In re Maharashtra State Electricity Transmission Company Ltd. (GST AAR Maharashtra)
Maharashtra State Electricity Transmission Company Limited (MSETCL), a prominent state transmission utility and a wholly-owned entity of the Maharashtra Government, has received a ruling from the Authority for Advance Ruling (AAR) that several of its revenue streams, typically categorized as penalties or forfeited amounts, do not attract Goods and Services Tax (GST).
MSETCL, primarily engaged in the transmission of electricity—an activity exempt from GST under Notification No. 12/2017-CT (R), SI. No. 25—sought clarity on the GST implications of various financial recoveries from its contractors and suppliers, as well as accounting adjustments.
The AAR’s decision, issued on April 28, 2025, addresses key questions posed by MSETCL, aligning with a recent circular from the Central Board of Indirect Taxes and Customs (CBIC) that clarifies the taxability of such receipts.
Liquidated Damages and Penalties: Not a Supply
MSETCL regularly levies liquidated damages (LD) and penalties from contractors and suppliers for breaches of contract, including delays in completing work on EHV substations and lines. Similar penalties are imposed on “Deposit Works/Outright Contribution (ORC) Works” undertaken for government and semi-government entities (e.g., Central Railway, NHSRCL, PWD, NHAI, CIDCO) for specific requirements like shifting transmission towers.
The AAR referenced Circular No. 178/10/2022-GST dated August 3, 2022, which states that liquidated damages are compensation for loss or damage due to contract breach, not consideration for a supply. The circular emphasizes that such payments are a mere flow of money and do not imply an agreement by the aggrieved party to tolerate an act or refrain from doing anything in return for the payment.
The AAR observed that MSETCL’s objective in imposing these penalties is to ensure timely service delivery, not to enter into a separate agreement for tolerating the breach. Therefore, these recoveries are not considered a “supply of service” under GST law. This ruling supersedes earlier advance ruling orders, including one concerning MAHAGENCO, as the circular reflects the current understanding of the issue.
Forfeiture of Security and Earnest Money Deposits: No Taxable Event
MSETCL also forfeits Earnest Money Deposits (EMD) and Security Deposits (SD) in instances where a bidder, despite being the lowest (L1), refuses to accept a work order or a supplier/contractor fails to perform.
Consistent with Circular No. 178/10/2022-GST, the AAR held that the forfeiture of these deposits is primarily to discourage non-serious bidders or contractors and to compensate for losses incurred due to non-compliance. These amounts are not collected as consideration for tolerating a breach but rather as a penalty to deter such actions. Consequently, such forfeitures do not constitute a taxable supply under GST.
Accounting Write-Backs: Beyond GST Scope
MSETCL’s practice of writing back old and unclaimed creditors’ balances to its income account after three years from contract completion, and similarly writing back old and unclaimed EMD/Security Deposit balances after three years from the completion of the guarantee period, was also examined.
The AAR concluded that these write-backs are purely accounting entries and do not involve the provision or receipt of any services by MSETCL. The absence of a “supply” element, specifically the lack of consideration for any service rendered, means these transactions fall outside the purview of GST.
Penalties for Contract Violations: Not Taxable Supply
Finally, MSETCL’s imposition of penalties or charges for general violations of contract terms and conditions was addressed. The AAR reiterated the principles outlined in paragraphs 4 to 7 of Circular No. 178/10/2022-GST.
The circular clarifies that for a payment to be considered a “supply,” there must be an express or implied contractual relationship where one party agrees to do or abstain from doing something in exchange for consideration. Payments like liquidated damages or penalties for breach are considered deterrents or compensation for non-performance, not consideration for an agreement to tolerate the breach. The AAR determined that MSETCL’s recovery of such penalties for contract violations is not consideration for a taxable supply.
Conclusion on “Supply” Status
In light of these findings, the AAR answered in the negative to all questions regarding whether these activities constitute a “supply” under GST. As a result, the subsequent questions concerning the time of supply, HSN/SAC codes, GST rates, and the utilization of Input Tax Credit (ITC) were deemed irrelevant and left unanswered.
This ruling provides significant clarity for MSETCL, affirming that various financial recoveries and accounting adjustments are not subject to GST, thereby potentially reducing its compliance burden and tax liability.
FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, MAHARASHTRA
