TMI Blog2019 (1) TMI 1668X X X X Extracts X X X X X X X X Extracts X X X X ..... vendor. The LD so deducted is treated as other miscellaneous income. In respect of contracts relating to Construction of new plant in expansion project or renovation of old plant, normally the contract is awarded to vendors to build the sub plant or a part of it on Turnkey basis - If there is any delay in completing the contract, the factual position would be ascertained, particularly to know the fact whether the contractor/vendor is responsible for the delay or not. If the delay is on account of the contractor, then Liquidated Damages would be calculated as per the contractual terms and same will be charged from the contractor. Time of supply - HELD THAT:- The liquidated damages are determined and imposed upon the contractor after in-depth study. In terms of the agreement, the clauses revealed that the levy of liquidated damages is not when the delay is occurring but the liability of payment of these liquidated damages by the Contractor will be established once the delay in successful execution of work is established on the part of the Contractor. This would define the time of supply. Liquidated damages if any collected/received under previously applicable Service Tax regim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L enters in to various contracts with vendors for providing materials and services for operational activities. In this case, if there is any delay on the part of the supplier/contractor to provide materials/ services, Liquidated damages (LD) are deducted from the amount payable to such vendor. The LD so deducted is treated as other miscellaneous income. (A copy of the contract for material supply containing the LD clause is submitted at Annexure-I as a sample copy) Type 2: Construction of new plant in expansion project or renovation of old plant In this type of contracts, normally the contract is awarded to vendors to build the sub plant or a part of it on Turnkey basis. Normally the contracts are awarded in two parts. One for designing, manufacture and supply of machinery and another for storage, erection commissioning. As per the terms and conditions the period of completing the contract is fixed. When plant construction is completed, the actual time taken for completion of contract would be calculated. If there is any delay in completing the contract, the factual position would be ascertained, particularly to know the fact whether the contractor/vendor is responsible f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20.01.2016. Date on which LD was transferred to P L - Post GST 31.03.2018 31.03.201 The contracts are inclusive contracts i.e. inclusive of Excise Duty CST/APVAT, LD is calculated on the total contract value. The applicant had filed an application in form GST ARA-01, dt:25.09.2018, paying the prescribed amount of fee for seeking Advance Ruling on the following issues. The applicant sought Advance Ruling on 1) Whether Liquidated Damages and other penalties like milestone penalties levied on suppliers/ contractors in the nature of making good the damages for any delays in supply of service or goods in the following cases are exigible to GST or not? a) Supply and maintenance contracts - b) Project construction contracts 2) If GST is applicable, the following may kindly be clarified a) Whether the GST on Liquidated Damages, and other penalties is covered under Schedule II entry No. 5(2)(e) vide HSN code 9997 - Other services, for which the rate at 18% is relevant or any other entry is applicable? b) Liquidated damages are determined and imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalties etc. arise out of the same contract. Since the executed portion of the contract value already suffers GST, levying of further GST on damages or compensation measures like LD and, milestone penalties etc imposes double taxation on the contract values. Imagining existence of one more contract for tolerating an act or a situation, which is not the intention of the parties, and levying GST on the basis of such imaginary contract treating the LD as a result of such contract, is not justified. 2) Entry 5(e) of Schedule II is not applicable for LD and milestone penalties: As per entry 5(e) of Schedule II of the CGST Act, an activity of agreeing to the obligation to refrain from an action, or to tolerate an act or a situation, or to do an act shall be treated as supply of service. The expression to 'tolerate an act' should be understood to cover instances where the consideration is being charged by one person in order to allow another person to undertake any particular activity. These are cases where it is clear at the very inception that the intention of one party is to undertake an activity and the other party shall allow the same without any hindrance. Such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation by way of penalty. Exception : When any person enters into any bail-bond; recognizance or other instruments of the same nature, or, under the provisions of any law or under the orders of the Central Government or of any State Government, gives any bond for the performance of any public duty or act in- which public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein. Explanation : A person who enters into a contract with Government does not necessarily thereby undertake any public duty or promise to do an act in which public are interested. It has been consistently held that liquidated damage is to compensate the person for loss suffered by him the amount of loss suffered by appellant due to delay as mentioned in the contract. The damages are not received by the person for the toleration of an act, but it is made to compensate the loss suffered by the appellant. In view of the above submissions, Applicant prayed the Advance Ruling Authority to consider that the damages in the form of LD or penalties are not subject to GST. 6. RECORD OF PERSONAL HEARING: Sri A. Sarweswar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enalties is withheld from the bills. In Accounting, LD / milestone penalties imposed are treated as other miscellaneous income. This would be taking place after completion of delay analysis. In the present case, Agreement provided that the liability of payment of these Liquidated Damages by the contractor will be established, once the delay in successful execution of work is established on the part of the contractor. Thus, the act of delayed supply has happened. The same was being tolerated by an additional levy in the nature of liquidated damages. The agreement had also provided that the payment by contractor or deduction by owner of any sums under the provision of this clause shall not relieve the contractor from his obligations to complete the works or from his other obligations under the contract. This provision just ensured that the obligations under the contract are fulfilled. The facts are much obvious that the empowerment to levy liquidated damages is for the reason that there had been a delay and the same would be tolerated, but for a price or damages. The income though presented in the form of a deduction from the payments to be made to the contractor was the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Ruling: (Under section 98 of Central Goods and Services Tax Act, 2017 and the Andhra Pradesh Goods and Services Tax Act,2017) For reasons as discussed in the body of the order, the questions are answered, as under, in terms of the contract for material supply and turnkey contract {for Design, Engineering and Supply of all equipment including commission spares and Insurance Spares for Indoor LBDS, HVLC and Interplant Cabling for which copies were provided by the applicant as sample agreements and as per the applicant all contract terms contain similar provisions pertaining to Liquidated Damages and other penalties like milestone penalties levied on suppliers/ contractors. 1) Whether Liquidated Damages and other penalties like milestone penalties levied on suppliers/ contractors in the nature of making good the damages for any delays in supply of service or goods in the following cases are exigible to GST or not? (a) Supply and maintenance contracts (b) Project construction contracts In terms of the aforesaid contract agreement, GST would be applicable on the Liquidated Damages. 2) If GST is applicable, the following may kindly be clarified ..... X X X X Extracts X X X X X X X X Extracts X X X X
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