Issue: Should the levy of liquidated damages be treated as supply of services by the appellant?

Background: Appellant has awarded a contract to Bharat Heavy Electricals Limited for erection, testing & commissioning of a power plant. The contract provides for payment of liquidated damages if project completion is delayed beyond the scheduled date.

Ruling: Appellant is in a contractual agreement with the contractor to impose levy of liquidated damages in case of completion of project beyond due date. Also, appellant was well within his rights to terminate the agreement in case of delay in completion of project; but, the appellant agrees to tolerate the delay on the part of the contractor in return for payment of liquidated damages.

Similarly, when the contract specifically provides for payment of damages, it manifests a separate contractual agreement between the two parties. Both the parties voluntarily agree that damages become due once delay occurs. Hence, the appellant has tolerated an act or a situation. Any supply of services of tolerating an act is a supply under Schedule II of the CGST Act.

Comment(s): Any contract is expected to have a penal clause. Does it mean the enforcement of penal clause should be treated as a tolerating act under all circumstances?