The Telangana Appellate Authority of Advance Ruling (AAAR) in the case of M/s. Achampet Solar Private Limited vide Order No. AAAR.COM/04/2022 dated 19.10.2022, has held that liquidated damages recoverable by the applicant from Bi-electric India on account of delay in commissioning do not qualify as a “supply” and no GST is payable.
The AAAR has observed that the amount paid as “liquidated damages” is an amount paid only to compensate for the injury, loss, or damage suffered by the aggrieved party due to a breach of contract. 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. In such cases, liquidated damages are a mere flow of money from the party who causes a breach of the contract to the party who suffers loss or damage due to such breach. The payments do not constitute consideration for a supply and are not taxable.
The appellant is in the business of producing and distributing electricity obtained from solar energy. They have engaged Belectric India for the construction of solar power projects. The agreement has clauses for the recovery of liquidated damages on two counts namely, there was a delay in delivering the contract and another regarding the performance of the plant.
The appellant sought an advance ruling on the issue of whether liquidated damages recoverable by the applicant from Belectric India on account of delay in commissioning qualify as a “supply” under the GST law, thereby attracting the levy of GST.
The lower authority held that liquidated damages recoverable by the applicant from Belectric India on account of delay in commissioning qualify as a “supply” under the GST law and 18% GST are payable.
The appellant contended that the appropriate justification for treating liquidated damages as taxable under GST has not been provided by the authority. The order fails to discuss why the favourable rulings pronounced by various courts in similar fact patterns as those of the appellant would not be applicable to the instant case. It is a settled principle of law that where a similar dispute has been resolved in the past, the court is usually bound to follow the reasoning used in the prior decision.
The AAAR, while setting aside the ruling of the lower authority, stated that the CBIC has issued a circular dated August 3, 2022, related to GST applicability on liquidated damages. When the principal supply is exempt, the ancillary activities related to the principal supply would not be subject to GST. Since the applicant's principal supply is the production and distribution of electricity, which is exempt from payment of GST, the liquidated damages received need to be considered a flow of money without having the implication of GST payment.
