Court orders refund of Rs. 5 crores paid under protest, citing arbitrary and unlawful demand contrary to GST Circular 178/10/2022.
In a significant ruling, the Karnataka High Court has quashed a show cause notice demanding Goods and Services Tax (GST) on liquidated damages received by M/s Krazybee Services Private Limited. The court held that such damages are not subject to GST under the relevant circular issued by the tax authorities.
The case, which was presided over by Justice S.R. Krishna Kumar, involved a petition challenging the show cause notice issued by the Additional Director, DGGI, BZU, Karnataka. The petitioner argued that the damages received were not taxable under the Central Goods and Services Tax (CGST) Act, 2017, as per Circular No. 178/10/2022 dated August 3, 2022.
The court examined the framework agreement between Krazybee Services and its Lending Service Providers (LSPs), highlighting that any damages claimed due to a breach of contract are considered liquidated damages. These damages, according to Paragraphs 7.1 to 7.1.6 of the circular, are not a consideration for a taxable supply and hence fall outside the purview of GST.
Justice Krishna Kumar emphasized that the demand for GST on these damages was arbitrary and contrary to the provisions of the said circular. The circular clarifies that liquidated damages are not consideration for a supply but rather an event in the course of contract performance. The court further noted that the payment received was not for tolerating an act or situation but was compensation for breach of contract.
The court also directed the refund of Rs. 5 crores, which Krazybee Services had paid under protest. The refund order was based on the principle that payments made involuntarily, especially during search and inspection proceedings without proper adjudication, are deemed unlawful.
The High Court's decision aligns with a previous ruling in the case of Ramesh Chand v. Union of India, where it was held that involuntary payments collected during tax raids must be refunded with interest.
The judgment has significant implications for the interpretation of liquidated damages under GST law, providing clarity on what constitutes taxable consideration versus compensation for contract breaches.
Bottom Line:
Liquidated damages received under a contract are not amenable to GST as per Paragraphs 7.1 to 7.1.6 of Circular No.178/10/2022 dated 03.08.2022. Refund of amount paid under protest along with interest can be directed when the demand is found to be arbitrary and contrary to law.
Statutory provision(s): CGST Act, 2017 Sections 73 and 74; Circular No. 178/10/2022
