The Karnataka High Court (Bengaluru Bench) ruled that the receipt of compensation by way of liquidated damages arising out of the contract entered into between an NBFC and a Lending Service Provider falls outside the purview of GST. Holding that the said damages are not subject to GST, the Court quashed the show cause notice issued by the Department, which had demanded GST on such damages.
A Single Judge Bench of Justice S.R. Krishna Kumar found from a perusal of the impugned show cause notice that the Additional Director, DGGI, has imposed GST on the Non-banking financial company (NBFC-petitioner) in relation to the liquidated damages received by the petitioner.
However, the Bench observed that the term ‘liquidated damages’ is clearly covered by Paragraphs No.7.1 and 7.1.6 to the Board’s Circular No. 178/10/2022 dated August 3, 2022, whereby these payments are mentioned as not taxable. Hence, the Bench concluded that the Department is wrong in claiming GST on liquidated damages.
The Bench also adverted to the allegation made in the impugned show cause notice that the petitioner has supplied similar services to other NBFCs like IIFL, PayU Finance India, MAS Financial Services, etc., which are charging GST, albeit under a different nomenclature and that the petitioner is not entitled to two different methodologies for similar transactions to evade tax.
However, having regard to the terms and conditions of the specific Master Service Agreement entered into between the petitioner and its LSPs, the Bench explained that merely because there are other transactions between the petitioner and LSPs, the said circumstance cannot be made the basis to fasten liability on the petitioner, especially when the same is expressly barred by way of Board’s Circular.
Briefly, a Framework Agreement was entered into between the petitioner (NBFC) and one Finnovation Tech Solutions Private Limited (Lending Service Provider), i.e., a LSP, as per which, any claim by the petitioner as against the said LSP would be liquidated damages, which is not exigible to payment of GST. Accordingly, the petitioner claimed that the demand made in the show cause notice, calling upon the petitioner to pay GST on liquidated damages, would be illegal, arbitrary, and contrary to Circular No. 178/10/2022 dated August 3, 2022.
The Department, however, alleged that the contract entered into between the petitioner and the said LSP, as recorded under the head ‘deficiency service fee‘ with the ledger account, and the receipts are in the form of consideration received for tolerating an act or a situation to tolerate the deficiency in services received from the LSP. Accordingly, the contract between the two would be classifiable as ‘taxable service’, and since the petitioner had failed to discharge the same, the Department justified the show cause notice, claiming no writ interference in the same.
Appearances:
Senior Advocate G. Shivadass, along with Advocates Prashanth S., Rishab J., Nitin Aditya, and Shraddha Rajgiri, for the Petitioner/ Taxpayer
Advocate Jeevan J. Neeralgi, for the Respondent/ Revenue
