GST Vidhi | GST Advance Ruling

GST Is Not Leviable On Compensation Amounts Such As Liquidated Damages, Trade Settlement, Or Damages Collected For Non-Performance Or Breach Of Contract

Authority for Advance Ruling: Andhra Pradesh Authority for Advance Ruling (GST)

Ruling Order Number: AAR No. 12/AP/GST/2023

Date of Order: 21.12.2023

Name of Party: M/s. South India Krishna Oil & Fats Pvt Ltd

Summary of Advance Ruling:

• The applicant sought clarification on whether GST is leviable on compensation amounts such as liquidated damages, trade settlement, or damages collected from customers for non-performance or breach of contract.
• The ruling concluded that GST is not applicable on these amounts as they do not qualify as a supply of goods or services under Section 7 of the CGST/APGST Act, 2017.

 Facts of Case:

• The applicant is engaged in the manufacturing of edible oils.
• They enter into agreements with customers to supply a specified quantity of edible oils at a specific rate.
• If customers fail to lift the material as agreed, the applicant collects compensation amounts such as liquidated damages or trade settlement for breach of contract.
• Initially, the applicant discharged GST liability on these amounts under the entry "Agreeing to tolerate an act" but discontinued it after a clarification issued by CBIC.

Sections Covered:

• Section 7 of the CGST/APGST Act, 2017
• Section 97 of the CGST/APGST Act, 2017
• Section 98 of the CGST/APGST Act, 2017

Question of Advance Ruling:

• Whether GST is leviable on compensation amounts such as liquidated damages, trade settlement, or damages collected for non-performance or breach of contract?
• If GST is applicable, what is the HSN Code and rate?
• If GST is not applicable, does the restriction of input tax credit of common services under sections 42 and 43 of the CGST/APGST Rules, 2017 apply?

Submission by Applicant:

• The compensation amounts collected are for breach of contract and do not constitute a supply of goods or services.
• Reference to various legal precedents and circulars, particularly CBIC Circular No. 178/10/2022-GST dated 03/08/2022, which clarified that such compensation does not satisfy the definition of “Supply” under GST.

Findings and Decision:

• The authority found that the compensation amounts collected for breach of contract do not qualify as consideration for any independent supply of goods or services.
• The activity does not meet the definition of "Supply" under Section 7 of the CGST/APGST Act, 2017, and hence GST is not leviable on these amounts.
• The ruling also discussed various legal precedents supporting the applicant's stance.

Conclusion:

• GST is not applicable on compensation amounts such as liquidated damages, trade settlement, or damages collected from customers for breach of contract or non-performance.
• The restrictions on input tax credit under sections 42 and 43 of the CGST/APGST Rules, 2017, do not apply to these transactions.

Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.