Out-of-court settlement does not attract GST: AAR
Mumbai, June 30, 2023
The Telangana bench of the GST-Authority for Advance Rulings (AAR) has held that an amount paid to a sub-contractor as compensation by way of an out-of-court settlement will not be subject to goods and services tax (GST).
Under GST provisions, “agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act constitutes a taxable supply of service”.
Varying interpretations have resulted in contrasting judgments being given by high courts on the taxability of liquidated damages. Subsequently The Central Board of Indirect Taxes and Customs (CBIC) issued a clarificatory circular dated August 3, 2022 on the applicability of GST on various charges arising out of the breach of contract. However, taxability of liquidated damages, amounts received pursuant to out-of-court settlements or arbitration awards continues to be a bone of contention between India Inc and GST officials.
While advance rulings do not set a judicial precedent, they do have a persuasive impact in the course of assessments, hence This ruling is being welcomed by tax experts. “This is a well-reasoned ruling which has rightly appreciated the fact that receipt of damages does not imply that the recipient has permitted or tolerated non-fulfilment of the promise. Damages are paid only to compensate for loss of damage due to breach of the contract, and hence there is no underlying supply of service,” states Harpreet Singh, partner, KPMG India.
In this case, TPSC (India), a private limited company, which sought the advance ruling, was engaged in taking up thermal projects. For one such project, it sub-contracted work to another company — Delta Global Allied (DGAL).
The sub-contractor alleged that delay in execution of the project was due to non-finalisation of drawings or supply of raw materials by the contractor. TPSC de-scoped a certain quantum of work awarded to DGAL and entrusted it to other sub-contractors.
Aggrieved by reduction in quantum of work, DGAL sought recourse under arbitration proceedings. The tribunal awarded it a compensation of Rs 42.5 crore (which consisted of liquidated damages and interest). TPSC filed an appeal. However, during the pendency of the appeal, the two parties reached a settlement for a sum of Rs 38.6 crore. The AAR bench held that this sum will not be subject to GST.
[The Times of India]
