Please Help: GST Liability of Award received by a Company
Posted Date : 21-Feb-2025 , 07:46:04 pm | Posted By: HK Jain & Co
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GST | Answers :
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A manufacturing Company won and received an award after a long legal battel about the breach of a Contract for cancellation of a supply contract. No supply took place but supplier company suffered losses due to specifically designed machinery which was finally scrapped due to cancellation of the order. Will the award amount fall within the preview of GST ? Please advise. |
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Answers:
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 Answer by: Kavya |
| here lets break down
A manufacturing company designed machinery specifically for a contract.
The contract was cancelled unilaterally.
No goods were actually supplied.
The company went through a legal battle and finally received an award (compensation).
Machinery was scrapped—implying actual loss due to breach.
GST Applicability Analysis
Relevant Provision:
Under Section 7(1)(a) of the CGST Act, supply includes all forms of supply made for a consideration in the course or furtherance of business.
Also, Schedule II, Entry 5(e) includes:
“Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”
as a supply of service and hence liable to GST.
When GST is Applicable on Compensation:
If the compensation is for:
Tolerating the act of breach or cancellation of a contract
The party receiving the amount has agreed implicitly or explicitly to such toleration
Then, this falls under Schedule II, Entry 5(e) and is considered a supply of service, even if no goods were supplied.
? GST is applicable on the compensation/award amount.
When GST is not Applicable:
If the award is:
Purely compensatory in nature (i.e., not for "tolerating" breach but to compensate actual losses)
Arising from court order/arbitration after a dispute—not agreed in advance
Not connected to any actionable supply of goods/services/toleration
Then, it is not a supply under GST.
???? Refer to:
CBIC Circular No. 178/10/2022-GST dated 3 August 2022
– Clarifies that pure damages/compensation for breach are not taxable under GST.
If the payment is for liquidated damages due to breach, and there is no agreement to tolerate such breach, then it is not taxable.
Conclusion:
Based on your case:
If the award is purely compensatory, ordered after litigation for actual loss (scrapped machinery) ?
No GST applicable (as per CBIC Circular and judicial interpretation).
If the award amount was pre-agreed in the contract as a fee for cancellation/toleration ?
GST would apply under Schedule II.
Recommendation:
Carefully review the legal award order or arbitral ruling.
Check if there’s any clause in the original contract regarding toleration or penalty payments.
If unsure, consider obtaining an Advance Ruling under GST or consulting a GST litigation specialist for a binding opinion.
here is all. you need to know
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