Rashtriya Ispat Nigam Ltd.- 2020 (32) G.S.T.L. 492 (A.A.R. – GST – Andhra Pradesh)

Provisions of Section 14 of CGST Act should be referred to determine the time of supply, when Liquidation damages is levied for delay in execution of work.

Facts: In this case, the applicant is a Central Public Sector Undertaking under the Ministry of Steel with Navaratna Status. They have an integrated steel plant at Visakhapatnam, Andhra Pradesh, and are in the business of manufacture and selling of steel products. The steel plant consists of many sub-plants. In various contracts entered into by the company, there is a clause to deduct Liquidated Damages (LD) in case of default by the contractor/vendor to complete the work/supply in time.

Issue: (1) Whether “Liquidated Damages” and other penalties like milestone penalties levied on suppliers/contractors in the nature of making good the damages for any delays in supply of service or goods in the following cases are exigible to GST or not?

(a) Supply and maintenance contracts

(b) Project construction contracts

(2) If GST is applicable, the following may kindly be clarified

(a) Whether the GST on Liquidated Damages, and other penalties is covered under Schedule II Entry No. 5(2)(e) vide HSN Code 9997 – Other services, for which the rate at 18% is relevant or any other entry is applicable?

(b) Liquidated damages are determined and imposed upon the contractor after in-depth study. In such case, what would be the time of supply? Will it be the period in which delay has occurred or it is the time when decision is taken or at the time when accounting entry for recovery is passed?

 (c) When some part of the delay in supply has occurred before the implementation of the GST and some part of delay in supply has occurred after GST came into force, whether GST will be applicable to the Liquidated damages imposed for entire period of delay or it would be applicable only to the period falling after introduction of GST?

Held- In order of AAR it was held that the questions are answered, as under, in terms of the contract for material supply and turnkey contract (for “Design, Engineering and Supply of all equipment including commission spares and Insurance Spares for Indoor LBDS, HVLC and Interplant Cabling for which copies were provided by the applicant as sample agreements and as per the applicant all contract terms contain similar provisions pertaining to “Liquidated Damages” and other penalties like “milestone penalties” levied on suppliers/contractors.

1.In terms of the aforesaid contract agreement, GST would be applicable on the Liquidated Damages.

2.a. In terms of the aforesaid agreement, schedule Entry No. 35 of the Notification No. 11/2017- Central/State Tax (Rate) [as amended from time to time] for taxable services would cover the impugned levy of liquidated damages.

b. In terms of the aforesaid agreement, the clauses reveal that the levy of liquidated damages is not when the delay is occurring but the liability of payment of these liquidated damages by the contractor will be established once the delay in successful execution of work is established on the part of the Contractor. This would define the time of supply. 

c. Sub-section (1) of Section 13 of the GST Act provides that the liability to pay tax on services shall arise at the time of supply. In view thereof, as discussed in the answer to the Q.2(b), the agreement clauses would have to be referred to. Since no precise facts are before us, the Section 14 of the GST Act would have to be referred to by the applicant.

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