Liquidated Damages Do Not Constitute Supply Under GST: AAR
The applicant, JBM Ecolife Mobility Surat Pvt Ltd, provides mobility solutions, primarily for public transportation and and runs a concessionaire for projects like operation, maintenance of electric buses for city routes. The applicant won a bidding which was invited by Convergence Energy Services Limited for the supply, operation and maintenance of 5690 e-buses. The applicant got the project for Surat for 150 Nos BRTS AC Electric Buses on behalf of Surat Municipal Corporation (SMC). However, the project was later transferred to M/s Sitilink Limited (SSL) for O&M purposes by the SMC and a Tripartite agreement was signed between the application, SMC, and SSL for the roles and responsibilities shifted to SSL.
The applicant is liable to pay a specified amount for damages known as liquidated damages or compensation to the SSL if the applicant breaches or does not do its duty as specified in the agreement.
The applicant asked the following questions before the Gujarat Authority for Advance Ruling (AAR):
“(1) Whether the GST is payable on the liquidated damages paid by the Applicant to SSL for various material defaults, breaches or non performance of the obligation as per the terms and conditions of the Concession Agreement, under the provisions of GST law?
(2) If the answer to above question is in affirmative, what shall be the applicable rate of GST thereupon and the corresponding Service Accounting Code (SAC)?
(3) If the answer to question no. 1 is in affirmative, whether the applicant is eligible to avail ITC of the GST so paid to SSL on liquidated damages?”
As per the Gujarat AAR, GST is not payable on the liquidated damages paid by the Applicant to SSL for material defaults, breaches, or not performing the duties as per the Concession Agreement. The AAR held that liquidated damages are just a flow of money from one party for breach of the contract, to compensate the other party for the loss, and such payments do not constitute a supply of goods or services and thus, are not taxable.
Case Citation: JBM Ecolife Mobility Surat Pvt Ltd (Gujarat AAR); ADVANCE RULING NO. GUJ/GAAR/R/2025/47; 03/11/2025
