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TMI Blog2023 (12) TMI 509X X X X Extracts X X X X X X X X Extracts X X X X ..... r No. 178/ 10/2022, it is clear that amount paid for termination of lease constitute consideration for the supply of a facility and are subject to GST and they shall be eligible to be assessed as the principal supply. In the impugned case the principal supply is sub letting of a commercial property which is a taxable supply of service and is classified under chapter heading 9972 - Real Estate Services. The damages received by the applicant from the tenant towards the termination of sub-lease before the agreed upon lock-in period as per the sub-lease deed agreements tantamount to supply as per Section 7 of Central GST Act, 2017 and the amount received towards damages as per the settlement agreement is to be construed as Consideration for the above supply - The services provided by the Applicant are classifiable under Chapter heading 9972 and is liable to GST at 18% (9% CGST and 9% SGST). X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned agreements/contract; that to maintain cordial relationship with the client, they agreed upon for the early termination of the contract subject to payment of damages by the Client. 5.4 The applicant states that they have received the amount towards damages by way of forfeiture of interest free security deposit of Rs. 1,19,00,000/- and Rs. 16,00,000/-. The Client has also paid Rs. 50,00,000 from Jul' 22 to Jan' 23 in various trenches towards damages for foreclosure as one-time settlement. 6. Applicant's Interpretation of Law: 6.1 The Applicant states that sub-section (1A) of section 7 that certain activities or transactions will be considered as a supply of goods or services, if it is a supply of goods or services and in exchange for a consideration and is a business transaction. To examine the classification as goods or services, first and foremost the transaction should satisfy the requirements of Supply as per provisions of Section 7(1) of Central Goods and Services Tax Act, 2017. 6.2 The applicant is of the view that this is not a deemed service. Entry No 5(e) in Schedule II of the CGST Act 2017 states that the following activity is to be treated as a deem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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." Hence, it is very clear that damages are monetary compensation for loss due to non-occupancy of the rental property and no GST is applicable in this regard. PERSONAL HEARING / PROCEEDINGS HELD ON 13.07.2023 7. Sri Gella Praveen Kumar, Chartered Accountant and Duly Authorised Representative appeared for personal hearing proceedings held on 13.07.2023 and reiterated the facts narrated in their application. FINDINGS & DISCUSSION 8. At the outset we would like to make it clear that the provisions of CGST Act, 2017 and the KG ST Act, 2017 are in pari-materia and have the same provisions in like matter and differ from each other only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the CGST Act would also mean reference to the corresponding similar provisions in the KGST Act. 9. We have considered the submissions made by the applicant in their application for advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; (aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration. Explanation .-For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;] (b) import of services for a consideration whether or not in the course or furtherance of business; -[and] (c) the activities specified in Schedule I, made or agreed to be made without a consideration; (1A) 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) ...................... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn of the payment received by his client. The same can be understood as consideration received by the Applicant for "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation" of their client of not completing the lock-in period, which he had agreed in terms of contractual obligations. 13.2 As per the contract, the Applicant agrees to refrain or tolerate or to do an act. In case obligation/condition of the contract is not fulfilled, then such act is squarely covered under clause 5(e) of Schedule-II. Therefore, this activity constitutes supply in terms of Section 7(1) of CGST Act, 2017. 14. The Applicant has relied upon CBIC circular No. 178/ 10/2022 stating that damages are monetary compensation loss due to non-occupancy of the rental property and no GST is applicable in this regard. The circular explains about liquidated damages in para 7.1 to 7.1.6 and the same is reproduced below: Liquidated Damages 7.1 Breach or non-performance of contract by one party results in loss and damages to the other party. Therefore, the law provides in Section 73 of the Contract Act, 1972 that when a contract has been broken, the party which suffers by such brea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do 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. 7.1.5 Examples of such cases are damages resulting from damage to property, negligence, piracy, unauthorized use of trade name, copyright, etc. Other examples that may be covered here are the penalty stipulated in a contract for delayed construction of houses.lt is a penalty paid by the builder to the buyers to compensate them for the loss that they suffer due to such delayed construction and not for getting anything in return from the buyers. Similarly, forfeiture of earnest money by a seller in case of breach of 'an agreement to sell' an immovable property by the buyer or by Government or local authority in the event of a successful bidder failing to act after winning the bid, for allotment of natural resources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the contract as part of commercial terms agreed to by the parties, constitute consideration for the supply of a facility, namely, of acceptance of late payment, early termination of a lease agreement, of pre-payment of loan and of making arrangements for the intended supply by the tour operator respectively. Therefore, such payments, even though they may be referred to as fine or penalty, are actually payments that amount to consideration for supply, and are subject to GST, in cases where such supply is taxable. Since these supplies are ancillary to the principal supply for which the contract is signed, they shall be eligible to be assessed as the principal supply, as discussed in detail in the later paragraphs. Naturally, such payments will not be taxable if the principal supply is exempt. 14.1 In para 7.1.6 of the circular, it is mentioned that amounts paid for early termination of lease as contemplated by the contract as part of commercial terms agreed to by the parties, constitute consideration for the supply of a facility, namely, early termination of a lease agreement. Therefore, such payments, even though they may be referred to as fine or penalty, are actually payments ..... X X X X Extracts X X X X X X X X Extracts X X X X
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