In re Continental Engineering Corporation (GST AAR Telangana)
GST payable on amount received through Arbitration for work executed in pre-GST period
Telangana Authority for Advance Ruling has held that Goods and Services Tax (GST) would be payable on the amount received through Arbitration for work executed in the pre-GST period.
M/s. Continental Engineering Corporation (Applicant) had executed a works contract for M/s. Hyderabad Growth Corridor Ltd (HGCL). The work was completed in pre-GST era and the Applicant had raised certain claims under an Arbitration proceeding regarding compensation for delay in execution, payment of difference in rates and other contractual breaches. An arbitration award was passed on 09.05.2019 for Rs.169,58,22,197/- to be paid to the Applicant.
In the grounds submitted by the Applicant, they had contended that the works were completed in the Pre-GST regime and that only money was receivable after introduction of GST due to arbitration award. They have asserted that the receipt of money is not taxable under the provisions of GST laws as it doesn’t amount to supply of goods as money is excluded from the definition goods.
The Hon’ble AAR Telangana observed that as the amount received via the arbitration award would comprise a cost for the delays in performing contractual obligations, the amount shall fall within the meaning of consideration for tolerating an act or a situation arising out of the contractual obligation as given under entry 5(e) of Schedule II to the Central Goods and Services Tax Act, 2017 (“the CGST Act”). It was reiterated that the time of supply of the service of tolerance is the time when such determination takes place, which happened only by the arbitration award dated May 09, 2019. Therefore, the time of supply of this service as per Section 13 of the CGST Act is May 09, 2019. Accordingly, the amount received through Arbitration shall be taxable under the GST regime.
Earlier (before the Central Goods and Services (Amendment) Act, 2018) the same was dealt under Section 7(1)(d) of the CGST Act which included activities referred to in Schedule II to CGST Act, in the scope of supply. Paragraph 5 of Schedule II to the CGST Act provides a list of activities to be treated as either as ‘supply of goods’ or ‘supply of services’ wherein inter alia comprised Para 5– “(e) agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act”.
The Hon’ble Maharashtra AAR in the matter of Maharashtra State Power Generation Company Limited [Order No. GST-ARA- 15/2017-18/B-30, decided on May 8, 2018] held that GST at the rate of 18% would be payable on liquidated damages received by the Applicant for delayed supply under a contract and considered liquidated damages to be a consideration for agreeing to the obligation to tolerate an act or a situation, which is treated as a supply of service under Para 5(e) of Schedule II of the CGST Act.
Further, a similar view has been taken by the Hon’ble Gujarat AAR, in the matter of M/s. Dholera Industrial City Development Project Ltd. [Advance Ruling No. GUJ/GAAR/R/2019/06, decided on March 4, 2019] wherein it was held that Applicant is liable to collect GST on amount recovered from contractors on account of breach of conditions specified in the contract and the transaction shall be treated as supply of services. Moreover, as violation charges are payable by the contractors, the same are required to be treated as consideration. Therefore, the transaction is liable to GST.
However, vide Central Goods and Services (Amendment) Act, 2018, Section 7(1)(d) of the CGST Act was retrospectively omitted and a new sub-section i.e., Section 7(1A) of the CGST Act was inserted w.e.f. July 1, 2017. Consequently, all activities which were specified in Schedule II to the CGST Act would be only for determination of classification of transactions either as ‘supply of goods’ or supply of services’ but, it would be chargeable to GST only if such transaction qualify as a supply in terms of Section 7(1) of CGST Act.
In our view, the levy of GST on recovery of compensation/penalty/damages depends upon the “test of supply” i.e., one has to satisfy that recovery of compensation/penalty/damages in itself is a supply, then only GST could be levied on it in terms of the insertion of sub-clause (1A) in Section 7 of the CGST Act read with omission of sub-section (d) of Section 7(1) of the CGST Act (vide Central Goods and Services Tax (Amendment) Act, 2018 w.e.f. July 1, 2017).
The Schedule II of the CGST Act is confined to define as to what constitute supply of goods or supply of services and does not defines supply per se. Schedule II of the CGST Act has to be read along with Section 7 of the CGST Act, which means if an activity does not constitute a “supply” in itself as per Section 7(1) of the CGST Act, mere coverage of the same under the entry Schedule II ibid cannot make it liable to GST.
Further, there is no positive act of supply of services between the parties and there is no agreement between the parties to cause loss or damage by breaching terms and conditions of an agreement for a consideration. The expression ‘to tolerate an act’ relates to situations where a person commissions another person to do or commit a particular act for a consideration. The payment of cost for the delays in performing contractual obligations is a condition of contract and not a consideration for any service in the nature of forbearance or tolerating an act.
Entry 5(e) of Schedule II to the CGST Act:
“5(e): Agreeing to the obligation to refrain from an act, or tolerate an act, or a situation, or to do an act.”
FULL TEXT OF THE ORDER OF AUTHORITY OF ADVANCE RULING,TELANGANA
1. M/s. Continental Engineering Corporation, F.No. 102, 1st Floor, Boston Towers, Uppar pally, Rajendernagar, Rangareddy, Telangana, 500 048. (GSTIN No. 36AACCC6948C1ZQ) have filed an application in FORM GST ARA-01 under Section 97(1) of TGST Act, 2017 read with Rule 104 of CGST/TGST Rules,
2. At the outset, it is made clear that the provisions of both the CGST Act and the TGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the TGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, the expression ‘GST Act’ would be a common reference to both CGST Act and TGST Act.
3. It is observed that the query raised by the applicant falls within the ambit of Section 97(2)(e) of the GST ACT read with 20(xviii) of the IGST Act, 2017. The Applicant enclosed copies of challans as proof of payment of Rs. 5,000/for SGST and Rs. 5,000/- for CGST towards the fee for Advance Ruling. The Applicant has declared that the questions raised in the application have neither been decided by nor are pending before any authority under any provisions of the GST Act. The application is therefore, admitted.
4. Facts of the Case:
The applicant M/s. Continental Engineering Corporation has executed works contract for M/s. Hyderabad Growth Corridor Ltd (HGCL). The work was completed in pre-GST era and the applicant raised certain claims regarding compensation for delay in execution, payment of difference in rates and other contractual breaches which was referred to a dispute resolution board on 1606-2017. The applicant after notifying to contractee on 25.09.2017, approached an arbitration tribunal which initiated proceedings on 20.11.2017 and passed an order on 09.05.2019 for Rs.169,58,22,197/- to be paid to the applicant under following heads.
|NATURE OF CLAIM
|Compensation for delay in execution of the Works and Prolongation Costs
|Claim for release of wrongful deduction of Liquidated Damages
|Payment difference in rates for varied work of ‘Hard Rock Excavation with Controlled Blasting” plus applicable Price Adjustment 3 (Variation Order 9)
|Non-certification / non-payment of the work of providing and laying selected granular soil. behind reinforced earth structures including compacting completed as per Additional Technical pecification A-16 of Vol.2
|Non-payment for construction of Stone Pitching and Filter Media Works along the Chute Drains
|Non payment of the work of Backfilling of GSB Boulder and RCC M30 to improve soil stability 6 of RE Wall foundation
|Refund of Seigniorage recovered on use of earth
|Claim for payment of 18% Overhead and 10% profit on the additional works of Utility shifting
|Claim for payment of amount due towards Price Adjustment amounts based on WPI Series with Basic year 2004-2005
|Refund of amounts wrongfully deducted from various IPCs towards Labour Cess @ 1%.
|Refund of amount deducted against increase in VAT from 4% to 5% (under Subsequent Legislation, Clause 70.6 of COPA)
|Cost of Arbitration
|INTEREST ON DELAYED PAYMENT
|Interest on delayed payments against interim payment certificates (IPCs) by Employer
|Interest @ 10% on the sums To be becoming due from 01.02.2018 calculated at till the dateof publishing the Award
|Interest on the total amount payable @ 2% higher than the Bank rate of interest prevalent. on the date of the Award: from the date of publishing the award till the actual date of release of payment by the Respondent to the Claimant
5. Clarification Sought:
Based on the facts mentioned hereinafter, the applicant sought Advance Ruling on the following issues:-
a. Whether GST is applicable on the proposed receipt of money in case of Arbitration claims awarded for works contract completed in the Pre-GST regime?
b. If the answer to the above question is Yes then under what HSN Code and GST rate the liability is to be discharged by the applicant?
6. Grounds submitted & Personal Hearing:
The applicant M/s. Continental Engineering Corporation has filed an application for clarification before Authority for Advance Ruling on 24-08-2020 manually. After receipt of the application, the concerned Jurisdictional Authority i.e. Assistant Commissioner (ST), Rajendranagar-I Circle was asked to inform if any similar issue is pending before him that were raised by the applicant M/s. Continental Engineering Corporation. In the meanwhile due to the COVID-19 pandemic, personal hearings could not be issued. However, Government of India, CBIC have issued certain instructions on 21-08-2020 to takeup Personal Hearings through virtual method.
Hence, the Authority for Advance Ruling has decided to takeup personal hearings through virtual method. In the mean time, the Jurisdictional Authority was once again reminded on 25-11-2020 to submit the information whether any issued raises by applicant are pending before him.
However, the Jurisdictional Authority has submitted his reply on 03-02-2021 (through mail) duly informing that there were no such issues are pending that were raised by the applicant. Therefore, the application filed by M/s. Continental Engineering Corporation is admitted.
In the meanwhile the State member was retired on 31-01-2021 on superannuation. Government vide G.O.Rt No. 216, Revenue (CT-II) Department, dt. 16-06-2021 have nominated State member. Hence a personal Hearing notice was issued to the applicant on 01-07-2021 to appear for hearing before the Authority for Advance Ruling on 09-07-2021.
The authorized representatives Sri. Rajat Mohan, CA & Smt. Priyanka Sachdeva, CA reiterated their averments in the application submitted and contended as follows:-
1. That they are suppliers of works contract services and have executed the work prior to July, 2017. That in the course of execution of works certain claims related to work was denied by the employer. That against this they had arbitration with the employer and the arbitration was awarded to them in the GST regime.
2. That they seek clarification on the exigibility of the consideration receivable due to the arbitration award. That the receivables are for various services including amounts wrongfully deducted, seigniorage recovered, interest on delayed payment, non-certification and nonpayment of work done etc., enumerated in page no.14 of Annexure-2. They also seek the HSN code and rate applicable to the said service.
In the grounds submitted by the applicant they have contended that the works were completed in the Pre-GST regime and that only money was receivable after introduction of GST due to arbitration award. They have asserted that the receipt of money is not taxable under the provisions of CGST/ SGST as it doesn’t amount to supply of goods as money is excluded from the definition goods.
The applicant contended that where the contract for supply is made prior to introduction of GST but the goods/services are supplied on the appointed day or after the introduction of GST then CGST / SGST is payable under Section 142(10). And if a price revision is made after introduction of GST then tax is payable under CGST / SGST under Section 142(2)(a). However as the works were executed by the applicant are prior to the appointed day these provisions are not applicable to them. The applicant further contended that if tax was leviable under VAT or service tax on goods or services then CGST/ SGST cannot be levied as enumerated under Section 142(11). The applicant therefore concluded his arguments by asserting that the amount received on arbitration for execution of work in pre-GST period cannot be taxed under CGST / SGST Act.
The applicant relied on catena of case law to assert that receipt of money cannot be considered as taxable event as the entire work was completed in the Pre-GST regime and only money is receivable in the GST regime. These case laws include:-
i. Commissioner of C.Ex & Cus, Vadodara Vs. Schott Glass India Pvt. Ltd., 2009 (14) STR 146 (Guj).
ii. Sudesh Sharma Vs. Commissioner of Central Excise 2010 (19) STR 512 (Tri- Dl).
iii. Commissioner of Service Tax Vs. Consulting Engineering Services (I) P. Ltd., 2013 (30) STR 586.
iv. Vistar Construction (P) Ltd., Vs. Union of India (2013) 30 Taxman.Com 269 Delhi.
The applicant further stated that there is no man power and operation after the GST as seen from the financial statements.
7. Discussion & Findings:
We have considered the submissions made by the applicant in their application for advance ruling as well as the submissions made during the personal hearing by Sri. Rajat Mohan, CA & AR and Smt. Priyanka Sachdeva, CA & AR during the personal hearing. We also considered the issues involved on which advance ruling is sought by the applicant and relevant facts. At the outset, we would like to state that the provisions of both the CGST Act and the TGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the TGST Act.
The applicant sought clarification regarding exigibility of the money received in an arbitration regarding a contract executed by them prior to introduction of GST. The claims in arbitration when abstracted pertain to the following (6) categories.
|Unpaid Amounts for the work executed including escalation
|Difference in rate for excavation
|Unpaid amount for work – Laying of granule soil
|Unpaid amount for work – Laying of stone pitching
|Unpaid amount for work – back filling
|Payment of overhead on work
|Refund of excess deductions
|Wrongful deduction of liquidated damages
|Wrongful deduction of labour cess
|Wrongful deducted of VAT for increase in rate of tax from 4% to 5%
|Wrongful deduction of seigniorage
|Interest on bills
|Interest on delayed payment on interim payment certificates
|Cost of arbitration
|Compensation for delay in execution
|Interest on arbitration amount
|Interest on arbitration amount
The liability to tax under CGST/SGST Acts for works contracts is determined by the time of supply of services in Section 13 read with Section 31 i.e., the provisions pertaining to tax invoice. The time of supply of service according to Section 13(2) is the earliest of the date on which invoice is issued or date of provision of service or date of receipt of payment or date on which recipient shows the receipt of services in his books. As seen from the averments of the applicant the supply was made prior to introduction of GST. Therefore it is not covered by Section 13(2) of the CGST/SGST Acts. Hence the amounts claimed pertaining to the works executed earlier to introduction of GST are not taxable under CGST/SGST Acts.
The refund of excess deductions both statutory and non-statutory made against the bills raised for the works completed in pre-GST period do not constitute consideration for supplies made under GST period. Therefore these amounts are not taxable under CGST/SGST Acts.
As seen from the averments of the applicant the interest is claimed on delayed payments on the works executed and payment certificates received in pre-GST period. In light of Section 13(2) of the CSGT Act the time of supply is not in GST period, hence these amounts are not liable to tax under CGST/SGST Acts.
The consideration received by arbitral tribunal is taxable on reverse charge basis under CGST & SGST Act @9% each. The service tariff code is 998215.
In the present case, Arbitration as service was supplied independently after the introduction of GST i.e., the tribunal was constituted conclusively on 20.11.2017 and rendered its orders on 09.05.2019 and therefore this supply is liable to tax on reverse charge basis under GST.
These damages are claimed by the applicant from the contractee due to the delays in making available possession of site, drawings & other schedules by the contractee beyond the milestones fixed for completion of project. These damages are consideration for tolerating an act or a situation arising out of the contractual obligation. The entry in 5(e) of Schedule II to the CGST Act classifies this act of forbearance as follows:
5(e): Agreeing to the obligation to refrain from an act, or tolerate an act, or a situation, or to do an act.
Further Section 2(31)(b) of the CGST Act mentions that consideration in relation to the supply of goods or services or both includes the monetary value of an act of forbearance. Therefore such a toleration of an act or a situation under an agreement constitutes supply of service and the consideration or monetary value is exigible to tax.
The arbitration award speaks of many clauses in the agreement regarding certain milestones to be met and the cost to be paid to the applicant wherever such cost need to be paid according to the estimation made by the contractee.
As per the issues mentioned in the arbitration award, clauses 6.4 and 42.2 of the General Conditions of Contract (GCC) specifically state that in case of any delay in issuance of drawings or failure to give possession of site the engineer shall determine the extension of time and amount of cost that the contractor may suffer due to such delays in consultation with the employer and the contractor. Therefore the time of supply of the service of tolerance is the time when such determination takes place. However, the contractee/employer has not determined the cost of delay prior to arbitration award. It was determined only by arbitration award on 09.05.2019. Therefore the time of supply of this service as per Section 13 of the CGST Act is 09.05.2019. The Consideration received for such forbearace is taxable under CGST and SGST @9% Each under the chapter head 9997 at serial no. 35 of Notification No. 11/2017- Central/State tax rate
The applicant is claiming interest on the amounts determined by the arbitrary tribunal under various heads. Under Section 15(2)(d) of the CGST/SGST Acts interest for delayed payment against a supply is consideration which is taxable under CGST/SGST Acts. Therefore the interest on amounts exigible to tax under CGST/SGST forms part of value of taxable supply.
8. In view of the observations stated above, the following ruling is issued :
|Advance Ruling Issued
|a. Whether GST is applicable on the proposed receipt of money in case of Arbitration claims awarded for works contract completed in the Pre-GST regime?
|1. GST is applicable as enumerated above under each head
|b. If the answer to the above question is Yes then under what HSN Code and GST rate the liability is to be discharged by the applicant?
|2. HSN codes as enumerated above where GST is leviable.
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