No GST On Liquidated Damages For Breach Of Contract: Karnataka High Court Quashes SCN

The Karnataka High Court held that liquidated damages recovered for breach or delay in contractual obligations are compensatory in nature and do not constitute consideration for any supply under GST. Justice S.R. Krishna Kumar examined whether the amount paid as compensation by the Lending Service Provider (LSP) to the assessee constituted 'liquidated damages' and whether such amount was taxable under the provisions of the CGST Act. In the case at hand, the assessee/petitioner was a non-banking financial company. The assessee entered into a Master Service Agreement with Finnovation Tech Solutions Private Limited, which is a Lending Service Provider (LSP). The agreement indicates that any breach of contract committed by the aforesaid LSPs would entitle the assessee to claim liquidated damages, which is covered by Paragraph No.7 of the Circular No.178/10/2022 dated 03.08.2022. The Circular dated 03.08.2022 mandates that a party to the contract who suffers such breach would be entitled to claim compensation from the other party towards such loss or damage caused to him by such breach or non-performance of the contract by either party in terms of Sections 73 and 74 of the Indian Contract Act, 1872. A show cause notice was issued to the assessee, calling upon the assessee to pay GST on liquidated damages. It was alleged that the assessee had supplied similar services to M/s.IIFL, M/s.PayU Finance India Pvt. Ltd., M/s. MAS Financial Services Pvt., Ltd., which charges GST albeit under a different nomenclature, and the assessee is not entitled to two different methodologies for the same/similar transactions to evade tax. As per the assessee, any claim by the assessee against the said LSP would be in the nature of liquidated damages, which is not amenable/exigible to payment of GST as per Paragraph No.7.1 and Paragraph 7.1.6 of the Circular dated 03.08.2022. The bench noted that the department has imposed/levied GST on the assessee in relation to the liquidated damages received by the assessee, and the same is clearly covered by Paragraph No.7.1 and 7.1.6 to the aforesaid Circular, and such payments are not taxable. The bench agreed with the assessee that while Paragraphs No.7.1 to 7.1.6 of the said Circular are specific and would be applicable to the assessee's case, Paragraphs Nos. 6 and 7 are generic in nature. Further, paragraphs No.7.1 to 7.1.6 specifically deals with the receipt of compensation by way of liquidated damages arising out of the contract entered into between the petitioner and aforesaid LSPs and consequently, the amount received by the petitioner from its LSPs by way of liquidated damages fall outside the purview of GST in terms of the said Circular and the said amounts cannot be made amenable/exigible to GST as wrongly demanded in the impugned show cause notice, which deserves to be quashed., stated the bench. The bench opined that merely because there are other transactions between the assessee and LSPs, the said circumstance cannot be made the basis to fasten liability on the assessee, especially when the same is expressly / specifically included in Paragraph Nos.7 to 7.1.6 of the said Circular. In view of the above, the bench allowed the petition. Case Title: M/s Krazybee Services Pvt. Ltd. v. Additional Director, DGGI, BZU Case Number: WRIT PETITION NO. 16471 OF 2024 (T-RES) Counsel for Petitioner/Assessee: G. Shivadass Counsel for Respondent/Department: Jeevan J. Neeralgi Click Here To read/Download Order Citation: 2026 LiveLaw (Kar) 1

No GST On Liquidated Damages For Breach Of Contract: Karnataka High Court Quashes SCN

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No GST On Liquidated Damages For Breach Of Contract: Karnataka High Court Quashes SCN

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