The Telangana Authority of Advance Ruling (AAR) consisting of members K.V. Kasi Visweswara Rao and B. Ragu Kiran has ruled that the liquidated damages and penalties received by the applicant due to breach of conditions of the contract by the contractor are exigible to tax under the CGST and SGST Acts.
The applicant, M/s. Singareni Collieries Company Limited, is entering into contracts with a host of vendors and suppliers for the extraction of coal. The applicant is recovering liquidated damages for lapses on the part of the supplier of service.
The applicant demanded penalties and liquidated damages from the contractors for lapses in performance of the contract, including delays, underperformance with respect to targeted extraction, and breach of terms of the contract.
The applicant sought an advance ruling on the issue of whether the liquidated damages/penalties received by the applicant can be said to be for any ‘supply’ under the Central Goods and Services Act, 2017, attracting the levy of GST or should be treated as a price adjustment to the main supply.
The AAR noted that liquidated damages are claimed by the applicant from the contractor due to the delay in performance of the contract, beyond the date prescribed in the contract by the contractor. Similarly, penalties were fixed for breach of the provisions of the contract. These amounts are consideration for tolerating an act or a situation arising out of the contractual obligation.
The AAR ruled that consideration in relation to the supply of goods or services or both, including the monetary value of an act of forbearance, is mentioned in Section 2(31)(b) of the CGST Act.Therefore, a toleration of an act or a situation under an agreement constitutes a supply of service, and the consideration or monetary value is exigible to tax.
The AAR observed that the consideration received for such forbearance is taxable under CGST and SGST at the rate of 9% each under the chapter head 9997 at serial no. 35 of Notification No.11/2017-Central/State tax rate.
Applicant’s Name: Singareni Collieries Company Limited