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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 ..... eiving the liquidated damages, to do or abstain from doing anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable. Appeal disposed off. - AAAR.COM/04/2022 Order-in-Appeal No. AAAR/10/2022 - - - Dated:- 19-10-2022 - NEETU PRASAD AND B.V. SIVA NAGA KUMARI, MEMBER (Passed under Section 101 (1) of the Telangana Goods and Services Tax Act, 2017) Preamble 1. In terms of Section 102 of the Telangana Goods and Services Tax Act, 2017 (TGST Act, 2017 or the Act), this Order may be amended by the Appellate authority so as to rectify any error apparent on the face of the record, if such error is noticed by the Appellate authority on its own accord, or is brought to its notice by the concerned officer, the jurisdictional officer or the applicant within a period of six months from the date of the order. Provided that no rectification which has the effect of enhancing the tax liability or reducing the amount of admissible input tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . M/s. Achampet Solar Private Limited is engaged in production and distribution of electricity obtained from solar energy. They have engaged M/s. Belectric India (P) Ltd for construction of solar power project. The agreement has clauses for recovery of liquidated damages on (2) counts, one delay in delivering of the contract and the other regarding non-performance of the plant. The applicant is desirous of ascertaining exigibility of liquidated damages to GST on account of delay in commissioning and its time of supply. Hence this application. Questions raised: 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? 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? 3. Liquidated damages are demanded by the applicant from the contractor due to the delay in commissioning of the project and postponement in the taking over date beyond the milestones fixed for completion of project. 4. When the parties to a contract specify the time for its performance, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct or a situation arising out of the contractual obligation. The entry in 5(e) of Schedule II to the CGST Act classifies this act of forbearance as follows: 5(e): Agreeing to the obligation to refrain from an act, or tolerate an act, or a situation, or to do an act. 5. Further Section 2(31)(b) of the CGST Act mentions that consideration in relation to the supply of goods or services or both includes the monetary value of an act of forbearance. Therefore such a toleration of an act or a situation under an agreement constitutes supply of service and the consideration or monetary value of such toleration is exigible to tax. 6. The clause (6) of the co-ordination agreement filed by the applicant specifies different liquidated damages to be paid for different periods of delay on the commissioning. This clause also specifies that the amount shall be paid within (3) days after the actual commissioning date as per the prescribed formula. The formula consists of various periods of delay i.e., delay upto (1) month, delay between (1) month to (3) months and such periods. Therefore the contract itself prescribes the date on which the damage has to be determined and paid. The date o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd therefore, liable to be set aside. In this regard, the Appellant wish to rely on the following decisions: In Atul Engineering Udyogvs Commissioner of Central Excise, Kanpur reported as [2011 (21) STR 85 (Tri - Del)], the order of Commissioner (Appeal) was assailed as mechanical concurring with adjudicating authority. When there is a bias of above nature, the Tribunal directed to dispose the appeal sending the matter back to the appellate authority below to pass a reasoned and speaking order depicting the matter in controversy, submissions of the appellant, evidence recorded, reasons of decisions and decision to show that his order is not only rendered justice but also seemed to have been done. In Aspinwall Co. Limited vs Commissioner of Central Excise, Mangalore reported as [2011 (21) STR 257 (Tri Bang)], a common order was passed disposing nine appeals. Among the nine cases the Tribunal found that in the case Hason Haji Co., the adjudicating authority has ordered for recovery of CENVAT credit which according to him was not eligible to the assessee. On a careful scrutiny and perusal of the order, the Tribunal found that the adjudicating authority has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course or furtherance of business; (c) the activities specified in Schedule I, made or agreed to made without a consideration; and (d) the activities to be treated as supply of goods or supply of services as referred to Schedule II. .. (emphasis supplied) 2.4. Clause (d) above is deleted and new Section 7(1A) (extracted below) is inserted effective 1 February 2019: where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II. 2.5. Section 7 of the CGST Act, 2017 defines the term supply to include all forms of supply of goods or services or both. On a combined reading of the above provisions, it can be inferred that, by way of deletion of clause (d) and insertion of clause (1A) in section 7 of the CGST Act retrospectively, activities or transactions specified in Schedule II would constitute as supply of goods or services, only when such activity or transaction would qualify as a supply. Accordingly, for applicability of GST, the transaction has to first pass the test of supply. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a service provider and a service recipient who have agreed to perform/ receive specified services. The contract/agreement should involve contractual reciprocity, i.e., to say, an act done without corresponding desire or without reciprocate contractual obligation of the service recipient cannot be considered as an activity for a consideration. 2.9. In the case at hand, the claims of liquidated damages ( LDs ) are not payable as consideration towards rendition/supply of any goods or services. The claims of LDs stem from occurrence of an event of default, i.e., in the event of delay or not complying with the obligations under the contract, and hence, are merely in the nature of compensation for losses incurred on account of default by the contractor. 2.10. Therefore, under the contracts entered into between the Parties, the LD clauses are not for the purpose of a defined activity for which a consideration is fixed. It is rather for the avoidance of any delay or non-compliance, for which the Appellant is raising the claim of LDs. Hence, the Appellant submits that raising any claim and subsequent receipt of LDs should not qualify as a supply of service performed by one person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one in breach of contract as they both entail civil wrongs. Damages represent the compensation or restitution for the loss caused to the plaintiff for the violation of a legal right. It may even be the closest monetary alternative to a remedy in specific performance. The term 'Damages' may be used to include payments towards contractual obligations which are performed yet unpaid for, but the law of damages is not restricted to ordering that what ought to have been done or ought to have been paid under contract. The law recognizes and awards damages between persons who do not have priority, if there is a violation of a legal right resulting in a civil wrong which must be remedied. .. 73 I am of the view that although the measure for quantifying a payment of royalty to the Court Receiver may be determined by looking at consideration payable under a contract or arising out of a business relationship, the royalty may still be in the nature of payments towards a potential award of damages or Mesne Profits, and therefore not liable to attract GST for reasons separately stated. 73. I am of the view that although the quantification of royalty towards a claim of da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ests breached, which were expected to cause some damage or loss to the appellant, the contract itself provides for compensation to make good the possible damages owning to delay, or breach, as the case may be, by way of payment of liquidated damages by the contractor to the appellant. As such, the contracts provide for an eventuality which was uncertain and also corresponding consequence or remedy if that eventuality occurs. As such the present ex-gratia charges made by the M/s Parle to the appellant were towards making good the damages, losses or injuries arising from unintended events and does not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be the payments for any services. 2.14. Placing reliance on the principles laid down in the aforesaid decisions, the Appellant submits that the liquidated damages recovered from Belectric India is in the nature of damages for violation of timelines provided in the contract defined to cover an uncertain event. The said recovery cannot be treated as consideration for tolerating an act or situation agreed upon through the contract. Further, in absence of reci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acting (selling) the product B. Since agreement to refrain forms the contract between X and Y, refrainment of X will be taxable under this category. The refrainment of X for not selling the similar products benefits Y. (b) Tolerate an act or a situation - Similarly, a person or institution may agree to tolerate an act of others. It is common knowledge that whenever repairs or major interior work is undertaken in the society, the society frames certain regulations to avoid inconvenience to the members of the society. For example, the society may frame regulations that work is permitted between given hours or material like cement, steel etc. may be carried in the lift only during a particular time, etc. The society also charges the person carrying out the repair for the inconvenience caused to the other members. This, in commercial terms, is known as hardship amount . In such situations, the members agree to tolerate the act carried out by the other person. Such situation can be taxed under this category. (c) To do an act Very often, suppliers enter into an agreement with their purchasers to further sell only their products. For example, we have witnessed that in theatr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o understand the meaning of the term obligation . The GST laws do not provide any definition for the term obligation , hence recourse is taken from other legislations/ judicial precedents or dictionary meaning. The same is provided below: Under Section 2(a) of the Specific Relief Act, 1963, Obligation includes every duty enforceable by law The Andhra Pradesh High Court in case of Hyderabad Stock Exchange Ltd vs Rangnath Rathi Co reported as [AIR (1958) AP 43] has held that An obligation is a tie or a bond which constraints a person to do or suffer something . As per the Wharton s law lexicon, the term Obligation has been defined as An act, which binds a person to some performance; or for the performance of a covenant etc. 2.25. Hence, on a perusal of the project and co-ordination agreements and above conditions, in the instant case, the only obligation that flows from the contract, and is enforceable under the contract, is on the Contractor to undertake the activities set out in the contract, such as erection and commissioning of the power plant, land and site development or operation and maintenance of the power plant. There is no other obligatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be a distinction made between amount payable for breach of contractual terms or delay in performance and something specifically agreed upon for forbearance or tolerance of an act (like a non-compete fees). In the present case, the Appellant has not entered into a contract with Belectric India to tolerate non-performance of contract. The contract is entered for engineering, procurement and commissioning of solar power projects in India and hence the Appellant submits that no separate supply exists in the event of non-performance of contract. 2.30. Additionally, even under the service tax laws, which had identical provisions and requirements, it was settled law that mere flow of money cannot be subject matter of service tax and consideration/money should have nexus with an identified supply of service. It was also equally settled that payment for damages made were not for any provision of service and were instead made to make good the loss suffered. Reliance in this regard can be placed on the following case laws: In the case of Cricket Club of India vs Commissioner of Service Tax reported as [(2015) (40) STR 973], the Hon ble CESTAT (Mumbai Bench), observed that mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e list or otherwise exempt, attracted service tax. The term service was defined to mean any activity carried out by a person for another for consideration and including a declared service . 2.33. Section 66E of the Finance Act, 1994 contained list of declared services on which Service Tax was leviable. Entry 5(e) of Schedule II to the CGST Act has adopted a provision identical to the Section 66E(e) of the Finance Act, 1994 and treats agreeing to the obligation to refrain from an act, or tolerating an act, or to do an act as supply of services. The relevant extract of provision under service tax regime is extracted below: The following shall constitute declared services, namely:- (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act . 2.34. The Education Guide was issued by Central Board of Excise and Customs ( CBEC ), though not binding, it addressed various concerns under the negative list of services regime under service tax law from 1 July 2012. In that context, CBEC provided the following clarifications on payment of penalty or amounts paid as settlement of disputes. 2.3.1 Would imposition of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ford India Private Limited vs Commissioner, LTU Chennai [Vide appeal no. ST/196 and 197/2009 dated 23 January 2018], the Chennai Tribunal observed that consideration received due to termination of contract is not taxable- Regarding the tax liability on the consideration received due to termination of the arrangement, we note that no identifiable service can be attributed for such consideration. It is rather a termination of arrangement which itself the original authority held as a service. We note that by terminating the arrangement, the appellants are adversely put to certain business loss. The consideration has been paid for such loss. No identifiable service could be attributed for such payment during the material time. Accordingly, the tax liability on such consideration could not be sustained. (b) In Small Industries Development Bank of India vs CCE, Chandigarh reported as [2011 (23) STR392 (Tri- Del)], the Delhi Tribunal observed that the foreclosure of loan means ending of loan already given and cannot be treated as rendering any services by financial institution. It was in nature of compensation for possible loss of interest revenue. Foreclosure premium is a kin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the sums paid constituting genuine consideration for an identifiable service supplied in the context of a legal relationship in which performance is reciprocal.(Case 102/86 Apple and Pear Development Council [1998] ECR 1443, Case C-16/93 Tolsma [1994] ECR I-743) Relying on the aforesaid precedents, in the case of Societethermaled Eugenie-les-Bains reported as [(2007) STI 1866], the question that came up for consideration of the Court of Justice of the European Communities is whether a deposit (taken as advance for booking a room) retained by a hotel in case of cancellation by the clients should be subject to VAT. The Court took into consideration the aforesaid principle and held that payment of a deposit by a client on the one hand, and the obligation of the hotelier on the other hand, not to contract with anyone else in such a way as to prevent it from honouring its undertaking towards that client cannot be classified as reciprocal performance, as the obligation to make a reservation arises from the contract for accommodation itself and not from the payment of a deposit. Therefore, the Court held that since, on the one hand, the deposit paid does not constitute the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract is terminated), no tax should be paid on the same, as termination of the contract is an event which occurs post the event of default and it is well settled in these judgments that any payment made for any default caused by the supplier of service cannot be considered as a separate activity liable to tax. 2.39. The Indian GST law is in its formative stages. There is no jurisprudence on certain expressions employed under the Act and taxability of damages under the indirect tax law, particularly the GST law, is still uncertain and unclear. In such circumstances, recourse ought to be had to international cases and rulings understand the meaning and import of certain expressions. 2.40. The Supreme Court of India and High Courts across the country routinely follow international rulings and commentaries, where there is little or almost no jurisprudence on a given subject, for sufficient guidance. As a result, where the rulings in aforesaid foreign rulings cited by the Appellant shed sufficient light on the taxability of damages in the context of the expression tolerate an act , such rulings ought to be taken into consideration before deciding the issue at hand before this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be construed to cast an obligation on the Appellant to tolerate an illegal act or situation as the same would have the effect of rendering the said agreement unenforceable. 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 2.47. It is pertinent to note that the contract law permits that a promisee can claim set off for loss suffered under the provisions of the contract against price payable. Reliance in this regard can be placed on Devidayal sales P Ltd vs State of Maharashtra reported as[AIR 2006 BOM 307]. 2.48. The Appellant submits that the fact that the tax is payable on the gross amount charged/transaction value and not on the amount inclusive of liquidated damages/penalty is also supported by Section 34(1) of the CGST Act. According to Section 34(1), where a supplier has issued an invoice, or received any payment against a service to be provided which is not so provided by him either wholly or partially for any reason or where the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract, the supplie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew that since the task was not completed within the time schedule, the appellant agreed to tolerate the same for a consideration in the form of liquidated damages, which would be subjected to service tax under section 66E(e) of the Finance Act. a. CESTAT Chennai in M /s Steel Authority of India Ltd. vs Commissioner of GST Central Excise [2021 (7) TMI 1092 - CESTAT CHENNAI It is not possible to sustain the view taken by the Commissioner that since the task was not completed within the time schedule, the appellant agreed to tolerate the same for a consideration in the form of liquidated damages ; b. M/s Neyveli Lignite Corporation Ltd vs Commissioner of Customs, Central Excise and Service Tax, Chennai with M/s NLC India Ltd vs Commissioner of GST and Central Excise, Trichy reported as[2021 (7) TMI 1090 - CESTAT CHENNAI] it is not possible to sustain the view taken by the Commissioner that since BHEL did not complete the task within the time / schedule, the appellant agreed to tolerate the same for a consideration in the form of liquidated damages c. MP PoorvaKshetra Vidyut Vitran CoLtd reported as [2021 (2) TMI 821] It is not possible to sustain the order p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoice, a debt is clearly created, and the said amount would fall within the scope and ambit of an actionable claim . 2.59. Such a claim would be in the nature of a debt enforceable in law, if the payment was not made by the Contractor to compensate for the loss accruing to Appellant. Consequently, the compensatory payments are a transaction in relation to such actionable claims and therefore cannot be treated as neither supply of goods nor supply of service in terms of Schedule III. Reliance in this regard is placed on a judgment, rendered in the context of service tax, by the Hon ble Kolkata Tribunal in the case of Amit Metaliks Limited Vs CCE, Bolpur [2019 11 TMI 183 Kolkata Tri]: 25. We also find a considerable force in the contention raised by the learned Advocate that the compensation received by the Appellant from the cultivators and M/s AML, the debt in present and future, which as per Transfer of Property Act in the category of Actionable Claim placing reliance on the decision of H on ble Supreme Court in case of Kesoram Industries and Sunrise Association(Supra) 13. A careful reading of the Settlement Agreement in question clearly show that the lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligation 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 a difference between the term condition to a contract and consideration to a contract Merely because the service recipient has to fulfil the conditions attached to a contract would not mean that the value would form part of the value of the taxable services that are provided. The recovery of liquidated damages is in the nature of actionable claim , outside the ambit of GST. 2.62. It is submitted that, since the transaction would not attract the levy of GST, it is our humble submission that the question regarding the time of supply provision as to when the GST liability shall be triggered does not arise. Whether the appeal is filed in time: 9. In terms of Section 100 (2) of the Act, an appeal against Advance Ruling passed by the Advance Ruling Authority, has to be filed within thirty (30) days from the date of communication thereof to the applicant. The impugned Order dated 16.02.2022 was received by the appellant on 16.02.2021 as mentioned in their Appeal Form GST ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f GST. 13. The CBIC has issued Circular No. 178/10/2022-GSTdated:3.8.2022 related to GST applicability on liquidated damages. As per para 7.1.6 of the said circular, it was, interalia, observed that when principal supply is exempt, the ancillary activities to such principal supply would not get attracted to GST. Since in the present case, the applicant s principal supply is production and distribution of electricity, which is exempt from payment of GST, the liquidated damages received by the applicant towards such supply need to be considered as flow of money without having implication of GST payment. 14. As per the circular where the amount paid as liquidated damages is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to do or abstain from doing anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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