DIFFERENT TYPES OF DECLARED SERVICES: WHAT CBIC HAS TO SAY !!

[Dr. Sanjiv Agarwal]

CBIC has issued Circular No. 178 dated 03.08.2022 clarifying on GST applicability issues in relation to various types of declared services which were taxed for the first time on service tax w.e.f. 01.07.2012. These relate to liquidated damages, compensation, various types of cancellations, compensation for not collecting toll charges etc.

The major clarifications are in respect of :

1)     Declared services (Para 2.6)

2)     Liquidated damages (Para 7.1)

3)     Cheque dishonor fine / penalty (Para 7.3)

4)     Penalty for law violation (Para 7.4)

5)     Salary forfeiture (Para 7.5)

6)     Compensation for non-collecting of additional toll charges (Para 8)

7)     Late payment fee/ surcharge (Para 9)

8)     Cancellation charges for hotel, event, journey etc (Para 11)

CBIC (TRU) has issued Circular No. 178/10/2022-GST to clarify various issues / changes in relation to declared services emerging out of 47^th GST Council meeting and subsequent amendments notified by CBIC.

The gist of clarifications is as follows:

1. Declared service

• “Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act” has been specifically declared to be a supply of service in para 5 (e) of Schedule II of CGST Act if the same constitutes a “supply” within the meaning of the GST Act.

It includes :

• Agreeing to the obligations to refrain from an act
• Agreeing to the obligation to tolerate an act or a situation
• Agreeing to the obligation to do an act

• There has to be an express or implied agreement; oral or written, to do or abstain from doing something against payment of consideration for doing or abstaining from such act, for a taxable supply to exist. An agreement to do an act or abstain from doing an act or to tolerate an act or a situation cannot be imagined or presumed to exist just because there is a flow of money from one party to another.

• Unless there is an express or implied promise by the recipient of money to agree to do or abstain from doing something in return for the money paid to him, it cannot be assumed that such payment was for doing an act or for refraining from an act or for tolerating an act or situation.

• Unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity of tolerating an act, such payments will not constitute ‘consideration’ and hence such activities will not constitute “supply” within the meaning of the Act.

2. Liquidated damages 

• It is common for the parties entering into a contract, to specify in the contract itself, the compensation that would be payable in the event of the breach of the contract. Such compensation specified in a written contract for breach of non-performance of the contract or parties of the contract is referred to as liquidated damages.

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.

• 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 damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable.
• Examples of such cases can be damages resulting from damage to property, negligence, piracy, unauthorized use of trade name, copyright, etc. 
• 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. Naturally, such payments will not be taxable if the principal supply is exempt.

3. Compensation for cancellation of coal blocks

• The compensation paid for cancellation of coal blocks pursuant to the order of the Supreme Court is not taxable.

4. Cheque dishonor fine / penalty

• The fine or penalty that the supplier or a banker imposes, for dishonour of a cheque, is a penalty imposed not for tolerating the act or situation but a fine, or penalty imposed for not tolerating, penalizing and thereby deterring and discouraging such an act or situation.
• Cheque dishonor fine or penalty is not a consideration for any service and not taxable.

5. Penalty imposed for violation of laws

• Penalty imposed for violation of laws such as traffic violations, or for violation of pollution norms or other laws is also not consideration for any supply received and are not taxable.
• There is no agreement between the Government and the violator specifying that violation would be allowed or permitted against payment of fine or penalty.
• It was also clarified vide Circular No. 192/02/2016-Service Tax, dated 13.04.2016 that fines and penalty chargeable by Government or a local authority imposed for violation of a statute, bye-laws, rules or regulations are not leviable to Service Tax. The same holds true for GST also.

6. Forfeiture of salary or payment of bond amount etc.

• The provisions for forfeiture of salary or recovery of bond amount in the event of the employee leaving the employment before the minimum agreed period are incorporated in the employment contract to discourage non-serious candidates from taking up employment.
• Employee does not get anything in return from the employer against payment of such amounts.
• Such amounts recovered by the employer are not taxable as consideration for the service of agreeing to tolerate an act or a situation.

7. Compensation for non-collections of toll charges

• It had been clarified vide Circular No. 212/2/2019-ST dated 21.05.2019 that the service that is provided by toll operators is that of access to a road or bridge, toll charges being merely a consideration for that service.
• During the period from 8.11.2016 to 1.12.2016, the service of access to a road or bridge continued to be provided without collection of toll from users. Consideration came from the project authority. The fact that for this period, for the same service, consideration came from a person other than the actual user of service does not mean that the service has changed.

8. Late payment surcharge or fee

• The facility of accepting late payments with interest or late payment fee, fine or penalty is a facility granted by supplier naturally bundled with the main supply.
• Since it is ancillary to and naturally bundled with the principal supply such as of electricity, water, telecommunication, cooking gas, insurance etc. it should be assessed at the same rate as the principal supply. However, the same cannot be said of cheque dishonor fine or penalty.

9. Fixed capacity charges for power

• The price charged for electricity by the power generating companies from the State Electricity Boards (SEBs)/DISCOMS or by SEBs/DISCOMs from individual customers has two components, namely, a minimum fixed charge (or capacity charge) and variable per unit charge.
• The minimum fixed charges have to be paid by the SEBs/DISCOMS/individual customers irrespective of the quantity of electricity scheduled or purchased by them during a month. 
• Both the components of the price, the minimum fixed charges/capacity charges and the variable/energy charges are charged for sale of electricity and are thus not taxable as electricity is exempt from GST. Power purchase agreements may have provisions that the power producer shall not supply electricity to a third party without approval of buyer. Such agreements which ensure assured supply of power to State Electricity Boards/DISCOMS are ancillary arrangements; the contract is essentially for supply of electricity.

10. Cancellation charges

• A supply contracted for, such as booking of hotel accommodation, an entertainment event or a journey, may be cancelled by a customer or may not proceed as intended due to his failure to show up for availing the same at the designated place and time.
• In case the customer does not show up for availing the service, the supplier may retain or forfeit part of the consideration or security deposit or earnest money paid by the customer for the intended supply.
• Facilitation supply of allowing cancellation of an intended supply against payment of cancellation fee or retention or forfeiture of a part or whole of the consideration or security deposit in such cases should be assessed as the principal supply.
• The amount forfeited in the case of non-refundable ticket for air travel or security deposit or earnest money forfeited in case of the customer failing to avail the travel, tour operator or hotel accommodation service or such other intended supplies should be assessed at the same rate as applicable to the service contract, say air transport or tour operator service, or other such services.
• Forfeiture of earnest money in case of bids, being merely flow of money are not a consideration for any supply and are not taxable.

The readers may refer to the Circular for detailed reading.