GST UPDATE ON TAXABILITY OF LIQUIDATED DAMAGES IN PRE & POST GST REGIME:-

The triggering point of litigation as regards levy of tax on liquidated damages for breach of contract was the introduction of the clause (e) in the list of declared services under section 66E of the Finance Act, 1994 wherein “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” is considered as provision of service liable to service tax. The above entry not only created chaos and confusion in the negative list tax regime but also carried forward the baggage of old litigation in the GST era too. There is similar entry (e) in Schedule II to the CGST Act, 2017. Recently, the Hon’ble Chennai CESTAT in the case of M/s Neyveli Lignite Corporation Ltd. has concluded that

The appellant contended that no service tax is payable on the breach of conditions of the contract and placed reliance on the decision given in the case of M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE & SERVICE TAX, RAIPUR. Similar view was taken in the case of M/S POOVA KSHETRA VIDYUT VITRAN CO. LTD. VERSUS PRINCIPAL COMMISSIONER CGST& CENTRAL EXCISE BHOPAL. Reference was also made to the decision given in the case of COMMISSIONER OF SERVICE TAX, CHENNAI VS REPCO HOME FINANCE LIMITED wherein it was held that ‘foreclosure charges collected by banks from borrowers for premature closure of loan account are not consideration for banking services as foreclosure charges are damages collected for breach of terms and conditions in the loan agreement and cannot be construed as consideration for banking and other financial services.

The hon’ble Tribunal held that the decisions relied upon by the appellant are aptly applicable in the present case also. It was conceded that the agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and parties was for supply of coal and for availing various types of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted. It is not the intention of the appellant to impose any penalty on the other party nor it is the intention of the other party to get penalized. Hence, the recovery of liquidated damages/penalty from the other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation, nor can there be any intention of the other party to breach or violate the contract and suffer a loss. Hence, the agreement should specifically indicate the intention of provision of such a service.

The above decision is a turning point for all the misconceptions of the revenue authorities that each and every compensation or damages recovered for breach of terms and conditions of contract tantamount to provision of “tolerate to do an act service”. The government cannot levy tax on the liquidated damages by considering it as service by way of deeming fiction unless it is express from the contract/agreement entered into between the parties. Moreover, as the provisions are similar in the negative list era and the GST regime, the analogy of the above decision is squarely applicable in the GST regime. The above decision will definitely provide the needed relief in settling down the litigation as regards levy of tax on liquidated damages.

Comments

GST UPDATE ON TAXABILITY OF LIQUIDATED DAMAGES IN PRE & POST GST REGIME:-

Post a Comment

Query