GST applicable on Arbitration claims awarded for works contract completed in the Pre-GST regime

TELANGANA STATE AUTHORITY FOR ADVANCE RULING in matter of M/s. Continental Engineering Corporation has ruled out that GST applicable on Arbitration claims awarded for works contract completed in the Pre-GST regime. The main conclusions that can be drawn from ruling is as follows:

1. If GST is applicable on Unpaid amounts including escalation of price for works executed in pre-GST period:

The liability to tax under CGST/SGST Acts for works contracts is determined by the time of supply of services in Section 13 read with Section 31 i.e., the provisions pertaining to tax invoice. The time of supply of service according to Section 13(2) is the earliest of the date on which invoice is issued or date of provision of service or date of receipt of payment or date on which recipient shows the receipt of services in his books. As seen from the averments of the applicant the supply was made prior to introduction of GST. Therefore it is not covered by Section 13(2) of the CGST/SGST Acts. Hence the amounts claimed pertaining to the works executed earlier to introduction of GST are not taxable under CGST/SGST Acts.

2. If GST is applicable on Refund of excess deductions made:

The refund of excess deductions both statutory and non-statutory made against the bills raised for the works completed in pre-GST period do not constitute consideration for supplies made under GST period. Therefore these amounts are not taxable under CGST/SGST Acts.

3. Whether GST is applicable on Interest on delayed payments of interim payment certificates:

As seen from the averments of the applicant the interest is claimed on delayed payments on the works executed and payment certificates received in pre-GST period. In light of Section 13(2) of the CSGT Act the time of supply is not in GST period, hence these amounts are not liable to tax under CGST/SGST Acts.

4. GST Applicability on Cost of Arbitration:

The consideration received by arbitral tribunal is taxable on reverse charge basis under CGST & SGST Act @9% each. The service tariff code is 998215.
In the present case, Arbitration as service was supplied independently after the introduction of GST i.e., the tribunal was constituted conclusively on 20.11.2017 and rendered its orders on 09.05.2019 and therefore this supply is liable to tax on reverse charge basis under GST.

5. GST Applicability on Liquidated damages:

These damages are claimed by the applicant from the contractee due to the delays in making available possession of site, drawings & other schedules by the contractee beyond the milestones fixed for completion of project. These damages are consideration for tolerating an act or a situation arising out of the contractual obligation. The entry in 5(e) of Schedule II to the CGST Act classifies this act of forbearance as follows:

5(e): Agreeing to the obligation to refrain from an act, or tolerate an act, or a situation, or to do an act.

Further Section 2(31)(b) of the CGST Act mentions that consideration in relation to the supply of goods or services or both includes the monetary value of an act of forbearance. Therefore such a toleration of an act or a situation under an agreement constitutes supply of service and the consideration or monetary value is exigible to tax.

The arbitration award speaks of many clauses in the agreement regarding certain milestones to be met and the cost to be paid to the applicant wherever such cost need to be paid according to the estimation made by the contractee.

As per the issues mentioned in the arbitration award, clauses 6.4 and 42.2 of the General Conditions of Contract (GCC) specifically state that in case of any delay in issuance of drawings or failure to give possession of site the engineer shall determine the extension of time and amount of cost that the contractor may suffer due to such delays in consultation with the employer and the contractor.

Therefore the time of supply of the service of tolerance is the time when such determination takes place. However, the contractee/employer has not determined the cost of delay prior to arbitration award. It was determined only by arbitration award on 09.05.2019. Therefore the time of supply of this service as per Section 13 of the CGST Act is 09.05.2019. The Consideration received for such forbearace is taxable under CGST and SGSt @9% Each under the chapter head 9997 at serial no. 35 of Notification No.11/2017- Central/State tax rate

6.GST Applicability on Interest on Arbitration Amount:

The applicant is claiming interest on the amounts determined by the arbitrary tribunal under various heads. Under Section 15(2)(d) of the CGST/SGST Acts interest for delayed payment against a supply is consideration which is taxable under CGST/SGST Acts. Therefore the interest on amounts exigible to tax under CGST/SGST forms part of value of taxable supply.