like Coke Oven battery, Raw material Handling Plant, Sinter Plant, Blast Furnace, Steel Melting Shops, Rolling Mills and other units and each sub plant itself is a big unit or plant and the final steel product undergoes all the process through various sub plants. Initially the plant was installed with 3 million tons capacity. The plant is further taken up for expansion to 7.3 million tons capacity. Apart from procuring raw materials like iron ore, coking coal, boiler coal, ferro alloys in huge quantities, it also procures spare parts and machinery parts in huge quantities for maintenance of its plant(s). In various contracts entered into by the company, there is a clause to deduct Liquidated damages (LD) in case of default by the contractor/ vendor to complete the work/supply in time. The LD is deducted in two types of cases. Type 1: Operation & maintenance activities: In the normal course of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interplant Cabling Contract Value (Org.) 56,25,88,468.20 1,04,63,131.00 Date of Fax Letter of Acceptance 23.01.2008 23.01.2008 Date of Agreement 18.09.2008 18.09.2008 Date of Commencement 23.01.2008 23.01.2008 Date of Completion (Original) 22.04.2009 22.06.2009 Date of Completion (Actual) - Pre GST 27.07.2015 17.07.2015 No. of Extensions 23 extensions 20 extensions Date of completion of Delay Analysis - Pre GST 04.06.2016 04.06.2016 amount of LD (5% of Contract Value) 2,81,49,184.00 5,68,025.00 Dates of withholding of LD Pre GST 03.01.2015, 10.12.2016, 17.11.2015, 20.01.2016. Date on which LD was transferred to P&L - Post GST 31.03.2018 31.03.201 The contracts are inclusive contracts i.e. inclusive of Excise Duty & CST/APVAT, LD is calculated on the total contract value. The applicant had filed an application in form GST ARA-01, dt:25.09.2018, paying the prescribed amount of fee for seeking Advance Ruling on the following issues. The applicant sought Advance Ruling on 1) Whether "Liquidated Damages" and other penalties like milestone penalties levied on suppliers/ contractors in the nature of making good the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not earlier. In some of the contracts, it is offered bonus when the contractor completes the job before time in which event the contractor collects GST on the bonus value. In other words, the applicant pays GST whenever bonus amount is paid to contractor(s). It is never the intention of the applicant to enrich itself at the cost of the contractors/vendors by recovering LD. As submitted, there is only one contract for execution of supplies. The issues like Liquidated damages, milestone penalties etc. arise out of the same contract. Since the executed portion of the contract value already suffers GST, levying of further GST on damages or compensation measures like LD and, milestone penalties etc imposes double taxation on the contract values. Imagining existence of one more contract for tolerating an act or a situation, which is not the intention of the parties, and levying GST on the basis of such imaginary contract treating the LD as a result of such contract, is not justified. 2) Entry 5(e) of Schedule II is not applicable for LD and milestone penalties: As per entry 5(e) of Schedule II of the CGST Act, an activity of "agreeing to the obligation to refrain from an action, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reach, 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 provided to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named, or the case may be, the penalty stipulated for. Explanation: A stipulation for increased interest from the date of default may be a stipulation by way of penalty. Exception: When any person enters into any bail-bond; recognizance or other instruments of the same nature, or, under the provisions of any law or under the orders of the Central Government or of any State Government, gives any bond for the performance of any public duty or act in- which public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein. Explanation: A person who enters into a contract with Government does not necessarily thereby undertake any public duty or promise to do an act in which public are interested." It has been consistently held that liquidated damage is to compensate the person for loss suffered by him the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be charged from the contractor. Further, in the case of turnkey contracts the execution of work is monitored by dividing the stages of execution as reaching various milestones. If the execution of work is not as per the targets or milestones or achievements fixed, penalties also would be levied as milestone penalties before completing delay analysis. However, in the interim, the amounts equivalent to LD & milestone penalties is withheld from the bills. In Accounting, LD / milestone penalties imposed are treated as other miscellaneous income. This would be taking place after completion of delay analysis. In the present case, Agreement provided that the liability of payment of these Liquidated Damages by the contractor will be established, once the delay in successful execution of work is established on the part of the contractor. Thus, the act of delayed supply has happened. The same was being tolerated by an additional levy in the nature of liquidated damages. The agreement had also provided that the payment by contractor or deduction by owner of any sums under the provision of this clause shall not relieve the contractor from his obligations to complete the works or from his oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to by the applicant Liquidated damages if any collected/received under previously applicable Service Tax regime before coming into effect of GST, would be dealt with in accordance with the then existent provisions under applicable laws. 8. Ruling: (Under section 98 of Central Goods and Services Tax Act, 2017 and the Andhra Pradesh Goods and Services Tax Act,2017) For reasons as discussed in the body of the order, the questions are answered, as under, in terms of the contract for material supply and turnkey contract {for "Design, Engineering and Supply of all equipment including commission spares and Insurance Spares for Indoor LBDS, HVLC and Interplant Cabling for which copies were provided by the applicant as sample agreements and as per the applicant all contract terms contain similar provisions pertaining to "Liquidated Damages" and other penalties like "milestone penalties" levied on suppliers/ contractors. 1) Whether "Liquidated Damages" and other penalties like milestone penalties levied on suppliers/ contractors in the nature of making good the damages for any delays in supply of service or goods in the following cases are exigible to GST or not? (a) Supply an ..... 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