GST Applicable on recovery of liquidated damages for lapses on part of supplier of service: AAR

The Applicant is entering into contracts with a host of vendors/suppliers for the extraction of coal. The applicant is also recovering liquidated damages for lapses on the part of the supplier of service. The applicant is desirous of ascertaining whether such liquidated damages/penalties constitute consideration exigible to tax under the scheme of GST.

Question Raised

Whether, in the facts and circumstances of the case, liquidated damages/penalties received by the applicant can be said to be for any ‘supply’ under the Central Goods and Services Act, 2017, thereby attracting the levy of ‘GST’ or should be treated as price adjustment to the main supply?

Ruling

In the present case, Liquidated damages are claimed by the applicant from the contractor due to the delay in performance of the contract, beyond the date prescribed in such contract by the contractor. Similarly, penalties are fixed for breach of the provisions of the contract. These amounts are considerations 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 toleration of an act or a situation under an agreement constitutes the supply of service and the consideration or monetary value is exigible to tax.

The Consideration received for such forbearance is taxable under CGST and SGST @9% each under chapter head 9997 at serial no. 35 of Notification No.11/2017- Central/State tax rate