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Treatment of Liquidated damages collected on Capital contract, Goods and Services Tax - GST

Issue Id: - 117023
Dated: 19-2-2021
By:- ROHIT GOEL
Treatment of Liquidated damages collected on Capital contract

  • Contents

Sirs,

Our client had entered into a contract for commissioning of a capital asset and as per contract, delay in commissioning attracted liquidated damages @10%.

The supplier executed the work with considerable delay and now raised invoice for entire contracted price. The client now intends to deduct LD of 10% and make balance payment. As per our opinion, the LD deducted by the client would be taxable@18% under Schedule II.

We had following queries on which discussion is welcomed:

a) Whether the client has to raise separate invoice for the same?

b) Whether ITC can be claimed on entire invoice amount raised by vendor as LD will become a separate transaction?

c) Since client will be making payment after deducting LD+GST, whether it would mean a violation of condition of payment within 180 days or whether since that balance amount will be reduced from LD income, no ITC disallowance would be required?

d) Whether LD amount should be reduced from value of asset (like a capital receipt) or considered as separate income liable to tax?

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Showing Replies 1 to 3 of 3 Records

1 Dated: 21-2-2021
By:- Shilpi Jain

a) Whether the client has to raise separate invoice for the same? - LD may not be liable at all to GST. Another view which can be taken is that LD indicates deficiency in supply and should be adjusted by way of a credit note. Though it is not a view which the department would appreciate.

b) Whether ITC can be claimed on entire invoice amount raised by vendor as LD will become a separate transaction? - If tax is paid ITC should be eligible

c) Since client will be making payment after deducting LD+GST, whether it would mean a violation of condition of payment within 180 days or whether since that balance amount will be reduced from LD income, no ITC disallowance would be required? - Payment would include book adjustment also. So 180 days condition cannot be considered to be violated.

d) Whether LD amount should be reduced from value of asset (like a capital receipt) or considered as separate income liable to tax? - To be checked with your IT auditor.


2 Dated: 22-2-2021
By:- Ganeshan Kalyani

There is deficiency of service which can be affected by way of credit note. But there is another view which considers the same as 'tolerating an act...' which is a separate supply. If the taxpayer is considering it as tolerating an act then it becomes an income and accordingly need to account as an income. If deficiency of service then credit note to be accepted from vendor. This credit note then would be adjusted from capital asset. The impact of ITC reduction or availment in both the method is same.


3 Dated: 23-2-2021
By:- KASTURI SETHI

I agree with both experts. Nicely explained by both experts.


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