TaxTMI 
TaxTMI 
2024 (2) TMI 1054
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....ferred to as applicant), registered under the AP Goods & Services Tax Act, 2017. 3. Brief Facts of the case: 3.1 M/s South India Krishna Oil & Fats Pvt Ltd (Hereinafter referred to as "applicant") is engaged in manufacturing of edible oils and has its state-of the-art manufacturing facility. Applicant is having GST Registration number 37AANCS3846AlZA. 3.2 The Applicant, SIKOF enters into an agreement with its customers for supply of specified quantity of edible oils at specific rate to be delivered within a particular date. When the customer fails to lift the material as agreed, SIKOF collects compensation amounts such as Liquidated damages/ Trade settlement from the customer for breach/non-performing of the contract. 3.3 In a few instances, due to unfavorable market conditions, customers may not be able to lift the material as agreed and opts for closure of the contract. If the customer fails to lift the material as agreed and opts for closure of the contract, the Applicant is collecting compensation of losses such as Liquidated damages / Trade settlement for breach of the contract. The compensation amounts such as liquidated damages / trade settlement will be calculated based....
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....mpensation of losses such as Liquidated damages / Trade settlement for breach of the contract / non-performance. 4. The compensation amount such as Liquidated damages / Trade settlement will be calculated based on the difference between the rate agreed with the customer and the market rate on the date of settlement as agreed. 5. On introduction of Goods and Services Tax, it becomes imperative that the activity satisfies the definition of Supply as defined under Section 7 of CGST for levy of GST. 6. In the present context for determining whether levy of GST, determination of whether the said activity satisfies the definition of "Supply" becomes critical. Accordingly, reference has to be made to the provisions of Section 7 of CGST / APGST Act, 2017. 7. Liquidated damages are a form of compensation paid to one party by another as a result of a breach of contract or an unintentional action. The fundamental question that arises is whether GST should be levied on such payments. 8. One can understand that there was a prior agreement between the Applicant and its customer regarding damages or compensation in case of breach of contract. However, as per Section 7 of the CGST Act, n....
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....f the agreement/ contract and it is not a positive contract to agree to tolerate the breach of the customer. The intention of the parties is to avoid such breach and not to make breach. Hence, such an amount recovered could be juxtaposed with liquidated damages. 14. In this reference, the Applicant wishes to refer the following legal precedents:- a) In the case of Amit Metaliks Limited vs. C.G.S.T 2019 (11) TMI 183 -CESTAT KOLKATA it was held that the liquidated damages for non-supply of agreed quantity could not be treated as service under Section 66E(e) of the Act. b) In the case of M/s Spring Fresh Drinks vs Collector of Central Excise 1997 (92) ELT A70 (SC), it was held that damages/penalty is actually compensation for non-performance of the entire contract. This is an income or profit for the manufacturer, but not the price for the manufacture of goods. c) In the case of M/s K.N. Food Industries Pvt. Ltd. C.G & C.E 2020 (1) TMI 6 - CESTAT ALLAHABAD it was held that for the purpose of invoking the provisions of section 66E(e) of Finance Act 1994, there has to be first a concurrence to assume an obligation to refrain from an act or tolerate an act etc. d) In the case o....
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....e gmbit & co. KG. V. Finanzamtcalau [1998] BVC 70 held that in the absense of actual consumption of goods or services, any compensation received for refraining from doing an act or tolerating an act cannot be considered as supply of service'. 17. Hon'ble Bombay High Court, In the case of Bai Mamubai Trust, Vithaldas Laxmidas Bhatia, Smt. Indu VIthaldas Bhatia v. Suchitra (109 taxmnnn.com 200) = 2019 (31) G.S.T.L. 193 (Bom.), has held that GST is not payable on damages/compensation paid for a legal Injury. The principle laid down by the Court is that such payment does not have the necessary quality of reciprocity to make It a 'supply' and, therefore, GST is not payable on such amount. 18. The applicant submits that under GST Regime, a Circular was Issued by CBIC vide circular No. 178/10/2022-GST Dtd. 03/08/2022 with regard to give a clarity on applicability of GST is applicable on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law. 19 The relevant paragraph from the circular is extracted for your reference, 4. In Service Tax law, 'Service' was defined as any activity carried out by a person for another fo....
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.... other independent activity; it is just an event in the course of performance of that contract. 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. Section 74 of the Contract Act, 1872 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. 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....
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....lerating the breach of contract but as a compensation for the losses suffered and as a penalty for discouraging the non-serious buyers or bidders. Such payments being merely flow of money are not a consideration for any supply and are not taxable. The key in such cases is to consider whether the impugned payments constitute consideration for another independent contract envisaging tolerating an act or situation or refraining from doing any act or situation or 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". 21. From the above circular, the Government clarified that the Heading 9997 covers -Agreeing to tolerate an act where It explained that 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....
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....g were conducted on 01.12.2023, for which the authorized representative, Rajesh Maddi, CA, attended and reiterated the submissions already made. 7. Discussion and Findings: We have examined the issues raised in the application in light of the facts and arguments submitted by the applicant. We have considered the submissions made by the applicant in their application for advance ruling. We have considered the issues involved, from which advance ruling is sought by the applicant and the relevant facts along with arguments made by the applicant and also their submissions made during the time of the personal hearing. The applicant submits that, compensation of losses such as liquidated damages/Trade Settlement for breach of the contract will be collected when the customers fails to lift the material as agreed as per the terms and conditions stipulated in the contract, and opts for closure of the contract. The compensation amounts such as liquidated damages/trade settlement will be calculated based on the difference between the rate agreed with the customer and the market rate on the date of settlement as agreed. The issue at hand is to determine whether compensation amounts such as....
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....made, whether in money or otherwise, a) in respect of b) in response to c) for Inducement of supply of goods or services. In the present case the customers are paying certain amount to the applicant. The amount so paid is neither ad-hoc, unconditional nor at the whims of any customer nor the appellant. There is a clear mathematical formula as to calculation of such amount and the conditions/scenarios contingent upon which the amounts are payable are clearly narrated in the agreement itself. It is simply inconceivable that any prudent business person will pay amounts for no merit and benefit. It is certain that the customer is paying the said amounts only for certain advantage derived or to ward-off any disadvantage Incurred. Hence it is only in response to something done by the applicant. It is inconsequential whether the payment is for tolerating the mistake or not-tolerating. The circular and case laws relied upon by the applicant is not universal and absolute. The circular is only meant to clarify the position of law and shall be applied reasonably having regard to the facts of the case. The circular had clearly mentioned, Inter alia, vide para 7.1.6 that "Therefore, su....