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July 1, 2023

Arbitral Award & Mutual Agreement Required for GST Exemption on Liquidated Damages

Arbitral Award & Mutual Agreement Required for GST Exemption on Liquidated Damages

Fact and issue of the case

M/s. TPSC (India) Private Limited, A-1 Module, D-Quadrant, 2nd Floor, Cyber Towers, HITEC City, Madhapur, Hyderabad, Telangana -505081 (36AABCT1309H1ZN) has filed an application in FORM GST ARA-01 under Section 97(1) of TGST Act, 2017 read with Rule 104 of CGST/TGST Rules

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, for the purposes of this Advance Ruling, the expression ‘GST Act’ would be a common reference to both CGST Act and TGST Act.

It is observed that the queries raised by the applicant fall within the ambit of Section 97 of the GST ACT. The Applicant enclosed copies of challans as proof of payment of Rs. 5,000/- under SGST and Rs. 5,000/- under CGST towards the fee for Advance Ruling. The Applicant has declared that the questions raised in the application have neither been decided nor are pending before any authority under any provisions of the CGST/TGST Act’2017. The application is, therefore, admitted after examining it and the records called for and after hearing the applicant as per section 98(2) of TGST Act’2017.


Statement of relevant facts as per the applicant having a bearing on the question(s) on which Advance Ruling is required is reproduced below-

The applicant M/s. TPSC (India) Private Limited is engaged in taking up Thermal Projects in various cities in India and during the financial year 2013-2014, the applicant company was allotted an Erection and Pre-Commissioning works related to Steam Turbine Generator and Auxiliaries, project of NTPC, Kudgi, Karnataka and duration of completion of the project was for (4) years upto 2017.

The execution of the project was in Kudgi, Karnataka State, and was completed (taking over) on 06-Dec-2018. The entire contract was awarded by NTPC to TJPS (Toshiba JSW Power Systems Pvt Ltd.,) and in turn, TJPS awarded the erection works to TPSC India Private Limited (Applicant). On the entire contract value, VAT and Service Tax were remitted by the Applicant Company. During the execution of the contract, the applicant Company gave sub-contract to various companies, who were also registered dealers in their respective states.

The Applicant Company received a quotation for Sub-contract from M/S. Delta Global Allied Limited (formerly known as Delta Mechons India Limited; Hereafter referred to as DGAL) (Quotation Ref No. DGAL/TPSC/032/P.Fab.Erec/2012/REV 00) for piping and PreFabrication of Non- IBR Piping of all 3 units w.r.t 3 x 800 MW NTPC Kudgi Thermal Power Project, Bijapur- Karnataka. Based on the quotation, TPSC (India) Private Ltd (Hereafter referred to as TPSC, Applicant herein) issued a purchase order PO-1 dated 27/09/2013 amounting to Rs. 11,82,85,000 and PO-2 dated 10th June 2014) for Rs. 10,25,00,000.

After receiving PO, DGAL commenced work and raised several invoices till January 2017 amounting to Rs. 30,05,01,903/- and service tax of Rs. 2,94,21,453/- and TPSC (Applicant) made all payments except for the retention amount Rs.91,53,199/-. (For retention also Tax Paid by TPSCI)

POParticularsScheduleDuration in months
PO11.Fabrication for Unit 1,2 and 3Feb 14 to Dec 1411
2. Erection for Unit 1April 14 to 15 Feb11
POParticularsScheduleDuration in months
PO21.Erection for unit 2Sep 14 to April 158
2.Erection for unit 3Jan 15 to Aug 158

The Applicant Company submit that due to the delay in the supply of Isometric drawings, raw materials, and IBR Pipes by the Applicant, the project completion was delayed. But however, the entire contract was completed before implementation of GST and duly suffered VAT and Service Tax. However, handing over of the completed project was in December 2018. Even the in the case of supply of materials and labour in post GST period, the applicant and the sub-contractor has remitted the appropriate tax. DGAL were not able to handle higher quantum of work and the same had been accepted by DGAL. Hence the Applicant had been constrained to descope certain quantum work awarded to DGAL under Unit 1 and Unit 2. Due to descoping of work, DGAL lodged a claim against the Applicant and such claim was refuted and stoutly objected by the Applicant.

The Applicant had engaged 4 other sub-contractors, namely Shilpa Engineering Erectors, Fortuna Engi Tech and Structurals (India) Private Limited (Fortuna), Associated Engineering Services (AES) and Axis Inspection Solutions, to complete the work that had been unattended and descoped from the DGAL. Having not satisfied with the process and duration of the contract, DGAL issued a notice to proceed for Arbitration for compensation.

Observation of the court

In view of the above prescriptions in the circular the nature of transaction which took place between the applicant and his sub-contractor is briefed as follows:-

The applicant has not fulfilled his promise to award the total work to the sub- contractor as stipulated in their work order.

There is a breach of contract by the applicant on which he has paid liquidated damages by way of out of court settlement.

By accepting the liquidated damages the sub-contractor cannot be said to have permitted or tolerated the deviation on non-fulfillment of the promise.

It is not taxable if the liquidated damages are paid only to compensate injury or loss of damage suffered by the aggrieved party due to breach of the contract.

Against the Arbitral Award, the Applicant preferred an appeal u/s.34 of Section 34 of the Arbitration and Conciliation Act, 1996, before the Principal Special Court in the Cadre of District Judge for Trial and Disposal of Commercial Disputes at Hyderabad, in C.O.P.No.93/2022, seeking set aside the impugned Award 27.05.2022. While the pendency of the appeal, both parties came to an amicable settlement to settle the entire award amount at Rs.38,56,91,204/-.

Taxability of the amicable settlement made by the parties to settle the entire award amount at Rs.38,56,91,204/- should be assessed as if that was done as per the award by the Hon’ble Tribunal for Arbitration as the mutual settlement between parties was done only based on the award by the Hon’ble Tribunal as stated by the applicant.


In the result, appeal of the assessee is allowed and ruled in favour of the assessee

Read the full order from here


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