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TMI Blog2024 (7) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, would constitute supply and would attract GST - The purpose of imposing compensation or penalty is governed by the provisions of Indian Contract Act to ensure the defaulting act is not undertaken or repeated. The same maybe equated as receipt of consideration on account of toleration of an act. Supply or not - HELD THAT:- In the light of section 7 read with definition of consideration u/s 2 (31), compensation amounts paid by defaulting party to the non-defaulting party for tolerating the act of non-performance or breach of contract have to be treated as consideration for tolerating of an act or a situation under an agreement and hence such an activity constitutes supply of service and the compensation amounts such as liquidity damages are exigible to tax under GST Act. - SRI. K. RAVI SANKAR, AND SRI. B. LAKSHMI NARAYANA, MEMBER Represented by : R. Narasimha Murthy, Advocate ORDER (Under sub-section (4) of Section 98 of Central Goods and Services Tax Act, 2017 and sub-section (4) of Section 98 of Andhra Pradesh Goods and Services Tax Act, 2017) 1. At the outset we would like to make it clear that the provisions of CGST Act, 2017 and APGST Act, 2017 are in pari materia and ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e supplier after due consideration of the causes or on compassionate grounds. 4. To illustrate, the Applicant draws kind attention to Purchase Order No. 9000000391/PO. No. 976/CE/Trans/P MM/E.12/PMM12-e-20/2023/ Lot 3/D. No. 86/24, dt. 22.03.2024 and reference to Condition 9 of the contract, which is reproduced hereunder for ready reference: 9. PENALTY FOR LATE DELIVERY: a) The delivery period as per agreed delivery schedule shall be deemed to be the essence of the contract. In case of delay in delivery of materials and erection beyond the agreed delivery schedule or to perform the services within the period specified in the contract whatever be the reason the APTRANSCO may at its option, demand and recover from the supplier from the contract price, as liquidated damages, a sim equivalent to 0.5% per week on the undelivered portion subject to a maximum of 5% of total value of the contract. 5. In the case of purchase order No. 963-PMM/2024/CE/Trans/SE/P MM/EEIII/DEE-1/PMM31-e-25/D.No. 40/2024, dt. 08.02.2024, it is mentioned. 10. PENALTY FOR DELAY IN SUPPLIES: a) For Commissioning C R panels Works: In case of delay in scheduled works after completion period mentioned in Schedule B ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act and whether GST is leviable on the said penalty. C. Liquidated damages are damages which an injured party is entitled to receive on account of breach of the conditions of the contract by the other contracting party. They refer to a pre-determined amount of compensation as stipulated in the contract , which the parties before entering into a contract agree upon, will be payable in case there is a breach of the terms of the agreement by any of the contracting parties as provided in Sections 73 and 74 of the Indian Contract Act, 1872. It is common for the parties entering into a contract to specify in the contract itself, as to what compensation would be payable in the event of a breach of the contract. Black's Law Dictionary defines 'Liquidated Damages' as cash compensation agreed to by a signed, written contract for breach of contract, payable to the aggrieved party. D. In the instant case, the penalty being collected by the Applicant is nothing but liquidated damages for failure to supply the goods/services within the stipulated period. The amount of such liqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a hawker to operate from the common pavement in front of his shop against a monthly payment by the hawker. c. Agreeing to the obligation to do an act - For eg-agreement by Industrial unit to install equipment for zero emission/discharge. H. As per the Circular, to classify any transaction under the scope of Entry 5(e) of Schedule II, there should be nexus between the supply (i.e., agreement to do or to abstain from doing something) and consideration. In addition to the said nexus, following essentials are required to classify the activity or transaction under the relevant entry: (i) There must be a contract or agreement (whether implied or expressed) for the activity or transaction; (ii) The contractual obligation should be an independent arrangement (It could be independent stand-alone contract or may form part of another contract); (iii) Consideration must flow in return from one party to another party of the agreement/contract. I. Therefore, briefly stated if the aforesaid essentials are fulfilled/complied with, the activity or transaction would be subject to GST. J. On application of the above parameters, liquidated damages being collected by the Applicant cannot be said to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its option, demand and recover from the supplier from the contract price, as liquidated damages, a sim equivalent to 0.5% per week on the undelivered portion subject to a maximum of 5% of total value of the contract. LIQUIDATED DAMAGES UNDER CONTRACT LAW Liquidated Damages refer to the amount of compensation pre-determined in a contract, in estimation of the actual loss or injury to be suffered by one party for the breach of obligations under the contract by the other party. Such compensation is stipulated under a Liquidated Damages clause in the contract, which specifies the amount of compensation to be paid in case of specific types of breaches of the contract by the defaulting party. Liquidated Damages are often stipulated where such loss is of intangible nature, such as loss of revenue, loss of business, etc. The terms Damages and Liquidated Damages have not been defined under the Indian Contract Act, 1872 (the Contract Act). However, Section 73 of the Contract Act provides for compensation for loss or damage caused by breach of contract, and Section 74 of the Contract Act stipulates compensation for breach of contract where penalty is stipulated, i.e., in the case of Liquidate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he recipient of the supply are not related and the price is the sole consideration for the supply. In light of Section 7 read with Paragraph 5 (e) of Schedule II and Section 9 of the CGST Act, GST is applicable on the value of Liquidated Damages paid by the defaulting party to the non-defaulting party for tolerating the act of non-performance or breach of the contract. Decisions under the GST Regime: In the case of Maharashtra State Power Generation Company Ltd. (2018-VIL-33-AAR), wherein the Maharashtra Authority for Advance Ruling (AAR) held that Liquidated Damages are to be treated as consideration for an act of tolerance of non-performance, and thus the value of Liquidated Damages is subject to GST at the rate of 18% under the Heading 9997 . The Maharashtra Appellate AAR has further affirmed the ruling of the Maharashtra AAR in [2018 (70 GST 411)]. Similar rulings have also been pronounced in the below mentioned matters: Fastrack Deal Comm (P.) Ltd. (GUJ/GAAR/R/58/2020 dated 30.07.2020) Gujarat AAR held that GST is applicable on advance forfeited for breach of terms of contract. Amneal Pharmaceuticals (P.) Ltd. (GUJ/GAAR/R/51/2020 dated 30.07.2020) Gujarat AAR held that GST is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices or both. The term Supply has been defined as under: (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; .. (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. Schedule II to the CGST Act which lists out certain activities to be treated as supply of goods or supply of services specifically provides in Para 5(e) as under: (5) The following shall be treated as supply of 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; The aforementioned terms have not been defined under the CGST Act, Refrain from act: An agreement for non compete with each other. For example: Sale of brand name by X to Y where X agree that he will not sell similar product under any other brand in the market for a specified number o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Guide as under: The concept activity for a consideration involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done with such a relationship i.e., without the express or implied contractual reciprocity of a consideration would be an activity for consideration even though such an activity may lead or may not lead to accrual of gains to the person carrying out the activity. It is a well settled law that flow of money can be a subject matter of service tax and consideration should have nexus with an identified supply of service. In our view, in order to render a transaction liable for tax, the nexus between the consideration agreed and the services activity to be undertaken should be direct and clear. It can be established that a specific amount has been agreed upon as a quid pro quo for undertaking any particular activity or otherwise by a partner, it can be assumed that there was a consideration agreed upon for any specific activity so as to constitute a service. Given aforementioned legal provisions and judicial precedents, it is evident th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The same maybe equated as receipt of consideration on account of toleration of an act. In the present case, compensation amounts are claimed by the applicant from the customers for non-performing of contractual obligations or breach of the contract. The moot point here is whether the above said activity is supply or not or in words whether the said collection in the form of liquidity damages is consideration or not. It is immaterial to decide whether the amount collected by the applicant is for tolerating the act or for not toleration the act. In order to decide the same, we have a closer look into the definition of consideration as per GST Act. section 2 (31) 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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