TMI Blog2024 (2) TMI 1054X X X X Extracts X X X X X X X X Extracts X X X X ..... learly mentioned, Inter alia, vide para 7.1.6 that 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. In the light of section 7 read with definition of consideration u/s 2(31)7 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 CGST @ 9% and SGST @9% each under the chapter head 9997 at serial no. 35 of Notification No. 11/2017- Central/State tax rate. - SRI. K. RAVI SANKAR, AND SRI. B. LAKSHMI NARAYANA, MEMBER Represented ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Circular No. 178/10/2022-GST dated. 03/08/2022 to clarify the taxability of Liquidate Damages etc., the applicant discontinued collecting any GST on the compensation / liquidated damages/trade settlement amounts received from the customers as the activity do not satisfy the definition of Supply specified under Section 7 of CGST/APGST Act, 2017. 4. Questions raised before the authority: The applicant seeks advance ruling on the following: 1) Whether GST is leviable on compensation amounts such as liquidated damages/trade settlement/damages collected from the customers for non-performing of contractual obligations or breach of the contract? 2) If GST is leviable on the said activity, what is the HSN Code applicable and the rate of GST applicable for the said activity? 3) If GST is not leviable on the said activity, does the restriction of input tax Credit of common services under 42 43 of CGST/APGST Rules, 2017 will attract? On Verification of basic information of the applicant, it is observed that the applicant is under State jurisdiction i.e, Special Circle Nellore, Nellore-Division. Accordingly, the application has been forwarded to the jurisdictional off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows: 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, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business; 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. 10. In the instant case neither of the above-mentioned factors have been fulfilled in the present case to fulfill the definition of supply . The amount of damages / Compensation received is towards the breach of agreement not as consideration for supply of goods or services. 11. Neither the applicant is carrying on any activity to receive compensation nor can there be any presumption of the intention of the other party to breach or violate the contract and suffer losses. Hence, there is not at all a service/supply element, the amount forfeited or recovered is only compensation due to breach of agreement for the sale of edible oil contract which was not a positive int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to be towards any service per se, since neither appellant is carrying on any activity to receive compensation nor can there be any intention of other party to breach or violate contract and suffer a loss -Service Tax not leviable under Section 65B, read with Section 66E(e) of Finance Act, 1994 - Demand, interest and penalty not sustainable. e) South Eastern Coal fields Ltd Vs Commr. Of C.EX. S.T., Raipur - 2021 (55) G.S.T.L. 549 (Tri. - Del.). f) Krishnapatnam Port Co. Ltd. V Commr. Of C. Ex. S.T., Guntur 2023 (72) G.S.T.L. 259 (Tri. - Hyd.), where it is held that 9. We find that the term service is defined to mean any activity carried out by a person for another for consideration. The recovery of liquidated damages/penalty from the other party in the instant case cannot be said to be towards any service per se, as the Appellant did not carry on any activity to receive the 'compensation charges'. Hence, scope of levy of Service Tax cannot be extended to apply to situations where the actual activity was non-existent. 15. The cancellation charges / surrender charges recovered cannot be held to be the consideration for providing any servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done without such a relationship i.e., without the express or implied contractual reciprocity of a consideration would not be an activity for consideration . The element of contractual relationship, where one supplies goods or services at the desire or another, is an essential element of supply. 6.1 A perusal of the entry at serial 5(e) of Schedule II would reveal that it comprises the aforementioned three different sets of activities viz. (a) the obligation to refrain from an act, (b) obligation to tolerate an act or a situation and (c) obligation to do an act. All the three activities must be under an agreement or a contract (whether express or implied) to fall within the ambit of the said entry. In other words, one of the parties to such agreement/contract (the first party) must be under a contractual obligation to either (a) refrain from an act, or (b) to tolerate an act or a situation or (c) to do an act. Further some consideration must flow in return from the other party to this contract/agreement (the second party) to the first party for su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d damages are a measure of loss and damage that the parties agree would arise due to breach of contract. They do not act as a remedy for the breach of contract. They do not restitute the aggrieved person. It is further argued that a contract is entered into for execution and not for its breach. The liquidated damages or penalty are not the desired outcome of the contract. By accepting the liquidated damages, the party aggrieved by breach of contract cannot be said to have permitted or tolerated the deviation or non-fulfilment of the promise by the other party. In this background a reasonable view that can be taken with regard to taxability of liquidated damages is that 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 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 dam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant to enter into an agreement for the sale of edible oils with their customers. However, in the practical scenario, there would be customers who couldn't complete the terms of the agreement period by duly executing the Trade Confirmation Note. It is also clearly mentioned if the customer fails to lift the material within the delivery date as mutually agreed, the applicant has the right to cancel the contract at par/settlement whenever applicable without recourse. 23. From the above, the applicant understands that the amount of compensation received under head trade settlements charges/ Compensation/ liquidated damages for violating I non-performance of the contract is not taxable at all as per above cited circular issued by Government. 24. If the said activity did not satisfy the definition of Supply as discussed above, the said activity cannot be considered as supply of goods or services or both. Since the activity is not a supply of goods or services or both, then the question of treating such activity as exempted supply / non-GST supply did not arise. 25. The applicability of Section 17 of CGST Act read with Rule 42 43 comes into play only when the register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontractual obligations or breach of the contract. At this juncture, attention is invited to the provisions of Indian Contract Act, 1872 which is applicable to the above scenario. A combined reading of the provisions (1) (3) of Section 55 of the Indian Contract Act, 1872 reveals that a failure to perform the contract at the agreed time renders it voidable at the option of the opposite party and alternatively such party can recover compensation for such loss occasioned by non-performance. Similarly Section 73 74 of the Indian Contract Act enables recipient of supplies under a contract to be compensated with damages for breach of any provision of the contract. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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. Thus the circular had said payment towards damages are incidental to the main supply and if the main supply is taxable they shall also be taxable and if the principal supply is exempt then the incidental shall also be exempt. Thus the circular shall be understood in the proper context. Therefore, in the light of section 7 read with definition of consideration u/s 2(31)7 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 CGST @ 9% and SGST @9% each under the chapter head 9997 at seri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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