18% GST Applicable to Liquidated Damages: AAR [Read Order]

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The Maharashtra Authority for Advance Ruling (AAR) held that liquidated damages are classifiable as ‘other services’ and is taxable at the rate of 18% GST.

The applicant, Maharashtra State Power Generation Company Limited (Mahagenco), engages in the generation of power with an objective to make Power available to all at an affordable rate. In a contract entered with a contractor for the construction of a power generating plant, the applicant added a clause to deduct Liquidated Damages (LD) in case of default by the contractor/vendor.

The applicant has sought a clarification from the Authority for Advance Ruling (AAR) on whether the recovery of Liquidated Damages from the invoice of the contractor amounts to supply under Section 7 of the Goods & Services Act, 2017 or not.

The applicant was of the view that since the recovery of Liquidated Damages was part of the contract, the value of the main supply reduces to the extent of Liquidated Damages deducted by the applicant. He submitted that Liquidated Damages are in nature of a measure of damages to which parties agree, rather than the remedy. He clarified that by charging damages or forfeiture, one party doesn’t accept or permit the deviation of the other party. He concluded that Liquidated Damages could not be said to be the desired income and that it is a compensation of loss suffered by the recipient of the service.

The Authority comprising Members B.V. Borhade & Pankaj Kumar after perusing the contract and related documents found that the contract price and the liquidated damages are two different aspects. They noted that deduction of one from the other was a mere facilitation towards the settlement of the accounts. The members observed that the levy of the liquidated damages was specifically identified as an independent levy under the contract.

“In terms of the aforesaid agreement, GST would be applicable on the Liquidated Damages…we have observed that the impugned levy of liquidated damages would be recovered by clause (e) of para 5 of Schedule II appended to the GST Act…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” read the order.

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