Case Of: M/s. Transmission Corporation of Andhra Pradesh Limited
Issued By: Andhra Pradesh (AAR)
Order No: AAR No. 07/AP/GST/2024
Date: 9th May 2024
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The Applicant, a licensed electricity distributor, contracted suppliers to build and maintain the transmission network in AP within a set timeframe.
To address delays, the contracts included a penalty clause for late delivery, specified as liquidated damages under s. 74 of the Contract Act, 1972.
The Applicant sought an Advance Ruling under s. 97 of the CGST Act and APGT on whether these liquidated damages were taxable under GST.
The Applicant argued that these damages were not for tolerating breaches but to avoid breaches, and therefore, should not be taxable under the CGST Act.
The AAR observed that liquidated damages are pre-determined amounts specified in a contract to compensate for losses caused by a breach of contract.
According to para 5(e) of Schedule II of the CGST Act, liquidated damages received for tolerating non-performance are considered a supply of service under s. 7(1A) and are therefore taxable.
The ruling emphasized that there must be a direct link between the consideration and the service activity, making the agreed amount for such activities taxable under GST.
The AAR ruled that liquidated damages, being compensation for breaches of contract, are subject to GST as they are treated as consideration for a supply of services.