The Andhra Pradesh Authority for Advance Ruling (AAR) has held that 18% Goods and Services Tax (GST) would be applicable upon the liquidated damages collected from Chettinad Logistics Pvt Ltd for non-performing the acts.
The applicant AP Power Development Co. Ltd (APPDCI) was a special-purpose vehicle which was originally set up to implement mega power projects in the state of Andhra Pradesh. APPDCL has been running a thermal power project.
APPDCL had entered an agreement with Chettinad logistics private limited for supply of certain services .In the event of failure in performance of job assigned to the service provider (Chettinad logistics private ltd), the service receiver (APPDCL) would collect liquidated damages for increase in moisture of raw coal over the loading end, for increase in ash percentage, penalties for late transportation of coal and also penalty for short supply of coal, as per the penalties clause 11 of the contract.
The applicant submitted that the ‘liquidated damages’ was an amount paid only to compensate the loss or damage suffered by APPDCL due to breach of the contract and there was no agreement, express or implied,
The Authority Bench of Ravi Sankar, (Commissioner of State Tax) and RV Pradhamesh Bhanu, (Joint Commissioner of Central Tax) observed in the light of section 7 read with definition of consideration under Section 2(31), that the liquidated damages paid by defaulting party to the non-defaulting party for tolerating the act of non-performance or breach of contract have to be treated as consideration for tolerating of an act or a situation under an agreement and hence such an activity would constitute supply of service and the liquidity damages were exigible to tax under CGST and SGST @9% each under the chapter head 9997 at serial no. 35 of Notification No.11/2017-Central/State tax rate.
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