The Telangana State Authority for Advance Ruling (AAR) has held that the liquidated damages and penalties received by the applicant due to breach of conditions of the contract from the contractor are exigible to tax under Central GST and State GST Acts.
The applicant, M/s. The Singareni Collieries Company Limited demanded penalties and liquidated damages from their contractors on lapses in performance of the contract including delays, under performance with respect to targeted extraction and breach of terms of the contract. When the parties to a contract specify the time for its performance, it is expected that either party will perform his obligation at the stipulated time. But if one of them fails to do so, the question arises what is the effect upon 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) observed that this scenario is answered by Section 55 of the Indian Contract Act, 1872, which is extracted below: “Effect of failure to perform at fixed time, in contract in which time is essential-When a party to a contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, and fails to do any such thing at or before the specified time, the contract, or so much of it as has not been performed, becomes voidable at the option of the promisee if the intention of the parties was that time should be of the essence of the contract.”
“A combined reading of the provisions (1) & (3) of Section 55 of the Indian Contract Act, 1872 reveals that a failure to perform the contract at the agreed time renders it voidable at the option of the opposite party and alternatively such party can recover compensation for such loss occasioned by non-performance,” the AAR said.
Disposing the application, the AAR held that “Section 2(31)(b) of the CGST Act mentions that consideration in relation to the supply of goods or services or both includes the monetary value of an act of forbearance. Therefore such a toleration of an act or a situation under an agreement constitutes supply of service and the consideration or monetary value is exigible to tax.”
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