Page 70 - GSTL_20th August 2020_Vol 39_Part 3

284 GST LAW TIMES [ Vol. 39
ingly, where the LIH equipment is a scenario which is entirely contingent and
accidental in nature, it cannot be stated that ONGC has contracted for a reim-
bursement towards LIH equipment in conjunction with the drilling services. For
the same reason, it cannot be said that LIH equipment would form part of the
services for ‘building, construction... of any immovable property’ so as to qualify
as a composite supply of ‘works contract’, i.e. as the true nature of LIH is an ac-
cidental occurrence which may not even occur during the execution of the ‘works
contract’.
6.22 The aforesaid position also finds support in the FAQs on ‘Gov-
ernment Services issued by the Directorate General of Taxpayer Services (DGTS),
which in the context of the exemption for liquidated damages and contractual
penalties under Government contracts for supplies of goods/and or services, has
clarified as follows :
“Question 18 : What is the significance of services provided by Government
or a local authority by way of tolerating non-performance of a contract for
which consideration in the form of fines or liquidated damages is payable
to the Government or the local authority?
Answer : Non-performance of a contract or breach of contract is one of the
conditions normally stipulated in the Government contracts for supply of
goods or services. The agreement entered into between the parties stipu-
lates that both the service provider and service recipient abide by the terms
and conditions of the contract. In case any of the parties breach the contract
for any reason including non-performance of the contract, then such person
is liable to pay damages in the form of fines or penalty to the other party.
Non-performance of a contract is an activity or transaction which is treated
as a supply of service and the person is deemed to have received the con-
sideration in the form of fines or penalty and is, accordingly, required to
pay tax on such amount.
However non-performance of contract by the supplier of service in case of
supplies to Government is covered under the exemption from payment of
tax. Thus any consideration received by the Government from any person
or supplier for non-performance of contract is exempted from tax.
Illustration : Public Works Department of Karnataka entered into an agree-
ment with M/s. ABC, a construction company for construction of office
complex for certain amount of consideration. In the agreement dated 10-7-
2017, it was agreed by both the parties that M/s. ABC shall complete the
construction work and handover the project on or before 31-12-2017. It was
further agreed that any breach of the terms of contract by either party
would give right to the other party to claim for damages or penalty. As-
suming that M/s. ABC does not complete the construction and handover
the project by the specified date i.e., on or before 31-12-2017. As per the con-
tract, the department asks for damages/penalty from M/s. ABC and
threatened to go to the Court if not paid. Assuming that M/s. ABC has paid
an amount of Rs. 10,00,000/- to the department for non-performance of
contract. Such amount paid to department is exempted from payment of
tax.”
6.23 To similar effect is the view taken by the Maharashtra Authority
for Advance Rulings (AAR) under GST in In Re : Maharashtra State Power Genera-
tion Company Limited [2018 (13) G.S.T.L. 177 (A.A.R. - GST)], which was also up-
held by the Appellate Authority for Advance Rulings (AAAR) in In Re : Maha-
rashtra State Power Generation Company Limited [2018 (17) G.S.T.L. 451 (App.
A.A.R. - GST)], In this regard, the relevant findings of the AAAR are set out be-
low :

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