Taxmann’s Webinar | Recent Issues of Classification and Taxability under GST

Recent Issues of Classification and Taxability under GST ________________________________________________________________________________________________________

TATTVAM Advisors TAXMANN Research and Advisory (Indirect Tax) Team October 22, 2021

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Table of Content • Taxability of Corporate Guarantee • Classification of Carbonated Fruit Juice-based Drinks • Taxability of Ice Creams Parlours in India • Taxability of Solar Power Project

• GST on Liquidated Damages

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1. GST Implications on Corporate Guarantee

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Case Study on Corporate Guarantee Guarantee for Loan

Loan

Company B

Company A

Bank

• Case Study 1 : Company A and Company B are not related party • Case Study 2 : Company A is parent company of Company B 5

Contract of Guarantee Section 126 of Indian Contract Act, 1872

Parties

Consideration

Liability

Right to suit

Guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default.

There are three parties to the contract i.e. surety, principal debtor and creditor Anything done or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee

Liability of surety is secondary and the primary liability is on the debtor Surety has the right to file suit against the Principal Debtor upon discharge of debt or duty.

E.g. A advances a loan of Rs. 1 crore to B and C

promises to A that if B does not repay the loan , C will repay it on his behalf

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Tattvam Advisors Copyright

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Corporate Guarantee vs Bank Guarantee Corporate Guarantee •

Corporate Guarantee is a guarantee in which any corporation agrees to be responsible for the financial obligations of, or the performance of, contractual obligations by the principal debtor to

the creditor, in the event the principal debtor fails to

Bank Guarantee

discharge his obligation to the Creditor.

•

It is not secured by or tied to any specific asset of the surety.

• In Bank Guarantee, bank assures the third party that in event of any non-performance by the bank’s customer, the bank will honor the claim against the guarantee.

• Banks run risk assessments to ensure that the guaranteed sum can be retrieved, and bank may also require a security in the shape of cash or capital assets.

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GST Legal Provisions  Section 7 of the CGST Act, 2017, defines the term supply and it

includes all form of supply of goods or services or both made or agreed to be made for a consideration in the course or

Section 9 : GST is to be levied on all supply of goods or services or both except for supply of alcoholic liquor for human consumption

furtherance of business

 Includes import of services for a consideration whether or not in the course or furtherance of business  The activities as specified in Schedule I shall be treated as supply even if made without consideration  Activities or transactions specified in Schedule III shall be

Schedule 1 Clause 2 : Supply of goods or services or both between related persons or distinct persons when made in course or furtherance of business

Related Person (Explanation to Section 15) • Any person directly or indirectly owns, control or holds 25% or more shares • Directly or indirectly controlled by a third person • Together, directly or indirectly, control a third person

treated neither as supply of goods nor services 8

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Can Corporate Guarantee be considered as supply of services?

Whether provisions of TP be applicable on corporate guarantee given by Parent Company located outside India?

Income Tax Act

Jurisprudence

Services provided by Central or State Government to any business entity including PSU by way of guaranteeing the loan taken from financial institution against consideration shall be taxable

Micro Ink vs ACIT The guarantee were prima facie in the nature of shareholder activity as it was to provide, or compensate for lack of core strength or raising finances.

Circular 34/8/2018 GST

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Can Corporate Guarantee be considered as supply of services?

Mikro Ink Limited vs ACIT Taxability of Corporate guarantees have been a subject of dispute in the Income Tax Act, 1962 under the Transfer pricing provisions enumerated in Chapter X. It needs to be determined if commission received/paid for corporate guarantees comes under the scope of international transaction under section 92B. The Court in Micro link concurring with the view of the OECD Guidance categorically held that corporate guarantees are in the nature of quasi capital and shareholder activities to provide or compensate for the lack of core strength of raising finances from the banks and cannot be construed to be in nature of provision of service

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Discussion Point

Corporate Guarantee – Supply of Services?

• Can an argument can be taken under GST that issuance of corporate guarantee to related parties without consideration does not qualify as supply of services since Corporate guarantee is entirely entrepreneurial in the sense and it is issued for maximization of gains for the recipient entity and thus the group as a Whole?

• A guarantor does not arrange financing for the debtor, but merely executes a financial instrument in its favour. These guarantees do not cost anything to the guarantors 11

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Can Corporate Guarantee be considered as actionable claim?

S.III Clause 6. Actionable claims, other than lottery, betting and gambling shall neither be considered as supply of goods nor services 

Section 2(1) of the CGST Act: 



“actionable claim” shall have the same meaning as assigned to it in section 3 of the Transfer of Property Act, 1882;

Section 3 of the Transfer of Property Act: 

“actionable claim” means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property,



Or



to any beneficial interest in movable property not in possession, either actual or constructive, of the claimant, which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existing, accruing, conditional or contingent.

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Can Corporate Guarantee be considered as actionable claim? – Relevant Jurisprudence Sunrise Associates vs Govt of NCT of Delhi - [2006] 4 STT 105 (SC) M/s Yasha Overseas vs Commissioner of Sales Tax - [2008] 2008 taxmann.com 1747 (SC) Vikas Sales Corporation vs Comm. Of Commercial Tax - 1996 taxmann.com 1126 (SC)

Varjivandas v Maganlal

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Valuation of supply between related persons If value is not determinable under clause (a) or clause (b), be the value as determined by the application of rule 30 or rule 31, in that order. be the Open Market Value of the supply.

if the open market value is not available, be the value of supply of goods or services of like kind and quality

First proviso: Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person Second proviso: Provided further that where the recipient is eligible to full ITC, the value declared in the invoice shall be deemed to be the Open market value of the goods or services.

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Valuation of Corporate Guarantee Corporate Guarantee not similar to Bank Guarantee 01

Bombay High Court in the case of CIT vs Everest Kanto Cylinders Ltd held that the bank guarantees are different from Corporate Guarantee and therefore value cannot be compared with commission rate of banks

Valuation of Corporate

Safe Harbor Rules 02

In case of corporate guarantee provided to wholly owned subsidiary, commission or fees shall be 1% p.a

Guarantee

on the amount guaranteed

Tattvam Comments 03

In order to avoid any dispute, company shall take the services of registered valuer for arriving at the value of corporate guarantee.

Further, apart from safe harbor rules, other methods can be used like Interest Yield Approach, Loss Given Default Approach, Credit Default Swap Approach etc.

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2. Classification of Carbonated Fruit Juice-based Drinks

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Position prior to amendment

Schedule

S. No.

Tariff Item

Description

II

48

2202 99 20

III

24A

2202 91 00 2202 99 90

Other non-alcoholic beverages [other than tender coconut water]

2202 10

All goods [including aerated waters], containing added sugar or other sweetening matter or flavoured

IV

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Fruit pulp or fruit juice based drinks

Rate 12%

18%

28%

Coverage Non aerated drink Fruit content > 10% (5% in case of lemon) Non aerated drink Fruit content >5% (2.5% in case of lemon) but < 10% (5% in case of lemon) Aerated drinks Fruit content < 5 % (2.5% in case of lemon)

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Position post amendment w.e.f. 01.10.2021 Schedule

S. No.

Tariff Item

II

48

2202 99 20

24A

2202 91 00 2202 99 90

Other non-alcoholic beverages [other than tender coconut water]

2202 10

All goods [including aerated waters], containing added sugar or other sweetening matter or flavoured

III

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IV

2202* 12B

Description

Fruit pulp or fruit juice based drinks

Carbonated Beverages of Fruit Drink or Carbonated Beverages with Fruit Juice

Rate

Coverage

12%

Fruit content > 10% (5% in case of lemon)

18%

Fruit content >5% (2.5% in case of lemon) but < 10% (5% in case of lemon) Aerated drinks

28%

Fruit content <5 % (2.5% in case of lemon) Fruit content >5% (2.5% in case of lemon) but < 10% (5% in case of lemon)

* Similar entry inserted in Compensation Cess Notification vide Notification No. 1/2021-CC dated 30.9.2021 18

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Press Release of 45th GST Council Meeting GST Council vide the Press Release dated 17.09.2021, had clarified that “Carbonated Fruit Beverages of (sic) Fruit Drink" and "Carbonated Beverages with Fruit Juice" will attract GST rate of 28% and Cess of 12% Further it was stated that the same will be specifically prescribed in the GST rate schedule, i.e. Notification No. 1/2017-CT (Rate) The relevant extract of the same is reproduced below for the purpose of ready reference: “G. Clarification in relation to GST rate on Goods …

5. Carbonated Fruit Beverages of Fruit Drink" and "Carbonated Beverages with Fruit Juice" attract GST rate of 28% and Cess of 12%. This is being prescribed specifically in the GST rate schedule.”

Points to ponder

 Whether the above change is clarificatory or introduction of new entry?  Whether the above change is prospective or retrospective in nature?

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Possible Criteria for Classification

1

Composition of drink

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FSSAI Regulations

3

Common Parlance Test

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Tattvam Advisors Copyright

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Classification of drinks under FSSAI Regulations Food Safety and Standards (Food Products Standards and Food Additives) Regulations, 2011

Regulation

Classification

Fruit Juice content

2.3.10

Thermally Processed Fruit Beverages / Fruit Drink/ Ready to Serve Fruit Beverages

Not less than 10% fruit juice content (5% in case of lime/lemon juice)

2.3.30

Carbonated Fruit Beverages or Fruit Drinks

Not less than 10% fruit juice content (5% in case of lime/lemon juice)

2.3.30 (3A)

Carbonated Beverages with Fruit Juice

Below 10% but not less than 5% (2.5% in case of lime/lemon juice)

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Carbon Di Oxide- Additive or Base product Regulation 2.3.10 and Regulation 2.3.30- the products may contain food additives permitted in FSSAI regulations including Appendix A. GMP Table provisions for all food categories given in FSSAI regulations provides the list of additives that may be used in all food categories. In the list the following has been added:

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Carbon Dioxide

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Jurisprudence- FSSAI Test applied Parle Agro (P) Ltd. – [2017] 81 taxmann.com 194 (SC)

 ‘Appy Fizz’ containing more than 10% fruit juice and 0.6% carbon dioxide for preservation purpose was classified as a ‘Fruit juice based drink’. This product was classified as “Thermally Processed Fruit Juice Based Drink” under FSSAI.

 Supportive legislation test - FSSAI “55. bhat is the process for manufacture in accordance with the Food Safety and Standards Act, 2011 and the Regulations framed therein and what is the nature and characteristic of the product which has been licensed to be manufactured to the appellant cannot be said to be an irrelevant factor while examining the nature and contents of the product. Whether the product is an aerated branded soft drink or can be covered by residuary of Item 5 of Entry 71 is a question on which the manufacture licence, orders issued by Food Safety and Standards Authority of India were relevant facts We, thus, are of the opinion that the manufacture licence dated 19th August, 2015 granted to appellant and the opinion of the Government of India, Ministry of Food Processing Industries dated 28-3-2005 were relevant for finding the nature of the product of the appellant for the purpose of classification and the Committee of Joint Commissioners as well as High Court erred in not adverting to and considering the aforesaid material.”

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Jurisprudence- FSSAI Test applied Brindavan Beverages Pvt. Ltd.- [2020] 113 taxmann.com 178 (Allahabad - CESTAT) (LB)

 “Minute Maid Nimbu Fresh”, 7UP - ”Nimbooz Masala Soda” or 7UP - ”Nimbooz”, combination of carbonated and non carbonated beverages under FSSAI and containing more than 5% of lemon juice were classified under Tariff Item 2202 90 20 of Central Excise Tariff as fruit pulp or fruit juice based drinks.  Supporting legislation test- FSSAI. “The fruit juice content of lime or lemon juice in MMNF, Nimbu Masala Soda or Nimbooz has been indicated to be not less than 5% and the Total Soluble solids is also not less than 10%. All the three products namely MMNF, Nimbu Masala Soda and Nimbooz, satisfy the requirements of Regulation 2.3.10 or Regulation 2.3.30. These products, therefore, would classify under Tariff Item no. 2202 90 20 as fruit juice based drinks.”

Anutham Exim Private Limited- [2021] 131 taxmann.com 30  Carbonated fruit drinks such as Big Cola, Big Orange Cola, Big-lemon etc. containing more than 5% fruit juice (2.5% in the case of lime/lemon) were classified under Tariff Item 2202 9920 as fruit pulp or fruit juice based drink. These drinks are sold in the market as “Carbonated Beverages with fruit Drinks”  Tribunal’s view on FSSAI classification: In our considered view, a decision on this could be made by examining how they are being sold. They are being sold as “Carbonated beverages with fruit juice’- neither as fruit juice based drinks nor as carbonated beverages although the fruit juice content is only 5% (or 2.5% in case of lime). This gives the products their unique characteristic distinct from both carbonated beverages and fruit juices. The FSSAI regulation (2.3.30 clause 3A) also conceives of such a category of products in the market. Thus, they form a separate specie of products known to the market and are recognised as such by FSSAI.” 24

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Applicability of Common Parlance Test

In CCE vs. Wockhardt Life Sciences Ltd. reported at

In Brindavan Beverages Pvt. Ltd.- [2020] 113 taxmann.com 178 (Allahabad - CESTAT) (LB)

[2012] 28 taxmann.com 431 (SC)

SC observed as follows: There is no fixed test for classification of a taxable commodity. This is probably the reason why the ‘common parlance test’ or the commercial usage test’ are the most common. Whether a particular article will fall within a particular Tariff heading or not has to be decided on the bases of the tangible material or evidence to determine how such as article in understood in ‘common parlance’ or in ‘commercial world’ or in ‘trade circle’ or in its popular sense meaning.

Tribunal relied upon common parlance test for the classification of beverages

In CCE v. Connaught Plaza Restaurant (P) Ltd., [2014] 52 taxmann.com 531 (SC) SC observed as given below: “15 … it is also a well known principle that in the absence of any statutory definitions, excisable goods mentioned in tariff entries are construed according to the common parlance understanding of such goods.”

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Applicability of Common Parlance Test

In Naturalle Health vs. Collector reported at [2003] 2003 taxmann.com 340 (SC) the perception of consumer and practitioner has been held to be an important criteria. The SC observed as follows:: “..39. We are also of the opinion that when there is no definition of any kind in the relevant taxing statute, the articles enumerated in the tariff schedules must be construed as far as possible in their ordinary or popular sense, that is, how the common man and persons dealing with it understand it. If the customers and the practitioners in Ayurvedic medicine, the dealers and the licensing officials treat the products in question as Ayurvedic medicines and not as Allopathic medicines, that fact gives an indication that they are exclusively ayurvedic medicines or that they are used in Ayurvedic system of medicine, though it is a patented medicine.”

In CCE vs. Sharma Chemical Works reported at [2003] 2003 taxmann.com 1240 (SC)

the Apex Court held that: “the main criteria for determining classification is the use it is put to by the customers who use it.”

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Scenarios – Illustrative Specifications

CASE-1

CASE-2

CASE-3

CASE-4

Fruit Juice Content

Lemon Juice: 7% or Other Fruit Content: 15%

Lemon Juice: 7% or Other Fruit Content: 15%

Lemon Juice: 7% or Other Fruit Content: 15%

Lemon Juice: 7% or Other Fruit Content: 15%

Carbon Dioxide

Yes

As additive

Yes

As additive

Common Parlance

Marketed as carbonated drink/Fizz drink

Not marketed as carbonated drink/Fizz drink

Marketed as carbonated drink

Not marketed as carbonated drink

FSSAI Regulations

2.3.10: Thermally Processed Fruit Beverages / Fruit Drink/ Ready to Serve Fruit Beverages

2.3.10: Thermally Processed Fruit Beverages / Fruit Drink/ Ready to Serve Fruit Beverages

2.3.30: Carbonated Fruit Beverages or Fruit Drinks

2.3.30: Carbonated Fruit Beverages or Fruit Drinks

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Key Takeaways Ingredients- Fruit content, Carbon di oxide 1

Manufacturing process adopted 2

Change in FSSAI category 3 4

Applicable GST Rate

Fate of Past litigation?

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3. Taxability of Supply by ICE Cream Parlours

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Clarification on supply by Ice Cream Parlours CBIC vide its Circular No. 164 /20 /2021-GST, dated 6th October 2021 clarified that supply of ice cream by ice cream parlors will be taxable @18% • Ice cream parlors sell already manufactured ice- cream and they do not have a character of a restaurant

Retrospective or prospective

• Ice-cream parlors do not engage in any form of cooking at any stage, whereas, restaurant service involves the aspect of cooking/preparing during the course of providing service • Supply of ice-cream parlor stands on a different footing than restaurant service • Their activity entails supply of ice cream as goods (a manufactured item)

and not as a service, even if certain ingredients of service are present 30

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GST on Restaurant Service Entry No. 6 (b) of the Schedule II to the CGST Act, 2017

Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration to be treated as service

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GST on Ice Cream Parlours Ice cream parlours only selling ice creams (take away facility)

18%

Ice cream parlours selling ice creams and providing seating, entertainment and other catering services 5% or 18%?

Ice cream parlours opened in food courts with common seating facilities

Sri Venkateshwara Agencies [2020] 117 taxmann.com 214 (AAR- TELANGANA) held that parlour would fall within the term 'eating joint' and the supply of ice cream alongwith the service activities by the applicant therein squarely falls under the aforesaid definition of 'restaurant service'.

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Advance Rulings ARIHANT ENTERPRISES- [2019] 104 taxmann.com 230 (AAR - MAHARASHTRA) Supply of ice-cream by the applicant from its retail outlets involves transfer of title in ice creams from

Rule 147 (6)

the applicant to their customers and therefore as per entry no.1(a) of the Schedule II of the CGST Act, the subject transaction is nothing but a supply of goods - the supply of ice-cream by the applicant from its retail outlets would be treated as supply of "goods"

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Advance Rulings HATSUN AGRO PRODUCT LTD- [2019] 110

PIONEER BAKERS- [2021] 127 taxmann.com 22

taxmann.com 287 (AAR - KARNATAKA)

(AAR-ODISHA)

Ice creams, chocolates, ice cream cakes and pizza cakes made as per the orders of the customers and served in

IBACO outlet qualifies as composite supply under section 2(30) of the CGST Act and section2(30) of the Karnataka Goods and Services Tax Act,2017

The said composite supply shall be deemed to be a supply of

service as per the entry 6(b) of Schedule II to the CGST Act

Such supplies are classified under chapter "9963" as restaurant service and chargeable to tax at a rate of 5%

Supply of ice cream which are made to order involve both supplies of goods and services, with one of them as principal supply i.e. supply of goods which are naturally bundled and supplied in conjunction with each other

Rule 147 (6) Such supplies have to be considered as a composite supply under Section 2(30) of the CGST Act - the composite supply of goods being food or any other article for human consumption or any drink, where supply or service is for a consideration, then such composite supply shall be treated as a supply of services Since the applicant is supplying ice creams, cakes and other eatables, which are items for human consumption, by way of or as part of any service or in any other manner, the composite supply has to be treated as a supply of services, more specifically the 'Restaurant Service’ taxable @5%

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4. Taxability of Solar Power Projects

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Supply Chain Background

Raw material (PV Cells, etc.)

EPC Contractor

Project Developers (SPD)

DISCOMS

Responsible for supplying end-to-end Solar Power Generating System (SPGS) to SPDs

Supply of Power – Exempt under GST

Supply of power Exempt under GST

SubContractors Supply of electricity Exempt under GST

Customers

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Tax Structure – Pre - GST Regime Sl. No.

Relevant Tax/Duty

Applicable Tax Rates

1.

VAT

•

Generally no VAT on solar power products, etc.

2.

Excise Duty (ED)

•

Machinery, etc. for initial setting up of solar power generation project exempted from ED

•

No ED on supply of SPGS being Immovable

3.

Service Tax (ST)

•

ST on was levied on 40% value of total amount charged for works contract

4.

Customs

•

Machinery, etc. imported for initial setting up of solar power generation project exempted from whole of Additional Customs Duty; and BCD levied at the rate of 5%

•

Solar cells exempted from whole of BCD

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Tax Structure under GST Regime July 1, 2017

GST introduced GST Rate on specified Goods – 5% GST rate on Services – 18%

Sl. No.

Description

Notification Number

HSN/SAC

1.

Following renewable energy devices & parts for their manufacture (a) Bio-gas plant (b) Solar power based devices (c) Solar power generating system (d) Wind mills, Wind Operated Electricity Generator (WOEG) (e) Waste to energy plants / devices (f) Solar lantern / solar lamp (g) Ocean waves/tidal waves energy devices/plants

Notification No.1/2017Central Tax (Rate), Dated June 28, 2017

84, 85 or 94

Schedule I - Sl. No. 234

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Tax Structure under GST Regime July 1, 2017

GST introduced GST Rate on specified Goods – 5% GST rate on Services – 18%

Sl. No.

Nature of Supply

Approx. Portion

Rate of Tax

Effective Rate of Tax

1.

Goods (PV Modules etc.)

90%

5%

4.50%

2.

Services (Commissioning, Installation, etc.)

10%

18%

1.80%

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Tax Structure under GST Regime January 1, 2019

Explanation inserted in Rate Notifications of Goods and Services To thethe entire contract Tobifurcate bifurcate entire contract value into goods and services in thein the value into goods and services ratio of 70:30 ratio of 70:30 Sl. No.

Nature of Supply

Approx. Portion

Rate of Tax

1.

Goods (PV Modules etc.)

70%

5%

3.50%

2.

Services (Commissioning, Installation, etc.)

30%

18%

5.40%

Effective Rate of Tax

Effective Rate of Tax

8.90%

* Refer Sl. No. 234 of Schedule I of Notification No. 1/2017 - Central Tax (Rate), Dated June 28, 2017 and Sl. No. 38 of Notification No. 11/2017 – Central Tax (Rate), Dated June 28, 2017

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Tax Structure under GST Regime October 1, 2021

Increase in GST rates by amending# Rate Rate Notifications of power Goods Tax on Solar generating system increased from 5% to 12% Sl. No.

Nature of Supply

Approx. Portion

Rate of Tax

1.

Goods (PV Modules etc.)

70%

12%

8.40%

2.

Services (Commissioning, Installation, etc.)

30%

18%

5.40%

Revised Effective Rate of Tax

Effective Rate of Tax

13.80%

#

Refer Notification No. 08/2021-Central Tax (Rate), Dated September 30, 2021

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Explanation applicability July 17 - Dec 18 July 1, 2017

January 1, 2019

GST introduced GST Rate on specified Goods – 5% GST rate on Services – 18%

Explanation inserted in Rate Notifications of Goods and Services To thethe entire contract Tobifurcate bifurcate entire contract value into goods and services in thein the value into goods and services ratio of 70:30 ratio of 70:30

CBIC clarified@ 70:30 ratio would also apply from July 1, 2017 CBIC Clarification also provides that no refunds will be granted if GST already paid is more than the amount determined using the explanation – VALIDITY? @

Refer Circular No. 163/19/2021-GST, Dated October 6, 2021

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Situation before Jan 1, 2019 January 1, 2019

July 1, 2017

GST Advance Rulings^ Held that tax is liable to be paid at higher rate

V/S

Developers and EPC Contractors were considering to pay tax at lower rates

Lower rate of tax 18% Considering solar power generating system as immovable property – Held subject supply as works contract

Goods portion Devices & parts for the manufacture of SPGS and other goods, generally constitutes 90% of whole supply value

Service portion generally constitutes 10% of whole supply value

^ Refer Fermi Solar Farms (P.) Ltd., In re [2018] 93 taxmann.com 96 (AAR - Maharashtra), Giriraj Renewables (P.) Ltd., In re [2018] 97 taxmann.com 385 (AAAR-Maharashtra) & Solarys Nonconventional Energy (P.) Ltd., In re [2018] 97 taxmann.com 385 (AAAR-Maharashtra) etc.

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Situation before Jan 1, 2019 January 1, 2019

July 1, 2017

CBIC Clarifications Explanation to Rate Notification would also be applicable for tax period July 1, 2017 to December 31, 2018

V/S

Developers and EPC Contractors Who paid taxes at lower rates

8.9%

Lower rate of tax

70:30 ratio would apply retrospectively from July 1, 2017

Goods portion Devices & parts for the manufacture of SPGS and other goods, generally constitutes 90% of whole supply value

Service portion generally constitutes 10% of whole supply value

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Course of Action January 1, 2019

July 1, 2017

- Payment of differential tax along with interest Pay Tax @ 8.9%

Course of Action where tax is paid at lower rates

Litigate

Other Options

- 10% Penalty payable if paid after 30 days of SCN (its not a fraud, suppression etc. case)

- Challenging ratio of 70:30 (as actual ratio differs) - Not recommended - as liability @ 18% would arise

- Industry may file representations - To relieve from payment of differential tax - Rates already increased for future periods

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5. GST on Liquidated Damages

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Transaction Background

Supplier (S LTD)

Turnkey Contracts (Supply of Goods and Services)

Customer (C LTD)

Relevant Clauses of Contract: • Supply of a Plant (which involves supply of goods and services) • Plant is to be delivered in 24 months

• Consideration for the Contract would be say INR 50 crores • For delay in delivery of plant, 1% deduction from consideration would be made for each month of delay

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Queries relating to ‘Liquidated Damages’ Delay in Contract -

S Ltd handed over the plant with 3 months delay

-

C Ltd made deduction of 3% from the final payment made to S Ltd

Treatment of LD charges deducted in the hands of C LTD (Customer) Whether GST is payable on the amount deducted by C Ltd?

Treatment in the hands of S LTD -

If LD charges are taxable - C Ltd would issue Tax Invoice

-

If LD charges are not taxable – Can S Ltd issue a credit note and claim adjustment of tax already paid?

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Relevant Legal Provisions – LD charges Meaning of term ‘Supply’ Supply includes -

all forms of supply of goods or services or both 'such as' sale, transfer, barter, etc.,

-

made or agreed to be made for consideration

-

in the course or furtherance of business

Schedule II of CGST Act The following shall be treated as supply of services, namely:— (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; Meaning of term ‘Consideration’ under GST

Consideration has been defined in an inclusive manner. It includes -

Any payment made or to be made whether in money or otherwise; or

-

The monetary value of any act or forbearance

in respect of, in response to; or for the inducement of the supply of goods or services or both

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Relevant Legal Provisions – LD charges ‘Consideration’ under Indian Contract Act When, at the desire of the promisor, the promisee or any other person has -

Done or abstained from doing, or

-

Does or abstains from doing, or

-

Promises to do or to abstain from doing

something, such act or abstinence or promise is called a consideration for the promise; Key points relating to Taxability in context of LD Charges

-

There should be supply of goods or services

-

Supply must be for a consideration

-

Consideration is something which is at the desire of the promisor, etc.

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TAXMANN’s Analysis Was there any intention/desire of C Ltd under the contract to receive plant with delay and charge liquidated damages? – No

Interpreting the nature of Contract -

Terms and conditions under the Contract does not form a separate contract

-

A condition is an item in the contract of which it is a part

-

Consideration for each condition is the consideration for the contract taken as a whole

-

It is not split up in to several considerations apportioned between each item separately Chhatturbhuj Vithaldas Jasani Vs. Moreshwar & Others, AIR 1954 SC 236

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Relevant Jurisprudence – ST 1 South Eastern Coalfields Limited [2021] 124 taxmann.com 174 (New Delhi - CESTAT)

Neyveli Lignite Corporation Ltd. [2021] 128 taxmann.com 405 (Chennai - CESTAT)

•

Compensation/penalty under contract ensures that defaulting act is not undertaken /repeated

•

LD charges are not consideration for tolerating an act as parties neither carries on any activity to receive compensation nor there is any intention of other party to breach/violate contract and suffer loss

•

Foreclosure charges paid by borrower to bank are not liable to Service Tax as it is not a consideration per-se

•

Receiving any charges to reduce the loan tenure would loss to banks for interest and no bank will want to received this charges (no desire)

2 Repco Home Finance Ltd [2020] 117 taxmann.com 755 (Chennai - CESTAT) (LB)

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Relevant Legal Provisions - Credit Note Credit Note under GST It can be issued in the cases where -

the taxable value or tax charged in the tax invoice exceeds the taxable value in respect of such supply, or

-

goods supplied are returned by the recipient, or

-

Supply is found to be deficient

Value of supply under GST Where parties are not related and price is a sole consideration, value of supply = Transaction value (i.e. Price actually paid or payable) for the supply of goods or services

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TAXMANN’s Comments - Credit Note What is actual price paid or payable in respect of the impugned transaction of supply of plant?

– Amount after deduction of LD charges

Position under the erstwhile Regime Similar issue existed in the erstwhile regime, where excise duty was subject to transaction value of goods removed from factory -

Divergent views were provided by different Tribunals, and matter was finally considered by Larger Bench Chennai

-

Held that LD charges are eligible for deduction from Transaction value as these charges are not the actual price payable

-

Matter was appealed before the Supreme Court – Appeal dismissed due to monetary limit condition

-

In our view, judgement of Larger bench of Tribunal equally holds good under GST regime UnitedTelecom Ltd. 2007 taxmann.com 1565 (Bangalore - CESTAT); Victory Electricals Ltd. [2014] 42 taxmann.com 215 (Chennai - CESTAT) (LB) 54

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