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2021 (10) TMI 635 - AAR - GSTLevy of GST - Classification of services - HSN Code - rate of GST - proposed receipt of money in case of Arbitration claims awarded for works contract completed in the Pre-GST regime - Unpaid amounts including escalation of price for works executed in pre-GST period - Refund of excess deductions made - Interest on delayed payments of interim payment certificates - Cost of Arbitration - Liquidated damages - Interest on Arbitration Amount. Unpaid amounts including escalation of price for works executed in pre-GST period - time of supply of services - HELD THAT - The time of supply of service according to Section 13(2) is the earliest of the date on which invoice is issued or date of provision of service or date of receipt of payment or date on which recipient shows the receipt of services in his books. As seen from the averments of the applicant the supply was made prior to introduction of GST. Therefore it is not covered by Section 13(2) of the CGST/SGST Acts. Hence the amounts claimed pertaining to the works executed earlier to introduction of GST are not taxable under CGST/SGST Acts. Refund of excess deductions made - HELD THAT - The refund of excess deductions both statutory and non-statutory made against the bills raised for the works completed in pre-GST period do not constitute consideration for supplies made under GST period. Therefore these amounts are not taxable under CGST/SGST Acts. Interest on delayed payments of interim payment certificates - HELD THAT - In the present case Arbitration as service was supplied independently after the introduction of GST i.e. the tribunal was constituted conclusively on 20.11.2017 and rendered its orders on 09.05.2019 and therefore this supply is liable to tax on reverse charge basis under GST. Liquidated damages - HELD THAT - The time of supply of the service of tolerance is the time when such determination takes place. However the contractee/employer has not determined the cost of delay prior to arbitration award. It was determined only by arbitration award on 09.05.2019. Therefore the time of supply of this service as per Section 13 of the CGST Act is 09.05.2019. The Consideration received for such forbearace is taxable under CGST and SGSt @9%. Each under the chapter head 9997 at serial no. 35 of Notification No.11/2017- Central/State tax rate. Interest on Arbitration Amount - HELD THAT - The applicant is claiming interest on the amounts determined by the arbitrary tribunal under various heads. Under Section 15(2)(d) of the CGST/SGST Acts interest for delayed payment against a supply is consideration which is taxable under CGST/SGST Acts. Therefore the interest on amounts exigible to tax under CGST/SGST forms part of value of taxable supply.
1. The primary legal questions considered by the Authority for Advance Ruling (AAR) in this case are:
a. Whether Goods and Services Tax (GST) is applicable on the receipt of money awarded through arbitration claims related to works contracts executed prior to the introduction of GST? b. If GST is applicable, under which Harmonized System of Nomenclature (HSN) code and at what GST rate should the applicant discharge the liability? 2. Issue-wise Detailed Analysis Issue 1: Applicability of GST on arbitration award amounts relating to pre-GST works contracts Relevant legal framework and precedents: The GST Act provisions considered include Section 13 (Time of Supply), Section 15(2)(d) (Value of Supply including interest), Section 2(31)(b) (Definition of consideration including forbearance), and Schedule II (classification of services including forbearance). Section 142 of the CGST Act (transitional provisions) was also referenced by the applicant. The applicant relied on precedents such as Commissioner of C.Ex & Cus, Vadodara Vs. Schott Glass India Pvt. Ltd., Sudesh Sharma Vs. Commissioner of Central Excise, Commissioner of Service Tax Vs. Consulting Engineering Services (I) P. Ltd., and Vistar Construction (P) Ltd. Vs. Union of India, which held that receipt of money alone, without supply of goods or services in the GST regime, does not trigger tax liability. Court's interpretation and reasoning: The AAR examined the nature of the amounts awarded by arbitration, categorizing them into six heads: unpaid amounts for work executed (including escalation), refund of excess deductions, interest on delayed payments, cost of arbitration, liquidated damages, and interest on arbitration amounts. The Authority observed that the works contracts were executed in the pre-GST era, and the payments or claims arose post-GST introduction due to arbitration awards. The time of supply provisions under Section 13 were pivotal in determining tax liability. Key evidence and findings: The applicant had completed the works prior to July 2017 (pre-GST regime). The arbitration tribunal was constituted on 20.11.2017 and passed its award on 09.05.2019. The amounts claimed included compensation for delay, price adjustments, refund of wrongful deductions, interest on delayed payments, arbitration costs, and interest on arbitration sums. Application of law to facts and treatment of competing arguments: For unpaid amounts related to work executed pre-GST, the Authority held that since the supply of services was completed before GST's appointed day, these amounts do not attract GST. Similarly, refunds of excess deductions and interest on delayed payments related to pre-GST supplies were not taxable. The applicant's argument that money is excluded from goods and no supply occurred post-GST was accepted for these categories. However, the Authority distinguished certain components. The cost of arbitration service was held taxable under reverse charge as it was rendered post-GST introduction, with the arbitral tribunal constituted and functioning after GST commencement. The liquidated damages, representing consideration for forbearance or toleration of delay by the contractee, were held to constitute a taxable supply of service under Schedule II entry 5(e) and Section 2(31)(b). The time of supply for such service was the date of arbitration award (09.05.2019), making the amount taxable under GST at 9% CGST and 9% SGST under chapter heading 9997, serial no. 35 of Notification No. 11/2017. Regarding interest on arbitration amounts, the Authority applied Section 15(2)(d), which includes interest for delayed payments as part of the taxable value. Hence, interest payable on amounts taxable under GST also attracts GST. Issue 2: Applicable HSN codes and GST rates Relevant legal framework: The applicable HSN codes and GST rates are determined by the nature of the supply. The arbitration service is classified under service tariff code 998215. The liquidated damages (forbearance service) fall under chapter heading 9997, serial no. 35, attracting 18% GST (9% CGST + 9% SGST). Other amounts related to pre-GST supplies are not taxable and hence no HSN code or GST rate applies. Court's interpretation and reasoning: The Authority clarified that the arbitration service supplied independently post-GST commencement is taxable on reverse charge basis at 18% GST under HSN 998215. The liquidated damages are taxable at 18% GST under the specified notification entry. The unpaid amounts for pre-GST works, refunds, and interest on delayed payments related to pre-GST supplies are not taxable and thus no GST rate or HSN code applies. 3. Significant Holdings "The liability to tax under CGST/SGST Acts for works contracts is determined by the time of supply of services in Section 13 read with Section 31 i.e., the provisions pertaining to tax invoice. The time of supply of service according to Section 13(2) is the earliest of the date on which invoice is issued or date of provision of service or date of receipt of payment or date on which recipient shows the receipt of services in his books. As seen from the averments of the applicant the supply was made prior to introduction of GST. Therefore it is not covered by Section 13(2) of the CGST/SGST Acts. Hence the amounts claimed pertaining to the works executed earlier to introduction of GST are not taxable under CGST/SGST Acts." "The refund of excess deductions both statutory and non-statutory made against the bills raised for the works completed in pre-GST period do not constitute consideration for supplies made under GST period. Therefore these amounts are not taxable under CGST/SGST Acts." "The consideration received by arbitral tribunal is taxable on reverse charge basis under CGST & SGST Act @9% each. The service tariff code is 998215." "These damages are claimed by the applicant from the contractee due to the delays in making available possession of site, drawings & other schedules by the contractee beyond the milestones fixed for completion of project. These damages are consideration for tolerating an act 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. 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 is exigible to tax." "The time of supply of this service as per Section 13 of the CGST Act is 09.05.2019. The Consideration received for such forbearance is taxable under CGST and SGST @9%. Each under the chapter head 9997 at serial no. 35 of Notification No.11/2017- Central/State tax rate." "Under Section 15(2)(d) of the CGST/SGST Acts interest for delayed payment against a supply is consideration which is taxable under CGST/SGST Acts. Therefore the interest on amounts exigible to tax under CGST/SGST forms part of value of taxable supply." Core principles established:
Final determinations: GST is not applicable on amounts payable for works executed pre-GST, including unpaid amounts, refunds, and interest on delayed payments related thereto. GST is applicable on the cost of arbitration services rendered post-GST commencement and on liquidated damages awarded for forbearance. Interest on arbitration amounts taxable under GST also attracts GST. The applicable HSN codes and rates are 998215 at 18% GST (9% CGST + 9% SGST) for arbitration services and chapter heading 9997, serial no. 35 at 18% GST for liquidated damages.
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