A liquidated damage claim for delay in commissioning is not a supply, so there is no GST: AAAR

Nov 8, 2022 | GST FAQ, News | 0 comments

A liquidated damage claim for delay in commissioning is not a supply, so there is no GST: AAAR


The Telangana State Appellate Authority for Advance Ruling ( AAAR ), has recently while deciding an appeal filed before it, held that liquidated damages recoverable on account of delay in commissioning is not supply and hence that no GST is leviable on the same.

The aforesaid observation was made by the AAAR, when M/s. Achampet Solar Private Limited, engaged in production and distribution of electricity obtained from solar energy, filed an appeal before it, as against the Order No.07/2022 dated 16.02.2022, passed by the Telangana State Authority for Advance Ruling (Goods and Services Tax).

The facts of the case were that the CBIC had issued a Circular No. 178/10/2022-GSTdated:3.8.2022, related to the GST applicability on liquidated damages. And as per para 7.1.6 of the said circular, it was interalia observed that when principal supply is exempt, the ancillary activities to such principal supply would also not get attracted to GST.

In the present case, the applicant’s principal supply was production and distribution of electricity, and the same was exempt from payment of GST, and the underlying question involved in the appeal was as to the whether the liquidated damages recoverable by the applicant from Belectric India on account of delay in commissioning, qualify as a ‘supply’ under the GST law and would attract the levy of GST.

 With the applicant contending that liquidated damages received towards breach and noncompliance cannot be construed as ‘consideration’ for ‘refraining or tolerating an act’, and further that the claim of liquidated damages by them from the contractor does not qualify as a supply of service, the AAAR Bench consisting of  Neethu Prasad, the Commissioner of Commercial Taxes, Telengana State, along with B.V Siva Naga Kumari, the Chief Commissioner Central Tax, Hyderabad zone observed as follows :

“As per the circular, where the amount paid as ‘liquidated damages’ is 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 do or abstain from doing anything for the party paying the liquidated damages, the liquidated damages in such cases, are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach.”

“Such payments do not constitute consideration for a supply and are not taxable”, concluding its observation, the AAAR Bench ruled.

Source From = https://www.taxscan.in/liquidated-damages-recoverable-on-account-of-delay-in-commissioning-is-not-supply-no-gst-aaar/222577/

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