Maharashtra AAR rules that GST
is applicable on ‘liquidated damages’ chargeable upon the contractor once delay
in deliverables is established, in relation to operation & maintenance
activities and construction of new power plants or renovation of old plants;
Rejects applicant’s contention that these damages being towards deficiency in
services, amount to reduction in value of supply and same should not be
considered as separate service covered by the term “Obligation to tolerate an
act or a situation”; Perusing the agreement between the applicant and BHEL for
erection & commissioning of main plant package, AAR observes that contract
price and liquidated damages are two separate aspects / events, deduction of
one from the other is a mere facilitation towards settlement of accounts;
Stating that recovery of liquidated damages is an independent activity and
consideration for the work done remains unaltered, AAR observes “For the Taxman, what would matter is
the value for the work done. And once this valuation is properly done and tax
liability thereon discharged, whether this value is paid partially or not paid
at all would not be a concern from the taxation perspective but a matter
between contracting parties..”; Resultantly, holds that empowerment
to levy liquidated damages is for reason that there has been delay and the same
would be tolerated but for a price or damages, hence, the income of the
applicant would be for a ‘supply of service’ in terms of clause (e) of Para 5
of Schedule II; Such supply i.e. levy of liquidated damages, would be covered
under Heading 9997 i.e. “Other services” under Notification No. 11/2017-Central
Tax / State Tax (Rate) exigible to GST at 18%; Further clarifies that liability
to pay tax on services shall arise at the time of supply, if the contractor
fails to achieve trial operation within specified time period which falls under
GST regime, then levy of liquidated damages would attract GST : Maharashtra AAR
The order was passed by Shri.
B. V. Borhade and Shri. Pankaj Kumar.
Mr. S. S. Gupta, Mr. Karan Awtani, and Mr.
Ashutosh Shukla appeared on behalf of the applicant.
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