In re Rashtriya Ispat Nigam Ltd (GST AAR Andhra Pradesh)
1) Whether ‘Liquidated Damages’ and other penalties like milestone penalties levied on suppliers/ contractors in the nature of making good the damages for any delays in supply of service or goods in the following cases are exigible to GST or not?
(a) Supply and maintenance contracts
(b) Project construction contracts
In terms of the aforesaid contract agreement, GST would be applicable on the Liquidated Damages.
2) If GST is applicable, the following may kindly be clarified
(a) Whether the GST on Liquidated Damages, and other penalties is covered under Schedule II entry No. 5(2)(e) vide HSN code 9997 – Other services, for which the rate at 18% is relevant or any other entry is applicable?
In terms of the aforesaid agreement, schedule entry No.35 of the Notification No.11/2017 -Central/State Tax (Rate) [as amended from time to time] for taxable services would cover the impugned levy of liquidated damages.
(b) Liquidated damages are determined and imposed upon the contractor after in-depth study. In such case, what would be the time of supply? Will it be the period in which delay has occurred or it is the time when decision is taken or at the time when accounting entry for recovery is passed?
In terms of the aforesaid agreement, the clauses reveal that the levy of liquidated damages is , not when the delay is occurring but the liability of payment of these liquidated damages by the contractor will be established once the delay in successful execution of work is established on the part of the Contractor. This would define the time of supply.
(c) When some part of the delay in supply has occurred before the implementation of the GST and some part of delay in supply has occurred after GST came into force, whether GST will be applicable to the Liquidated damages imposed for entire period of delay or it would be applicable only to the period falling after introduction of GST?
Sub-section (1) of section 13 of the GST Act provides that the liability to pay tax on services shall arise at the time of supply. In view thereof, as discussed in the answer to the Q.2(b), the agreement clauses would have to be referred to. Since no precise facts are before us, the section 14 of the GST Act would have to be referred to by the applicant.
FULL TEXT OF ORDER OF AUTHORITY OF ADVANCE RULING, ANDHRA PRADESH
ORDER
(Under sub-section (4) of Section 98 of Central Goods and Services Tax Act, 2017 and sub- section (4) of Section 98 of Andhra Pradesh Goods and Services Tax Act, 2017)
1. The present application has been filed U/s 97 of the Central Goods & Services Tax Act, 2017 and AP Goods & Services Tax Act, 2017 (hereinafter referred to CGST Act and APGST Act respectively) by RASHTRIYA ISPAT NIGAM LTD, registered under the Goods & Services Tax.
2. The provisions of the CGST Act and APGST Act are identical, except for certain provisions. Therefore, unless a specific mention of the dissimilar provision is made, a reference to the CGST Act would also mean a reference to the same provision under the APGST Act.
3. Brief Facts of the case:
M/S RASHTRIYA ISPAT NIGAM LTD, hereinafter referred to as the applicant, is a Central Public Sector Undertaking under the Ministry of Steel with Navaratna Status. They have an integrated steel plant at Visakhapatnam, Andhra Pradesh, and are in the business of manufacture and selling of steel products. The steel plant consists of many sub plants, like Coke Oven battery, Raw material Handling Plant, Sinter Plant, Blast Furnace, Steel Melting Shops, Rolling Mills and other units and each sub plant itself is a big unit or plant and the final steel product undergoes all the process through various sub plants. Initially the plant was installed with 3 million tons capacity. The plant is further taken up for expansion to 7.3 million tons capacity. Apart from procuring raw materials like iron ore, coking coal, boiler coal, ferro alloys in huge quantities, it also procures spare parts and machinery parts in huge quantities for maintenance of its plant(s).
In various contracts entered into by the company, there is a clause to deduct Liquidated damages (LD) in case of default by the contractor/ vendor to complete the work/supply in time. The LD is deducted in two types of cases.
Type 1: Operation & maintenance activities:
In the normal course of business of steel manufacture and sale/ distribution of its products, RINL enters in to various contracts with vendors for providing materials and services for operational activities. In this case, if there is any delay on the part of the supplier/contractor to provide materials/ services, Liquidated damages (LD) are deducted from the amount payable to such vendor. The LD so deducted is treated as other miscellaneous income. (A copy of the contract for material supply containing the LD clause is submitted at Annexure-I as a sample copy)
Type 2: Construction of new plant in expansion project or renovation of old plant
In this type of contracts, normally the contract is awarded to vendors to build the sub plant or a part of it on Turnkey basis. Normally the contracts are awarded in two parts. One for designing, manufacture and supply of machinery and another for storage, erection & commissioning. As per the terms and conditions the period of completing the contract is fixed. When plant construction is completed, the actual time taken for completion of contract would be calculated. If there is any delay in completing the contract, the factual position would be ascertained, particularly to know the fact whether the contractor/vendor is responsible for the delay or not. If the delay is on account of the contractor, then Liquidated Damages would be calculated as per the contractual terms and same will be charged from the contractor.
Further, in the case of turnkey contracts the execution of work is monitored by dividing the stages of execution as reaching various milestones. If the execution of work is not as per the targets or milestones, achievements fixed, penalties also would be levied as milestone penalties before completing delay analysis. However, in the interim, the amounts equivalent to LD & milestone penalties are withheld from the bills.
In accounting, LD / milestone penalties imposed are treated as other miscellaneous income. This would be taking place after completion of delay analysis.
A copy of the turnkey contract for “Design, Engineering and Supply of all equipment including commission spares and Insurance Spares for Indoor LBDS, HVLC and Interplant Cabling” is submitted as Annexure-ll as sample copy, for information.
