9911796707
TMI Blog2023 (12) TMI 509X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal basis. 3. The applicant has sought advance ruling in respect of the following questions: i. Whether damages received by the applicant amounting to Rs. 1,85,00,000/-from the tenant towards the termination of sub-lease before the agreed upon lock-in period as per the sub-lease deed agreements dated 3rd November 2021 and 11th January 2022 tantamount to supply as per Section 7 of Central GST Act, 2017 and will the amount received towards damages for Rs. 1,85,00,000/- as per the settlement agreement dtd: 18-04-2023 to be construed as Consideration for the above supply? ii. If answer to the above question is affirmative, what is the Rate of GST applicable and what shall be appropriate classification / SAC for payment of GST? 4. Admissibility of the application: The question is about the "Classification of any goods or services or both", "determination of the liability to pay tax on any goods or service or both" and "whether any particular thing done by the applicant with respect to any goods and / or services or both amounts to or results in a supply of goods and/or services or both, within the meaning of that term" is admissible under Section 97(2)(a) 97(2) (e) and 97(2)(g) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng space as per the rental agreement is the principal essence of the contract to supply. In the event of failure to continue with the supply/ terminate the contract prior to the agreed upon lock-in period, the lessee makes the payment of damages for the contract violation as per the agreement duly agreed upon and the same is not considered as a Supply. 6.3 The applicant states that the breach of lock-in period is a breach of contract and Section 73 of the Indian Contract Act, 1872 deals with compensation for loss or damage caused by breach of contract. Further, the Section states that the injured party is entitled to receive the same amount of compensation quantified in money terms as he would be entitled to receive if the breach had not happened. 6.4 The applicant is of the understanding that the amount received and the amount forfeited are in the nature of liquidated damages for loss of rent and is in the nature of compensation for violation of the lock in period clause in the agreement. 6.5 The applicant is of the view that Circular No 178/ 10/2022 is squarely applicable in this case as the lock-in clause arises out of the primary rental contract and is only a compensatory cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly termination of the contract. The Applicant states that payment of damages is for the contract violation as per the agreement duly agreed upon and the same is not considered as a Supply under GST. 11. Now let us examine whether damages received by the Applicant is for a supply or not. On going through the sub lease agreements signed between the Applicant and their client, it is observed that there is a clause which says as below: 3. ................................ in the event of early termination the LESSEE shall continue to be liable for the rental that would otherwise be payable for the reminder of the lock-in period, the LESSOR shall refund the security deposit to the LESSEE within 30 days of such termination. 12. The amount which was received by the applicant from their client, was a part of the terms and condition of the lease agreement signed between the applicant and their client. This means that, while entering into the agreement, the client was aware about the terms and conditions of the contract that, in case of breach of agreement, i.e, in case, of early termination, they shall be liable to pay the rental till the end of lock-in period as a settlement for exit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etent authority or after its first occupation, whichever is earlier. Explanation. -For the purposes of this clause- (1) the expression "competent authority" means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:- (i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or (ii) a chartered engineer registered with the Institution of Engineers (India); or (iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority; (2) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure; (c) temporary transfer or permitting the use or enjoyment of any intellectual property right; (d) development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software; (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sation agreed to by a signed, written contract for breach of contract, payable to the aggrieved party. 7.1.2 Section 74 of the Contract Act, 1972 provides that when a contract is broken, if a sum has been named or a penalty stipulated in the contract as the amount or penalty to be paid in case of breach, the aggrieved party shall be entitled to receive reasonable compensation not exceeding the amount so named or the penalty so stipulated. 7.1.3 It is argued that performance is the essence of a contract. Liquidated damages cannot be said to be a consideration received for tolerating the breach or non-performance of contract. They are rather payments for not tolerating the breach of contract. Payment of liquidated damages is stipulated in a contract to ensure performance and to deter non-performance, unsatisfactory performance or delayed performance. Liquidated damages are a measure of loss and damage that the parties agree would arise due to breach of contract. They do not act as a remedy for the breach of contract. They do not restitute the aggrieved person. It is further argued that a contract is entered into for execution and not for its breach. The liquidated damages or pena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... simply doing an act. If the answer is yes, then it constitutes a 'supply' within the meaning of the Act, otherwise it is not a "supply". 7.1.6 If a payment constitutes a consideration for a supply, then it is taxable irrespective of by what name it is called; it must be remembered that a "consideration" cannot be considered de hors an agreement/contract between two persons wherein one person does something for another and that other pays the first in return. If the payment is merely an event in the course of the performance of the agreement and it does not represent the 'object', as such, of the contract then it cannot be considered 'consideration'. For example, a contract may provide that payment by the recipient of goods or services shall be made before a certain date and failure to make payment by the due date shall attract late fee or penalty. A contract for transport of passengers may stipulate that the ticket amount shall be partly or wholly forfeited if the passenger does not show up. A contract for package tour may stipulate forfeiture of security deposit in the event of cancellation of tour by the customer. Similarly, a contract for lease of movab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 9972 - Real Estate Services. The same is taxable as per entry No. 16(iii) of Notification No. 11/2017-Central Tax (Rate) dated 26.06.2017, as amended further which is reproduced below: SI. No. Chapter, Section or Heading, Group or Service Code (Tariff) Description of Service Rate (percent) Condition 16 Heading 9972 (i) Services by the Central Government, State Government, Union territory or local authority to governmental authority or government entity, by way of lease of land. NIL - (ii) Supply of land or undivided share of land by way of lease or sub lease where such supply is a part of composite supply of construction of flats, etc. specified in the entry in column (3), against serial number 3, at item [(i), (ia), (ib), (ic), (id), (ie) and (if). Provided that nothing contained in this entry shall apply to an amount charged for such lease and sub-lease in excess of one third of the total amount charged for the said composite supply. Total amount shall have the same meaning for the purpose of this proviso as given in paragraph 2 of this notification. NIL - (iii) Real estate services other than (i) and (ii) above. 9 - 15. In vi ..... 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