Telangana AAR rules on GST on liquidated damages

Telangana AAR rules on GST on liquidated damages

The Coram ruled that failure to perform the contract at an agreed time rendered the contract voidable

The Telangana Authority for Advance Ruling (AAR), comprising members B Raghu Kiran and SV Kasi Visweswara Rao, has ruled that liquidated damages recovered by an applicant for the delay in commissioning under an agreement constitute 'supply' under the Goods and Service Tax (GST), attracting a levy of 9 percent GST under the Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) Act, each.

The applicant, Achampet Solar Private Limited, engaged in the production and distribution of electricity obtained from solar energy, entered into an agreement with a company for the construction of a solar power project.

The agreement provided for liquidated damages for the delay in commissioning and delivery of the contract. The applicant, in its application to the AAR, raised the query whether the liquidated damages recoverable by him, due to delay in commissioning of the project, were exigible to tax under the GST laws.

The AAR held that under the Indian Contract Act, 1872 the failure to perform the contract at an agreed time rendered the contract voidable at the option of the aggrieved party. Alternatively, the party could recover compensation for the loss occasioned by non-performance.

The Authority ruled that the liquidated damages claimed by the applicant constituted consideration for tolerating an act or a situation arising out of the contractual obligations. Hence, those were taxable, as they fell under the 2017 CGST Act.

Holding that the provisions of CGST and Telangana GST were the same except for certain provisions, AAR observed that under CGST the term 'consideration' in relation to the supply of goods or services or both included the monetary value of an act of forbearance.

It further said, "Under CGST, the consideration in relation to the supply of goods or services or both includes the monetary value of an act of forbearance. Therefore, such toleration of an act or a situation under an agreement constitutes the supply of service and the consideration or monetary value of such toleration is exigible to tax."

It observed that the contract itself prescribed the date of determination and payment of liquidated damages. Thus, the date of determination of liquidated damages, as per the formula prescribed in the contract, would be the time of supply of such service.