The Telangana Authority for Advance Ruling (AAR), consisting of members B. Raghu Kiran and S.V. Kasi Visweswara Rao, ruled that liquidated damages recovered by Applicant for delay in commissioning under an agreement constitutes "supply" under the Goods and Service Tax (GST) law, attracting a levy of 9% GST under the Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) Act each.

The Applicant, engaged in production and distribution of electricity obtained from solar energy, entered into an agreement with a company for construction of a solar power project. The agreement clause provided for liquidated damages for delay in commissioning and delivery of contract. The Applicant, in its application to the AAR, raised the query as to whether the liquidated damages recoverable by him, due to delay in commissioning of the project, are exigible to tax under the GST laws.

The AAR held, observing the provisions of section 55 of the Indian Contract Act, 1872, that failure to perform the contract at an agreed time rendered the contract voidable at the option of the aggrieved party. Alternatively such party could recover compensation for loss occasioned by non-performance. The AAR ruled that, in the present case, the liquidated damages claimed by the Applicant for delay in commissioning beyond the time fixed under the agreement, constituted a consideration for tolerating an act or a situation arising out of contractual obligations, and hence they were taxable since they fell under Entry 5 (e) of Schedule II of the CGST Act, 2017. Holding that the provisions of the CGST and Telangana GST Act are the same except for certain provisions, the AAR observed that under the CGST Act the term "consideration" in relation to supply of goods or services or both included the monetary value of an act of forbearance. The AAR ruled that such a toleration of an act or situation under the agreement constituted supply of service under the Act, making the money value or consideration of such tolerance exigible to GST.

"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 of such toleration is exigible to tax."

Observing that the contract in the present case itself prescribed the date of determination and payment of liquidated damages, the AAR held that the date of determination of liquidated damages, as per the formula prescribed in the contract, would be the time of supply of such service.