Maharashtra AAR rules that penalties, forfeited deposits, and unclaimed balances by MSETCL do not qualify as 'supply' under GST.
Saloni Kumari | Jun 17, 2025 |
GST on Liquidated Damages, Forfeiture of Security Deposit, Unclaimed Creditor Written Back: AAR Answers
M/s. Maharashtra State Electricity Transmission Company Limited (MSETCL) is the legal applicant in this case. The applicant here is a company registered with the address C-19, E-Block, Prakashganga, BKC, Bandra, Mumbai, provided while obtaining the user ID. The correspondence address is different: Maharashtra, 400051.
Maharashtra State Electricity Transmission Company Limited (MSETCL) is a company owned by the Maharashtra government that handles electricity transmission (moving electricity from power plants to local distribution lines). It’s one of the largest electricity transmission companies in India, established in 2005.
Generally, the company offers electricity transmission services that are exempt from GST, according to the government notification. Hence, the company is generally not required to pay or collect any GST on its primary services.
Now, MSETCL is asking for GST on the following:
1. Late Completion Penalty:
MSETCL hires contractors to build things such as electric substations and high-voltage lines. If not built on time, the firm charges the contractor a penalty. Now the company wants to know, GST is applicable on this penalty amount?
2. Government Project Works:
The firm also accepts some special government-related projects, such as railways or highways, based on their needs. These projects also require contractors, and if they do not complete their work within the specified time limit, then the company charges them a penalty amount. Now the company wants to know, does this penalty amount attract GST?
3. Forfeited Security Deposits (EMD/SD):
For the purpose of security, the company accepts money (called an earnest money deposit or security deposit) from contractors to ensure they will not leave the contract in the middle. If any contractor leaves any contract in the middle, in that case, the firm keeps that money. Now the company wants to know if GST is applicable when this deposit is forfeited.
4. Unclaimed Balances Written Back as Income:
If there’s any leftover money (like from unpaid bills or deposits) that hasn’t been claimed even after 3 years, MSETCL adds it to its income. The company wants to know does it needs to pay GST on this unclaimed income?
5. Penalty for Violating Contract Terms:
If any rule is broken by the contractor in the contract, the company charges a penalty. Now the company wants to know if it should pay GST on these penalty amounts, too?
The applicant, M/s. Maharashtra State Electricity Transmission Company Limited, has filed the current application under Section 98 of the Central Goods and Services Tax Act, 2017, and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act,” respectively], seeking an advance ruling in respect of the following questions:
“Question 1. Whether the following be termed as “supply”?
(a) Liquidated Damages (LD)/Penalty recovered from contractors/suppliers for breach of contract.
(b) Liquidated Damages (LD)/Penalty recovered from contractors/suppliers on Deposit Works/Outright Contribution Works (ORC).
(c) Forfeiture of security deposit or earnest money deposit in case of refusal to accept the work order despite being the lowest one (L1) or failure of performance by the supplier or contractor.
(d) Old and unclaimed creditors’ balances are written back to the income account after three (03) years from the date of completion of the contract.
(e) Write back the old and unclaimed earnest money deposit (EMD) / security deposit (SD) to the income A/C after three (03) years from the date of the completion of the guarantee period as per the contract.
(f) Penalty or charges applied for violation of the conditions of the contract.
Question 2. If the above are decided as “supply,” then:
(a) What shall be the time of supply for each of the above items?
(b) What shall be the HSN/SAC code and rate of GST for such “supplies”?
(c) Whether ITC can be utilised against payment of GST on such supplies?
(d) What shall be the value of supply?”
In accordance with the Maharashtra Authority for Advance Ruling (MAAR), the above questions are being answered as follows under Section 98 of the Central Goods and Services Tax Act, 2017, and the Maharashtra Goods and Services Tax Act, 2017:
Ans 1:
(a) No, the liquidated damages (LD)/penalty recovered from contractors/suppliers for breach of contract cannot be termed as “supply.”
(b) No, liquidated damages (LD)/penalty recovered from contractors/suppliers on deposit works/outright contribution works (ORC) cannot be termed as “supply.”
(c) No, forfeiture of security deposit or earnest money deposit in case of refusal to accept the work order despite being the lowest one (L1) or failure of performance by the supplier or contractor cannot be termed as “supply.”
(d) No, old and unclaimed creditors’ balances written back to income accounts after three (03) years from the date of completion of the contract cannot be termed as “supply.”
(e) No, writing back of old and unclaimed earnest money deposit (EMD) / security deposit (SD) to income A/C after three (03) years from the date of the completion of the guarantee period as per contract cannot be termed as “supply.”
(f) No, penalties or charges applied for violation of conditions of contract cannot be termed as “supply.”
Ans 2: As all the activities mentioned in question no. 1 (all parts) are not considered as the supply of services (all answers are in the negative), hence, there is no need to answer question no. 2.
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