Continental Engineering Corporation {AUTHORITY FOR ADVANCE RULINGS TELANGANA}

Continental Engineering Corporation {AUTHORITY FOR ADVANCE RULINGS TELANGANA}:

Date of Order : 08-10-2021

GST Treatment of Arbitration Awards and Pre-GST Works – Continental Engineering Corporation Case

Background: Continental Engineering Corporation was involved in arbitration regarding payments and claims related to works executed before the introduction of GST (Goods and Services Tax).

Key Rulings:

1. Unpaid Amounts for Pre-GST Works:
   • Continental Engineering Corporation claimed unpaid amounts, including price escalation, in arbitration for works executed prior to the implementation of GST.
   • Ruling: GST was not applicable on these amounts because the services were rendered before GST came into effect. The time of supply under GST regulations did not occur during the GST period.
2. Refund of Excess Deductions for Pre-GST Works:
   • Deductions were made as per an arbitration award for works completed before the GST regime.
   • Ruling: The amounts refunded due to excess deductions made before the GST implementation were not considered as consideration for supply under GST law. Therefore, they were not taxable under GST.
3. Interest on Delayed Payments for Pre-GST Works:
   • Continental Engineering Corporation claimed interest on delayed payments for works executed before GST.
   • Ruling: Interest on delayed payments for services provided in the pre-GST period was not liable to GST. The time of supply did not fall within the GST period.

1. GST on Arbitration Services:
   • Continental Engineering Corporation received arbitration services after the introduction of GST for disputes pertaining to the pre-GST period.
   • Ruling: Arbitration services were deemed liable to GST under reverse charge mechanism. The applicable GST rate was 18%, and the relevant Service Accounting Code (SAC) was 998215.
2. GST on Damages for Delay in Pre-GST Works:
   • Liquidated damages were claimed for delays related to works completed before the GST law came into force.
   • Ruling: Damages for tolerating delays in contractual obligations constitute a supply of service under GST. The consideration received for such forbearance was liable to GST at 18% under SAC 9997. The time of supply for GST purposes was determined as the date of the arbitration award.
3. Interest on Arbitration Amounts:
   • Continental Engineering Corporation claimed interest on various heads covered under arbitration.
   • Ruling: Interest on delayed payments of consideration for supply was taxable under GST law. Interest on amounts exigible to GST was includible in the taxable value for GST.

Conclusion: The rulings by the Authority for Advance Rulings (AAR) in Telangana clarify the GST implications concerning arbitration awards related to works executed before the GST regime. It specifies that GST is not applicable on unpaid amounts, refunds of excess deductions, and interest on delayed payments for services provided before GST. However, GST applies to arbitration services received post-GST and to damages and interest determined through arbitration for pre-GST works, aligning with GST laws on supply and consideration. These clarifications help entities like Continental Engineering Corporation navigate their GST liabilities concerning arbitration awards involving pre-GST transactions.

Relevant Sections : 2,7,9,13,15,31 of CGST Act.