Order date – 31 March 2023

Applicant – M/s. AP Power Development Co. Ltd.

Facts –

• The Applicant, M/S AP POWER DEVELOPMENT CO, LA, (APPDCLY), a special-purpose vehicle established to execute power projects in Andhra Pradesh, wherein the company has engaged Chettinad logistics private limited to provide certain services for coordination and supervision of coal loading, transportation, and handling at various ports and sites.
• In case of any failure in performance by the service provider, the service receiver is entitled to collect liquidated damages, including penalties for an increase in moisture and ash content of raw coal, delay in transportation, and short supply of coal, as per the penalties clause 11 of the contract.

Issue –

• Whether liquidated damages collected by a company for non-performance of a contract should be considered as "consideration" under the Goods and Services Tax (GST) Act?

Order –

• The authorities observed that the meaning of the word consideration is very broad. It includes any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of the supply of goods or services or both.
• In the present case, the service provider is paying a certain amount to the applicant, and the amount so paid is neither ad-hoc, unconditional nor at the whims of any service provider nor the applicant.
• Therefore, the liquidated damages collected by the applicant from the service provider are considered as consideration under the GST Act.
• The circular relied upon by the applicant is not universal and absolute, and it is only meant to clarify the position of law and shall be applied reasonably having regard to the facts of the case.
• The circular had clearly mentioned that such payments, even though they may be referred to as fine or penalty, are payments that amount to consideration for supply and are subject to GST, in cases where such supply is taxable.
• Therefore, the liquidated damages collected by the applicant from the service provider are considered as consideration under the GST Act and are subject to GST.