#Whether GST Applicable on Liquidated Damages? By SN Panigrahi, Essenpee Business Solutions, Section 7(1) (d) of the GST Act, 2017, Advance Ruling on Liquidated damages ("LD")

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SN Panigrahi is a Versatile Practitioner, Strategist, Energetic Coach, Learning Enabler.
He is an International-Corporate Trainer, Mentor & Author – PMP Trainer
He has diverse experience and expertise in Project Management, Contract
Management, Supply Chain Management, Procurement, Strategic
Sourcing, Global Sourcing, Logistics, Exports & Imports, Indirect Taxes –
GST etc.
He had done more than 150 Workshops on above
Published more than 500 Articles; More than 60 YouTube
Presentations & More than 70 SlideShares
He is an Engineer + MBA +PGD ISO 9000 / TQM with around 29 Yrs of
Experience
He is a certified PMP® from PMI (USA) and become PMI India
Champion
Also a Certified Lean Six Sigma Green Belt from Exemplar Global
Trained in COD for 31/2 Yrs. on Strategy & Leadership
GST Certified – MSME – Tech. Dev. Centre (Govt of India Organization)
ZED Consultant – Certified by QCI – MSME (Govt of India Organization)
Member Board of Studies, IIMM
Co-Chairman, Indirect Tax Committee, FTAPCCI
Empanelled Faculty in NI MSME
He has shared his domain expertise in various forums as a speaker & presented a number of papers in various national and
international public forums and received a number of awards for his writings and contribution to business thoughts.
SN Panigrahi
9652571117
snpanigrahi1963@gmail.com
Hyderabad

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Meaning of Liquidated Damages:
Black’s Law Dictionary (Tenth Edition) on page 473 defines Liquidated Damages thus:
“An amount contractually stipulated as a reasonable
estimation of actual damages to be recovered by one party if
the other party breaches. If the parties to a contract have
properly agreed on liquidated damages, the sum fixed is the
measure of damages for a breach, whether it exceeds or falls
short of the actual damages.”
Liquidated damages are a means of compensation for the breach of a contract.
Example : If a contractor failed to complete a construction project on time and LD is charged
daily until the project has been finished.
A liquidated damages clause generally specifies a predetermined amount of money that
must be paid as damages for failure to perform under a contract.

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Relevant Provisions of CGST Act
Section 7(1) (d) of the GST Act, 2017 includes activities referred to in Schedule II in the Scope of
Supply. Paragraph 5 of Schedule II to CGST Act provides a list of activities to be treated as 'supply of
services' which inter alia comprises – "(e) agreeing to the obligation to refrain from an act, or to
tolerate an act or situation, or to do an act".
The view supporting levy of tax on liquidated damages and forfeiture of earnest money is based on
premise that the party has ‘tolerated’ the non-performance which is Supply.
GST is applicable on 'supply' of goods or services or both and is charged on the 'value of
supply’.
Section 15(1) of the GST Act defines 'value of taxable supply' as the transaction value, which is the
price actually paid or payable for the said supply where the supplier and the recipient of supply are
unrelated and the price is the sole consideration.
In case of Liquidated Damages, there is an act of Non-Performance / Breach and the same has
been tolerated by an additional levy in the nature of liquidated damage.
There are two events, the first event calls for the payment of a contract price to the Contractor and the
second event calls for the payment of liquidated damage to the owner.
The income (though presented in the form of deduction) from payments to be made to the Party that
Breached (Contractor) is the income of the Party that Suffered Damage (Principal / Owner) and would
be a supply of ‘service’ in terms of schedule II para 5 clause (e) of the GST Act.

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A BEntered into Contract With Liquidated Damages Clause
Say “B” Breached the Contract
“B” Supposed to Pay Compensation to “A”
That Means “A” Tolerated an Act of “B” (Breach), which is Treated as
a Supply of Service under Sec 7(1)(d) - para 5(e) of Schedule II of
CGST Act
Compensation Received as Liquidated Damages (LD) shall be
Treated as Consideration
Since “A” has Made Supply of Service in the Form of Tolerating the
Act of “B”, a Separate Invoice shall be Raised by “A” on “B”
Compensation (LD) which is Generally, Deducted from the Bills of
“B” shall be Treated as Consideration.
Since “A” has Made Supply to “B” for a Consideration, GST is
Applicable - SAC code 9997 (Other services) GST @ 18%
“A”ToRaiseInvoiceon“B”ChargingGST
“A”ToRaiseInvoiceon“B”ChargingGST
GST on Liquidated Damages
SN Panigrahi

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Advance Ruling on Liquidated damages ("LD")

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The Maharashtra Authority for Advance Ruling ("AAR") in the case of Maharashtra State Power
Generation Company Limited ("Applicant") held that Goods and Services Tax ("GST") at the rate of
18% would be payable on liquidated damages ("LD") received by the Applicant for delayed supply
under a contract.
The AAR has considered LD to be a consideration for agreeing to the obligation to tolerate an act or a
situation, which is treated as a supply of service under para 5(e) of Schedule II of the Central Goods
and Services Act, 2017 ("CGST Act") / Maharashtra Goods and Services Act, 2017 ("MGST") (as the
provisions of CGST Act and MGST are almost identical, they are collectively referred to as "GST
Act").
Ruling
The AAR ruled against the Applicant and held that LD under the Applicant Contracts constitute
payment for a separate supply of service under the category of 'agreeing to tolerate an act or
situation’.
It observed that deduction of LD from the contract consideration is a mere facilitation towards
settlement of accounts and it does not actually result in reduction in the value of the main supply.
Advance Ruling on Liquidated damages ("LD")

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Advance Ruling in GST pronounced by Maharashtra Authority in the case of ‘Maharashtra State
Power Generation Company Limited’ has given a rather opposed view as expected leading to
further eruption of questions in regard to the matter by considering LD as separate supply under
GST.
It has brought LD under Entry no. 5 (2) (e) of Schedule II of GST Act vide SAC code 9997
(Other services) making it taxable at 18%.
The Court has taken a literal interpretation in the said case by taxing LD where specifically
mentioned in contract and deductible from contract price to be supply under GST.
Advance Ruling on Liquidated damages ("LD")

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In re M/s. Maharashtra State Power Generation Co. Ltd (AAR Maharashtra)
NO.GST-ARA- 15/2017-18/B-30; dt. 08/05/2018
ORDER : The questions are answered, as under, in terms of the agreement between Maharashtra State Power
Generation Company Limited (Owner) and Bharat Heavy Electricals Limited (Contractor) for Erection &
Commissioning of Main Plant Package at Chandrapur T.P.S. Expansion Project 2 x 500 MW —
Q.1 Whether GST is applicable on Liquidated Damages in case of
Type 1 i.e. Operation & Maintenance activities
Type 2 i.e. Construction of new power plants or renovation of old plants
Or is applicable in both cases?
A.1 In terms of the aforesaid agreement, GST would be applicable on the Liquidated Damages.
Q.2 If GST is applicable, kindly clanfiy the following related aspects also –
Q.2(a) Whether the GST on Liquidated Damages is covered under Schedule II entry No 5(2)(e) vide HSN code
9997-Other Services rate 18% is correct or any other entry is relevant?
A.2(a) In terms of the aforesaid agreement, schedule entry no.35 of the Notification no. 11/2017 – Central [as
amended from time to time] for taxable services would cover the impugned levy of liquidated damages.

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In re M/s. Maharashtra State Power Generation Co. Ltd (AAR Maharashtra)
NO.GST-ARA- 15/2017-18/B-30; dt. 08/05/2018T
ORDER :
Q.2(b) Liquidated Damages is determined and imposed upon the contractor after in-depth study. In such case,
what will be construed as the time of supply. Will it be the period in which delay is occurring or it is the time
when decision to impose Liquidated Damages is taken?
A.2(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 the payment of these liquidated damage bu the contractor will be
established once the delay in successful completion of trail operation is established on the part of the
Contractor. This would define the time of supply.
Q,2 (c) If some part of delay has occurred before GST roll-out and some part of delay has occurred after GST
roll-out, whether GST will be applicable to the Liquidated Damages imposed for entire period of delay or to the
period falling after GST roll-out? In case when GST is to be imposed for period after date of GST rollout but
due to maximum capping of LD, the amount of LD is calculated at given percentage instead of being period-
based, then how GST needs to be levied.
A.2(b) 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.
Q.2(d) Whether the contractor/vendor will be able to utilize the amount of LD imposed over him as Input Tax
Credit subject to satisfijing all other conditions?
A.2(d) The above question is not answered as the proper person to raise this question would be the contractor
/Vendor and not applicant.

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In re M/s. North American Coal Corporation India Private limited (GST AAR Maharashtra);
Advance Ruling No. GST-ARA-07/2018-19/B-63; 11/07/2018
ORDER
For reasons as discussed in the body of the order, the questions are answered thus –
1. Whether liquidated damages that may he awarded to the Applicant by the International Chamber of
Commerce (“ICC”) qualifies as a ‘supply’ under the Goods and Services Tax (“GST”) law, thereby attracting the
levy of GST ?
Answer : Answered in the affirmative.
2. If the answer to Question No. 1 is in the affirmative, what should be the time of supply, that is to say, the point
of time in which NACC’s liability to pay GST arises ?
Answer: The time of supply would be determined as per the provisions of Section 13 of the CGST Act after the
award of arbitration proceedings is given by the Arbitration Tribunal as administered by the ICC as per the
Association Agreement by the parties to dispute, in the present proceedings.
3. If the answer to Question No. 1 is in the affirmative, what should be the value of supply on which GST is
payable , that is to say, whether the Applicant is liable to pay GST on amount of liquidated damages claimed
and awarded to the Applicant under the arbitral award or the amount which is actually received by the Applicant
after conclusion of the matter before the final Appellate authority.
Answer : The value of supply will be the actual amount of damages received by the applicant from SPL after the
award by ICC

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In re Rashtriya Ispat Nigam Ltd (GST AAR Andhra Pradesh)
Advance Ruling No. AAR 01/AP/GST/2019; 11/01/2019
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
Ruling :
In terms of the aforesaid contract agreement, GST would be applicable on the Liquidated Damages.

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In re M/s. Dholera Industrial City Development Project ltd. (GST
AAR Gujarat);
Advance Ruling No. GUJ/GAAR/R/2019/06; 04/03/2019
Ruling :
Question: Whether applicant is liable to collect GST on amount recovered from contractors on
account of breach of conditions specified in the contract.
Ans: Answered in affirmative.
Question : Whether applicant is liable to collect GST on amount recovered from contractors on
account of not achieving milestone ?
Ans: Answered in affirmative.
Question : Whether applicant is liable to collect GST on interest amount received for deferring the
liquidated damages recovered from contractors?
Ans: Answered in affirmative.

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In re Bajaj Finance Limited (GST AAAR Maharashtra)
Order No. MAH/AAAR/SS-RJ/24/2018-19; 14/03/2019
The Appellant is a non-banking financial company and is inter alio engaged in providing various types of loans to the customers such as
auto loans, loans against the property, personal loans, consumer durable goods loans, etc.
In case of delay in repayment of EMI by the customers, the Appellant collects penal/default interest (hereinafter referred to as ‘penal
interest’) as an additional interest for the number of days of delay as per terms of the agreements executed with the customers.
Under the GST law, the Appellant is of the view that penal interest collected from the customer is in the nature of additional interest, and
therefore, the same is not subjected to GST levy. However, considering the ambiguity on taxability under the GST law, as an abundant
caution, the Appellant had filed an application for Advance Ruling before the Maharashtra Authority for Advance Ruling on 09.05.2018, on
the following questions:
“i) Whether the Penal Interest is to be treated as interest for the purpose of exemption under Sr. No. 27 of Notification No.
12/2017-Central Tax (Rate) dated 28.06.2017, Sr. No. 27 of Maharashtra State Notification No. 12/2017-State Tax (Rate) dated
29.06.2017, and Sr. No. 28 of Notification No. 9/2017-Integrated Tax (Rate) dated 28.06.2017?
ii) If the answer to the above is negative, whether the activity of collecting penal interest by the Appellant would amount to a taxable
supply under the GST regime?”
The AAR passed the Order No. GST-ARA-21/2018-19/B-24 dated 06.08.2018, holding that the penal interest charged by the Appellant
amounts to supply of services under Sr. No. 5(e) of Schedule II to the CGST Act, and is therefore liable to GST.
Aggrieved by the impugned order dated 06.08.2018, the Appellant has filed the appeal.
The Appellate Authority for Advance Ruling upheld the ruling given by the Advance Ruling
Authority by observing that the penal charges / penalty recovered by the Appellant from their
borrowers on account of the delay in payment of EMI by borrowers are adequately covered under
clause 5 (e) of the Schedule II of the CGST Act, and will attract GST.

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The Rulings also impacts many other similar transactions.
For example, if a builder forfeits a buyer’s earnest money after the buyer fails
to buy a flat in a contracted period, GST will be levied on that forfeited amount
since the builder has ‘tolerated your act’ of not paying the full amount,
therefore, it becomes a ‘deemed service’ and GST is due.
So GST is Applicable on
 Liquidated Damages & Penalties,
 Advance Forfeited for Cancellation of Agreement,
 Forfeiture of Security for Damages Done,
 Compensation to Termination of Contract,
 Non Compete Fee for Agreeing Not to Compete,
 Cancellation Charges for Cancelling Travel Ticket (Air, Train, Bus),
 Demurrage or Detention Charges,
etc…etc….

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SN Panigrahi

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19. Contact Details:
SN Panigrahi
9652571117
snpanigrahi1963@gmail.com 19