TMI Blog2023 (4) TMI 205X X X X Extracts X X X X X X X X Extracts X X X X ..... deration 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 - 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. In the light of section 7 read with definition of consideration u/s 2(31), liquidity damages 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 liquidity damages are exigible to tax under CGST and SGST @9% each under the chapter head 9997 al serial no. 35 of Notification No.11/2017- Central/State tax rate. - AAR No. 04/AP/GST/2023 - - - Dated:- 31-3-2023 - SRI. K. RAVI SANKAR, AND SRI. RV PRADHAMESH BHANU, MEMBER Represented by : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f job assigned to the service provider (Chettinad logistics private ltd) , the service receiver (APPDCL) will collect liquidated damages for increase in moisture of raw coal over the loading end, for increase in ash percentage, penalties for late transportation of coal and also penalty for short supply of coal, as per the penalties clause 11 of the contract. 4. Questions : The applicant seeks advance ruling on the following:- 1. Whether liquidated damages collected by the APPDCL from CHETTINAD LOGISTICS PRIVATE LIMITED for non-performing of an act constitute as supply as per Section 7 of GST act. 2. What is the classification under GST for such liquidated damages collected by the service receiver from such service provider for non performing of an act. 3. What is the applicable rate of tax if the answer to the question number 1 is affirmative. On Verification of basic information of the applicant, it is observed that the applicant is under stale jurisdiction i.e, Nellore-1 Circle, Nellore Division. Accordingly, the application has been forwarded to the jurisdictional officer and a copy marked to the Central Tax authorities to offer their remarks as per S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atisfaction or a form of penalty resulting, from unsatisfactory performance or breach of the contract. 5.7 The applicant submits that, liquidated damage are a measure of loss and damage that the parties agree would arise due to breach of contract they do not as a remedy for the breach of contract. They do not restitute the aggrieved person. 5.8 The applicant submits that, such liquidated damages or penalties are not the desired result or intended to be a source of revenue for APPDCL, but are incurred to compensate for loss suffered by APPDCL, upon the occurrence of an unintended event. The very purpose of agreeing to payment of liquidated damages is to ensure performance and not for tolerating non-performance and we reiterate the fact that APPDCL contract with CHETTINAD LOGISTICS PRIVATE LIMITED not with an intent of non-performance or to tolerate non-performance. 5.9. The applicant submits that the 'liquidated damages' is an amount paid only to compensate the loss or damage suffered by APPDCL due to breach of the contract and there is no agreement, express or implied, by the APPDCL receiving the liquidated damages, to refrain from or tolerate an act or to do anyth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Contract Act, 1872 enables recipient of supplies under a contract to be compensated with damages for breach of any provision of the contract. In the present case, liquidated damages are claimed by the applicant from the contractor due to increase in moisture of raw coal over the loading end, for increase in ash percentage, penalties for late transportation of coal and also penalty for short supply of coal. The moot point here is whether the 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 In the applicant is for tolerating the act or for nut toleration the act. In order to decide the same, we have a closer look into the definition of consideration as per GST Act. Section 2(31) 'consideration' in relation to the supply of goods or services or both includes,- (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Gover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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), liquidity damages 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 liquidity damages are exigible to tax under CGST and SGST @9% each under the chapter head 9997 al serial no. 35 of Notification No.11/2017- Central/State tax rate. RULING (Under Section 98 of Central Goods and Services Tax Act, 2017 and the Andhra Pradesh Goods and Services Tax Act, 2017) Question 1: Whether liquidated damages collected by the APPDCL from CHETTINAD LOGISTICS PRIVATE LIMITED for non-performing of an act constitute as Supply as per Section 7 of GST act. Answer : Affirmative ..... X X X X Extracts X X X X X X X X Extracts X X X X
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