Facts of the Case:

In this case, the applicant was awarded a contract by Convergence Energy Services Limited (CESL) under the National E-Bus Programme (NEBP) Phase–I for the procurement, operation, and maintenance of buses for the city of Surat. Pursuant to this, a Concession Agreement was entered into with the Surat Municipal Corporation (SMC) for operation and maintenance of e-buses. Later, through a Tripartite Agreement , the obligations of SMC were transferred to Surat Sitilink Ltd. (SSL).

As per the terms of the Concession Agreement, the applicant was liable to pay liquidated damages to SSL in case of defaults, such as non-availability of buses, maintenance lapses, or failure to meet performance obligations. The applicant sought an advance ruling to determine whether such payments attract GST as a supply under Section 7 of the CGST Act, 2017.

Issue:

Whether liquidated damages or penalty amounts paid by the applicant for breach or non-performance under the Concession Agreement constitute a “supply” under Section 7 of the CGST Act, 2017, falling within the ambit of Entry 5(e) of Schedule II (“agreeing to the obligation to tolerate an act”), thereby attracting GST liability?

Held that:

The Gujarat AAR held as under:

• The payment of liquidated damages under the Concession Agreement represents compensation for breach of contractual terms and not consideration for any activity or forbearance undertaken by the recipient (SSL).
• There is no agreement to tolerate an act or situation in return for a consideration; the damages merely arise due to non-performance or breach by the applicant, resulting in compensation to SSL.
• The Authority relied on CBIC Circular No. 178/10/2022–GST, dated 03.08.2022, clarifying that amounts received as liquidated damages, forfeiture of deposits, or penalties for breach of contract do not qualify as consideration for a supply under Section 7 of the Act.
• Reference was also made to recent rulings including GSPC (JPDA) Ltd., Achampet Solar Pvt. Ltd., and RITES Ltd., which consistently held that compensatory payments for breach are outside the scope of GST.
• Consequently, no GST is payable on the liquidated damages or penalty amounts paid by the applicant to SSL, and hence, no question of availing input tax credit (ITC) arises.

The ruling reiterates the settled position that liquidated damages, being compensatory and not contractual consideration, are not exigible to GST. Payments made for breach of contract do not amount to a taxable “supply” under Entry 5(e) of Schedule II.

Case Name: In Re: M/s. JBM Ecolife Mobility Surat Private Ltd. dated 03.11.2025

To read the complete judgement 2025 Taxo.online 2929