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TMI Blog2022 (11) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... under Chapter XVII of the Act shall be binding only (a) On the applicant who had sought it in respect of any matter referred to in sub-Section (2) of Section 97 for advance ruling; (b) On the concerned officer or the jurisdictional officer in respect of the applicant. 3. Under Section 103 (2) of the Act, this advance ruling shall be binding unless the law, facts or circumstances supporting the original advance ruling have changed. 4. Under Section 104 (1) of the Act, where the Appellate Authority finds that advance ruling pronounced by it under sub-Section (1) of Section 101 has been obtained by the appellant by fraud or suppression of material facts or misrepresentation of facts, it may, by order, declare such ruling to be void ab-initio and thereupon all the provisions of this Act or the rules made thereunder shall apply to the appellant as if such advance ruling has never been made. * * * * * Subject: GST - Appeal filed by M/s. Achampet Solar Private Limited, Hyderabad 8-2-610/68/1,2,3, 5th Floor, Accord Blu, Road No 10, Banjara Hills, Hyderabad, Telangana - 500034. Telangana State under Section 100 (1) of TGST Act, 2017 Against Advance Ruling TSAAR Order No.07/2022 dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is extracted below: "Effect of failure to perform at fixed time, in contract in which time is essential-When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee if the intention of the parties was that time should be of the essence of the contract. Effect of such failure when time is not essential.-If it was not the intension of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure. Effect of acceptance of performance at time other than that agreed upon-If, in case of a contract voidable on account of the promisor's failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than that agreed, the promisee cannot claim compensation for any loss occas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter head 9997 at serial no. 35 of Notification No.11/2017- Central/State tax rate. 7. Lower authority, examined the submissions made by the Appellant and vide the impugned order, the Advance Ruling Authority had given the following Advance Rulings: Questions Ruling by AAR 1. Whether liquidated damages recoverable by the applicant from Belectric India on account of delay in commissioning, qualify as a 'supply' under the GST law, thereby attracting the levy of GST? Yes. 2. If the answer to Question No. 1 is in the affirmative, what should be the time of supply when liability to pay GST is triggered? 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. 8. Aggrieved by the above ruling, the present appeal has been file by the appellant on the following grounds: 1. The impugned order is a non-speaking order and is liable to be set aside 1.1. At the outset, the Appellant submits that the Ld. Authority without considering the detailed submissions made by the Appellant has concluded that the liquidated damages recovered by the Appellant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Justice before coming to a conclusion. 1.4. Based on the above, the Appellant wish to submit that the Ld. Authority did not take into cognizance the facts of the case and submissions made by and, therefore, the order passed by the Ld. Authority is bad in law. 2. Statement containing the Appellant's interpretation of law and/or facts, as the case may be, in respect of the aforesaid question(s) The position of law and our understanding of the same 2.1. It is important to note various statutory provisions which have a bearing on the questions raised in the present Appeal. The relevant statutory provisions are extracted hereunder for the ready reference of your goodself: Relevant Provisions of the Central Goods and Services Tax Act, 2017 ('CGST Act') and the Appellant's interpretation of the same 2.2. Under the GST law, all supplies of goods and services should attract GST (unless specifically exempted). Section 9 of the CGST Act is the charging Section which provides that there shall be a levy of a tax called the Central Goods and Services Tax on all intra-state supplies of goods or services or both on the value determined under Section 15 of the CGST Act, 2017 at such rates n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : - (a).......... ........................ (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and....' 2.7. Further, the term 'service' and 'consideration' is defined as follows under Section 2(102) and 2(31) of the CGST Act: 'services means anything other than goods, money and securities but includes activities relating to the use of money or conversion by cash or by any other mode, from one form, currency or denomination, to another form currency or denomination for which a separate consideration is charged.' 'consideration in relation to the supply of goods or services or both includes- (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of royalty as damages to be treated as a 'supply' for 'consideration' on which GST is payable. Relevant extracts from the judgment have been reproduced below: ".. 57. However, where no reciprocal relationship exists, and the plaintiff alleges violation of a legal right and seeks damages or compensation from a Court to make good the said violation (in closest possible monetary terms) it cannot be said that a 'supply' has taken place. 58. The Learned Amicus Curiae correctly submits that enforceable reciprocal obligations are essential to a supply. The supply doctrine does not contemplate or encompass a wrongful unilateral act or any resulting payment of damages. For example, in a money suit where the plaintiff seeks a money decree for unpaid consideration for letting out the premises to the defendant, the reciprocity of the enforceable obligations is present. The plaintiff in such a situation has permitted the defendant to occupy the premises for consideration which is not paid. The monies are payable as consideration towards an earlier taxable supply. However, in a suit, where the cause of action involves illegal occupation of immovable property or trespass (eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, in the present case, where the plaintiff has made out a strong prima facie case and the Defendant has not been able to demonstrate any semblance of right to occupy the Suit Premises, it cannot be said that the Defendant's occupation pursuant to an Order of the Court is a contract involving a 'supply' for consideration. In the absence of reciprocal enforceable obligations, it would not be correct to characterise the Defendant's occupation of the Suit Premises against payment of royalty as a 'supply' for 'consideration' on which GST is payable by the Court Receiver. .." 2.12. Despite the term 'supply' and 'business' defined in the GST law are inclusive and wide terms, the aforesaid decision emphasises the presence of enforceable reciprocal obligations as an essential requirement for determining whether a transaction is a supply and any amount received is a consideration for a supply. It shall be observed that, a clear distinction is established by the Hon'ble High Court, between the consideration received for letting out the property and the compensatory damages arising on account of unauthorised occupation of the property. 2.13. Further, the Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory right of claiming compensatory damages provided under the Indian Contract Act, 1872 which is to protect interests of its own. It is further submitted that a right belonging to self cannot be executed for another person. In so far as exercising of rights is correctly comprehended, it will not be wrong to state that a person can exercise rights for himself only and not for another person. 2.17. Therefore, the claim for compensatory damages (in the form of penalties) being a right of the Appellant which has been exercised by the Appellant at its option and to its own benefits. In the absence of any recipient of supply, it is submitted that there can be no supply and hence, there can be no levy of GST. The present arrangement cannot be said to be covered under Clause 5 (e) of Schedule II of the CGST Act, 2017 2.18. The Clause 5(e) of Schedule II can be divided into following three sub clauses: (a) Agreeing to the obligation to refrain from an act; (b) Agreeing to the obligation to tolerate an act or a situation; and (c) Agreeing to the obligation to do an act. 2.19. It is submitted that the words 'agreeing to the obligation' applies to all the three activities. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst which a consideration is received. The Appellant recovers liquidated damages from the Contractor on account of delay by the Contractor in delivering the project within the prescribed timelines. 2.21. In striking contrast to the examples cited above, in the present matter, the Appellant's right to recover compensatory damages becomes contingent upon the service provider/suppliers' delay/default. Thus, the impugned recovery arises on the event of failure on part of the service providers/suppliers not meeting the delivery time and does not emanate from an obligation on the part of the Appellant to tolerate an act or situation. The Appellant has suffered damage or loss, which cannot be equated with making a supply of taxable supply under clause 5(e) of Schedule II of the CGST Act, 2017. 2.22. Notwithstanding the aforesaid, the Appellant submits that to qualify as a 'supply of services' as envisaged under clause 5(e) of Schedule II of the CGST Act, 2017, the following conditions ought to be satisfied:- Conditions for levy of GST under Clause 5(e) of Schedule II - There should be agreement between parties towards discharging a contractual / agreement - linked obligati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the liquidated damages was never the primary purpose for entering into a contract, rather it is just a consequential effect of transactions already undertaken. There is nothing in the contracts that indicates that the intention of the Appellant or the Contractor is to effect a breach of the contract or to earn LDs by virtue of breach of commitment, which is to be tolerated by either of them. On the contrary, LD clauses are incorporated in the contract in order to avoid/ discourage such acts of default and there is no additional benefit given under the main contract of supply of goods/ services, in return for the LDs. 2.27. Further, LDs received for breach of contract should not qualify as 'consideration' under the contract, as LDs are neither 'in respect of' nor 'in response to' any identified supply made by the contractor, as is also explained in the preceding paragraphs. Instead, it is paid to make good the loss/ injury suffered by the Appellant as a result of default/delay in performance of the contract and have no nexus with any identified supply. 2.28. It is submitted that the liquidated damages, in the instant case, cannot be regarded as consideration for any provision of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ST, Jaipur-I, 2017 reported as [(49) STR 313 (TRI)], while dealing with service tax liability on cancellation charges in case of booking and subsequently cancelling a booth, it was observed that such cancellation charges are for putting the appellant into inconvenience by initially booking the booths and subsequently cancelled. In such case as no service stand provided by the appellant to their customers and for which purpose no consideration was ever received by them, it was held that the cancellation charges recovered by the appellant cannot be held to be the consideration for providing business exhibition services and hence, would not be liable to service tax. * In the case of Reliance Life Insurance Company Ltd vs Commissioner of Service Tax, Mumbai-II, Appeal No ST/85584/2015, demand of service tax was raised on the assessee on collection of surrender or partial withdrawal charges in case a policy holder diluted the policy completely or partially. The revenue was taxing such charges under the category of 'Management of Investment under ULIP services'. It was observed by the Hon'ble Mumbai Tribunal that there cannot be any levy of service on the surrender and partial withdra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of the consideration for an activity that has been carried out. If the dispute itself pertains to consideration relating to service then it would be a part of consideration.'' 2.35. As per the guidance provided in the Education Guide, with the concurrent existence of Section 66E(e), amount received on account of settlement of dispute was held to not be termed as consideration. 2.36. Thus, in absence of any agreement to provide services between the Appellant and the Contractor under the contract, the activity of recovery of liquidated damages for delay should not be construed as a service. The amount payable by the Contractor is not on account of any activity performed by the Appellant, which may be construed as 'refraining from an act'' or 'tolerating an act or situation' and should equally fall within the clarifications provided under Para 2.3.2 of the Education Guide. The amount payable by the Contractor is financially restitutionary in nature to compensate the customer of the initial investment made in the project, and therefore should not be liable to GST. 2.37. Additionally, in the erstwhile law, the taxability on termination of contract has been a subject of debat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-exhaustive list of activities or occurrences that are included within the meaning of supply. This, inter alia, under clause (g) includes: "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;" The Australian Government regularly issues rulings or GSTR (Goods and Services Tax Rulings) clarifying the position of law on various contentious issues. The Australian government has issued GSTR 2001/4 dated 20 June 2001 to clarify the position of law on taxability of liquidated damages. Under said GST Ruling (GSTR) at paragraphs 71 to 73, it has been categorically stated that in case of claims for damages arising out of negligence and causing loss of profits, termination or breach of contract, etc., the aggrieved party will often seek an appropriate compensation or claim for the damage caused. At Paragraph 73 the GSTR states that: "This damage, loss or injury, being the substance of the dispute, cannot in itself be characterized as a supply made by the aggrieved party. This is because the damage, loss, or injury, in itself does not constitute a supply under section 9-10 of the GST Act." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Australia GST Laws covers 'an obligation to refrain from an act and to tolerate an act or situation' as supply. Further, much like under the Indian law, the Australian GST law required that a supply should be made for consideration and for this requirement to be met, there i) had to be payment/any act or forbearance for consideration and ii) the said payment/any act or forbearance or consideration is 'in connection with', 'in response to' or 'inducement of a supply'. In the said background, the Australian Tax Office ruled that payments made on early termination of a lease by the lessor does not constitute a supply as the same is nothing but genuine damages for the loss suffered by the lessor. It further held that any payment received to compensate for genuine damage or loss flowing from a default of a party is not a consideration for any supply as it is not made in connection with any supply. * In this regard, reliance may also be placed on EU case law of Financial & General Print Ltd (LON/95/1281A), wherein it was held that the liquidated damages are the compensation for loss of earning and hence are not consideration for supplies and are outside the scope of VAT. It is how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a statutory right, it is also important to note that exercising statutory right granted under a statute cannot be termed as a supply under GST. 2.44. It is a business prudence that contracting parties foresee an act of breach by the other party and take measures to safeguard themselves against any consequent loss/ injury arising out of such breach. In this regard, it is a standard practice to include specific clauses in the agreements providing aggrieved party a right to seek damages against loss/ injury. These clauses act as a deterrence against breach of terms by the other party. 2.45. Mere fact that such a clause is included in the contract for protection of the aggrieved party would not result in creation of an obligation to tolerate a breach of the agreement. On the contrary, it gives the aggrieved party a right to sue/ enforce the terms and claim damages. There cannot be an agreement to tolerate a breach 2.46. The Appellant submits an agreement to tolerate an illegal act is not a valid agreement under the Indian law. Assuming without admitting that the Appellant is tolerating a default by the service recipient in discharging its obligations under the co-ordination agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice recipient has to fulfil such conditions would not mean that this value would form part of the value of the taxable services that are provided. 2.51. In this regard, the Appellant draws reference to a recent ruling by CESTAT New Delhi in the case of South Eastern Coalfields Ltd. vs Commissioner of Central Excise and Service Tax, Raipur reported as [2020 (12) TMI 912 - CESTAT New Delhi]. In the said ruling, the Tribunal referred to a decision by Supreme Court in Food Corporation of India vs. Surana Commercial co. and Others wherein the Supreme Court pointed out that if a party promises to abstain from doing something, it can be regarded as a consideration, but such abstinence has to be specifically mentioned in the agreement. 2.52. The Tribunal further held that 'In the present case, the agreements do not specify what precise obligation has been cast upon the appellant to refrain from an act or tolerate an act or a situation. It is no doubt true that the contracts may provide for penal clauses for breach of the terms of the contract but as noted above, there is a marked distinction between 'Conditions to a contract' and 'Considerations for a contract'. 2.53. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis conjoint reading of the definition and provisions provided with respect to taxability of actionable claim, it can be said that any claim to any debt whether such debt or beneficial interest is existent, accruing, conditional or contingent shall be termed as an actionable claim and shall be outside the ambit of GST. 2.57. In the present case, the Appellant submits that the contract is for engineering, procurement and commissioning of solar power projects in India. Further, the contract at maximum intends to incorporate certain indemnification clauses to make good the losses if any incurred by the Appellant on account of the delay caused by the Contractor. 2.58. In the event of the delay caused by the Contractor, the Appellant has the right to invoke indemnification clauses and the claim of debt undoubtedly accrues in favour of Appellant, when an invoice is raised on the Contractor for indemnification of the losses. Such an indemnification clause in the contract along with the issuance of invoice for recovery of the amount, results in crystallization of a debt which would be due from the Contractor. The Contractor is contractually liable to make the said payment. Under the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment Agreement, Settlement Agreement and compensation not fall under 'Service' under the Finance Act there is no application of Section 66 E(e) of the Act ibid.' 2.60. Basis the above, it can be said that the claim of liquidated damages by the Appellant from the Contractor is in the nature of actionable claim, outside the ambit of GST. 2.61. Considering the above submissions, the Appellant humbly submits that liquidated damages does not qualify as a supply of service under GST, in view of the following grounds: * There is no contractual reciprocity or concurrence to assume an obligation to refrain from an act or tolerate an act between the Appellant and the Contractor, which are indispensable and essential for a transaction to qualify as a 'supply of service'. * The liquidated damages preferred by the Appellant are not in lieu of any activity / obligation agreed to be performed at the behest of the service recipient, but on account of breach of contract (delay in completion of project timelines). * The Appellant's case does not get covered under Clause 5 (e) of Schedule II of the CGST Act, 2017 * Mere inclusion of a specific clause for payment of damages should not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to refrain from an act or tolerate an act between the applicant and the contractor, which are indispensible and essential for a transaction to qualify as a 'supply of service'. * The liquidated damages preferred by the applicant are not in lieu of any activity/obligation agreed to be performed at the behest of the service recipient, but on account of breach of contract(delay in compensation of project timelines). * The applicant case does not get covered under clause 5(e) of schedule II of the CGST Act,2017. * Mere inclusion of specific clause for payment of damages should not change the nature of transaction to transform a lawful right into an 'obligation to tolerate'. * Recovery of liquidated damages by the recipient can be viewed as mere renegotiation of the price of the original contract and not a separate transaction. * There is difference between term 'condition to a contract' and consideration to a contract' merely because the service recipient has to fulfill the conditions attached to the contract would not mean that the value would form part of the value of taxable services that are provided. * The recovery of liquidated damages is in the nature of 'actionabl ..... 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