Telangana AAR: GST Levy on Liquidated Damages for Contractual Breach

Telangana State Authority for Advance Ruling (AAR) said that the liquidated damages and penalties obtained via the petitioner because of the breach of the conditions of the contract from the contractor are subjected to tax beneath the CGST and the SGST acts.

The petitioner, M/s. the Singareni Collieries ltd asks for penalties, and the liquidated damages from their contractors for the gaps in the performance of the contract comprise the delays, beneath the performance towards the targeted extraction, and the theft of the terms of the contract. When the parties to the contract mentioned the time towards its performance the same seeks that either party would execute his responsibility during the mentioned time. when anyone losses to execute that then the query will be that what the kind of effect will be there on the contract.

A Coram of Sri B. Raghu Kiran, IRS, Additional Commissioner (Central Tax), and Sri S.V. Kasi Visweswara Rao, Additional Commissioner (State Tax) sees that the same case is answered by Section 55 of the Indian Contract Act, 1872, which is extracted below: the effect of failure to execute at the constant duration, in the contract where the time is mandatory when the party to the contract said to perform a specific thing at on or prior to the mentioned duration and losses to perform anything on or prior to the mentioned time, the contract or identical has not been executing, that evolves voidable at the choice of the promisee when the preference of the parties was that duration must be of the nature of the contract.

Complete provisions (1) & (3) of Section 55 of the Indian Contract Act, 1872 specified that a failure to execute the contract at the agreed time pointed towards the voidable at the choice of the opposite party and another party would recover the compensation for this loss at times by the nonperformance.

AAR while closing the application ruled that Section 2(31)(b) of the CGST Act said that the consideration for the goods and services supply or both consists of the fiscal value of the act of forbearance. Hence the same patience of the act under the agreement comprises the supply of services and the consideration or the fiscal value is subjected to tax.