Liquidated Damages received for Delay in Commissioning attracts GST: AAR [Read Order]

The Authority for Advance Rulings (AAR), Telangana bench has held that the liquidated damages claimed on account of delay in commissioning, qualify as a ‘supply’ under the GST law and therefore, attracts GST.

In the instant case, the applicant, Achampet Solar Private Limited, engaged in production and distribution of electricity obtained from solar energy, engaged M/s. Belectric India (P) Ltd for construction of solar power project. However, they recovered liquidated damages from Belectric India on account of delay in commissioning and filed an application before the bench to determine the tax liability on such receipt.

The bench consists ofMr. S V Kasi Viswesara Rao (Additional Commissioner, State Tax) and Mr. B Raghu Kiran (Additional Commissioner, Central Tax) found that the liquidated damages are demanded by the applicant from the contractor due to the delay in commissioning of the project and postponement in the taking over date beyond the milestones fixed for completion of project.

“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,” the bench said.

While answering the question, whether liquidated damages recoverable by the applicant from Belectric India on account of delay in commissioning, qualify as a ‘supply’ under the GST law, thereby attracting the levy of GST, the bench added that the date on which the liquidated damage is determined as per the formula prescribed in the clause 6 of the contract is the time of supply of service entry in 5(e) of Schedule II by the applicant.

 To Read the full text of the Order CLICK HERE

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