Various problems are cropped up during GST i.e. ‘Good & Simple Tax’ regime. Out of the same now let us discuss regarding taxability of incentive, discount and liquidated damages under the said Act.

As per GST Law, definition of Services says – Services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination for which a separate consideration is charged.


Here it is pointed out that as that of VAT Law, GST Law doesn’t speak about ‘incentive” specifically. But the Assessing Officers are taxing the same under the ambit of GST Law as the same is related to supply of Goods or Services.

Here is the case of a works contractor, who, having completed the work before the schedule time was eligible to get incentive from the concerned Executive Engineer as per agreement. He has disclosed the entire turnover in his returns those he has received towards execution of the works contract. The Executive Engineer when made payment of the incentive amount didn’t deduct TDS from the Gross Payment towards payment of incentive. The Tax Payer also didn’t disclose the same in its return filed under the GST Law as the incentive was neither coming under the ‘goods’ nor ‘services’. The Assessing Officer issued notice to the Tax Payer to reconcile the WAMIS data with that of the returns filed by him and file revised return accordingly. In response to the notice the Tax Payer replied that there was no discrepancy hence filing of revised return doesn’t arise. The Proper Officer sent SCN u/s.73 of the Act with GST DRC-01 stating therein the tax and interest payable for the escaped turnover. Thereafter the AO sent the DRC- 07 mentioning the tax, interest and penalty payable for not including the incentive amount and making payment of GST thereon. The Tax Payer carried on correspondences with the concerned contractee accordingly. The contractee wrote a letter to his higher authority with a copy to the Tax Payer as under:-

“In this matter it is to put forth that, incentive is an award system in a contract which comes into operation only after completion of all forms of supply of goods or services or both such sale, transfer, bater, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course of furtherance of business under Clause-7(1) of SGST and CGST Act.

It is not a perquisite for this supply in contrast to the inference made by the GST assessing authority. For an Agency to be eligible for incentive neither he has to supply any goods nor render any services. It becomes operational once the work is completed before stipulated date of completion. No further work is done or measurement is taken in order to receive incentive. It is a Reward system of Government. The incentive is allowed by the Government in token of acceptance of the efforts of the Agency who saves the Government from time over run of the Project.

Because this is only a reward therefore neither its value is included in the estimate nor amount put to tender. There is no instance of refund of GST in case penalty is levied over a work when the Agency delays the work. The averment made by GST authority for supply of the service at a higher performance is an implied conclusion which has no direct mention in the Law. In this matter the term “Supply” is from the point of view of the person who is supplying and not the person who is receiving the supply. Hence Sec- 12(2)(C) of the GST Rules may not be applicable in this case as incentive is neither a supply of ‘Good’s nor ‘Service’.

Considering these aspects GST was not allowed during release of the incentive to the Agency. However, if it is found pertinent to charge GST on incentive, then it may so be directed for taking action at this end.”

That the AO without considering the submissions of the Tax Payer when passed order imposing tax, interest and penalty on it, the Tax Payer has raised the submissions in the First Appeal as under:-

Section-2(31)(a) ‘Consideration’- any payment made or to be made, whether in money or otherwise. In respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government”.

Section-2(52) ‘Goods’-means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

Section-2(102) ‘Services’-means anything other than goods, money, and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Section-2(119) ‘Works Contract’-means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, revocation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.

Section-7(1)(a) ‘Supply’ includes- all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course of furtherance of business.

Section-15(2)(c) Value of taxable supply shall include- incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services.

In the FAQ released by CBIC on 15/12/2018 it has been clarified at Q No.7 as under:-

Whether post-supply discounts or incentives are to be included in the transaction value?

“Ans. Yes. However, where the post- supply discount is established as per the agreement which is known at or before the time of supply and where such discount specifically linked to the relevant invoice and the recipient has reversed input tax credit attributable to such discount, the discount is allowed as admissible deduction under Section 15 of the CGST Act.”

The CBIC in Circular No.92/11/2019- GST dated 07th March, 2019 declared as under:-

Therefore the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as supply under GST (except activities mentioned in Schedule I of the said Act).

The Advance Ruling Authority of Karnataka vide No.KAR- ADRG- 76/2018 dated-24/09/2019 in case of M/s KwalityMobikes Private Ltd. have held that :-

“The volume discount received on purchases in form of credit note without any adjustment of GST is not liable for GST.

  1. The volume discount received on retail (on sales) in the form of credit note without any adjustment of GST is not liable for GST.
  2. Since the amount received in the form of credit note is actually a discount

    and not a supply by the applicant to the authorized supplier, the applicant need not issue tax invoice for this transaction”.

Besides, the Tax Payer has cited the case law as under:-

That during the Service Tax regime the same view was taken towards receipt of “post-sale incentive/discount” as not taxable in the hands of the recipient. In case of Grey Worldwide (I) Pvt. Ltd-v.- Commissioner of Service Tax, Hon’ble CESTAT, West Zone, Mumbai held as under:-

Therefore, it can be seen that the Tribunal has been consistently taking the stand that the incentives received by an advertising agency cannot be levied to service tax under the category of BAS. These amounts are in any case payable to the media as and when the claim is lodged and therefore, this amount cannot be construed as consideration received towards services rendered”.


Under the General sales Tax Act ‘sale price’ means the amount payable to a dealer as consideration for the sale or supply of any goods, less any sum allowed as cash discount according to ordinary trade practice, but including any sum charged for anything done by the dealer in respect of the goods at the time of, or before, delivery thereof.

Under the CST Act “sale price” means the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respective of the goods at the time of or before the delivery there of other than the cost of the freight or delivery or the cost of the installation in cases where such cost is separately charged.

Under the VAT Law ‘sale price’ means the amount of valuable consideration received or receivable by a dealer as consideration for the sale of any goods less any sum allowed as cash discount or trade discount at the time of delivery or before delivery of such goods but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before delivery thereof.

That even if “trade discount” has not been mentioned in the definition of “sale price” either under the Central Sales Tax Act or under the General Sales Tax Act, but the Hon’ble Courts while deciding the cases have categorically held that ‘trade discount’ will not form a part of sale price.

Few case laws on ‘trade discount’ of the erstwhile Acts are reproduced hereunder for appreciation:-

Orient Paper Mills Ltd -v.- State of Orissa reported in 35–STC-84(Ori.),

  1. AdvaniOerlikon (Pvt.) Ltd. reported in 45-STC- 32(SC),
  2. Deputy commissioner of Sales Tax (Law) Board of Revenue (Taxes) Ernakulam v. Motor Industries Co. reported in 53- STC-48(SC),
  3. Deputy Commissioner of Sales Tax, Ernakulam -v.- Kerala Rubber & Allied Products reported in 90-STC- 170(SC),
  4. T. V. Suranam Ayangar & Sons Ltd reported in 65-STC- 41(AP),
  5. Mapra Laboratories Pvt. Ltd. -v.- State of Bihar & Others reported in 135-STC-157(Patna),
  6. Commercial Taxes Officer, Circle-A, Jaipur -v.- Singhal Paints Limited (1998)-111-STC-27(RTT),
  7. Mohan Breweries and Distilleries Limited -Versus- Commercial Tax Officer, Porur Assessment Circle, Chennai and Others (2005)-139-STC- 477(Mad.),
  8. DCCT, Corporate Division v. MRF Ltd (2008) 14-VST- 124(WBTT),
  9. Dey’s Medical Stores Limited -Versus- Commissioner, Trade Tax,U.P. (2004)134-STC-14 (Alld.),
  10. IFB Industries Ltd.- v.- State of Kerala -(2012)49- VST-1(S.C.),
  11. Southern Motors –Vrs- State of Karnataka and Others in the Civil Appeal Nos.10955-10971 of 2016 dated- 18/01/2017(SC)


The meaning of ‘liquidated damages’ in common parlance is that the damages or a sum of money which is agreed upon in a contact to be paid by one party to the other in the event of breach of any term or condition of the contract. That means the terms of a contract specify a sum payable for non-performance, which amount is to be treated as a penalty or as liquidated damages. In the Finance Act, 1994 nowhere the liquidated damages were defined. Scope of supply is defined in section 7 and charging section (levy and collection) is governed by section 9 of CGST Act 2017.

Under the Indian Contract Act, 1872- ‘Liquidated Damages’ have not been defined. But by the combined reading of sec 73 and sec 74 of the said act some light can be thrown on the above subject. Then another question automatically comes to mind that whether liquidated damages and penalty are one and the same.

There is no definition of Liquidated damages under the CGST Act, 2017. According to Section-7 of the CGST Act the scope of ‘Supply’ is defined. If we will read section 7(1) after amendment as on 1.2.2019:-

Sec-7(1) defines the expression “supply”, which includes:-

  1. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;(b) import of services for a consideration whether or not in the course or furtherance of business and; (c) the activities specified in Schedule I, made or agreed to be made without a consideration;

7(1A) defines – where certain activities or transactions, constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II. Schedule II only gives the classification of treatment of activities which are to be treated as supply of goods or supply of service. According to schedule II, Clause 5(e) says – agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Therefore Liquidated damages

are covered in the residual entry of services as there is no specific Service Accounting Code (SAC) for liquidated damages. It may be covered under the Heading “9997” (reference may be made to Central Tax (Rate) Notification No.11/2017 dated-28.06.2017) on which GST is payable comes @18%.

In view of above, it may be noted that a separate tax invoice should be issued by the field units against the deduction made from the invoice of the supplier on account of liquated damages. The field units charging liquidated damages shall issue Tax Invoice as per the GST Acts and the rules made thereunder. The example given under clause 8 of GST Circular No.3 under reference stands deleted.

The payment should be made net of invoice(s) received from the supplier and invoice(s) issued by the field unit in respect of the liquidated damages. In respect of any deduction in the invoice other than liquidated damages, the Credit Note needs to be issuedby the supplier.

Besides, the Circular No. 102/21/2019- GST play a vital role in determination of Liquidated Damages under the CGST Law. This Circular clarifies regarding applicability of GST on additional/penal interest and in case of EMIs (Equated monthly instalments) for repayment of Loan. Interest and penal fee charged by the banks for non-payment of EMI within the due date.

Let us discuss various Rulings of AARs on Liquidated Damages In GST, favoring it inclusion in entry No 35 as per clause 5(e) of schedule II:- (2018)(13) GSTL- 177(AAR- GST) (5) TMI-1332-AAR- Maharashtra.

The above decision of the AAR was upheld in the AAAR, Maharashtra reported in (2018)(17) GSTL-451(App. AAR- GST) 2018(9) TMI-1185(AAAR-Maharashtra)- In Re-Maharashtra State Power Generation Co. Ltd.

Similar Rulings are made by the AAR(s) in the following cases:

  1. In re M/s. North American Coal Corporation India Private Limited (GST AAR Maharashtra); Advance Ruling No. GST-ARA-07/2018- 19/B-63; 11/07/2018,
  2. In re Rashtriya Ispat Nigam Ltd (GST AAR Ansdhra Pradesh); Advance Ruling No. AAR 01/ AP/GST/2019; 11/01/2019, (3) In re M/s. Dholera Industrial City Development Project ltd. (GST AAR Gujarat); Advance Ruling No. GUJ/GAAR/R/2019/06; 04/03/ 2019,(4) In re Bajaj Finance Limited (GST AAAR Maharashtra); Order No. MAH/ AAAR/SS-RJ/24/ 2018-19; 14/03/2019

The view taken by various Courts/ Tribunals towards levy of ‘service tax’ on ‘liquidated damages’ during the earlier regime are as under:-

  1. M.P. Poorva Kshetra Vidyut Vitaran Company Ltd – Versus- Principal Commissioner, CGST & C. EX., Bhopal, 2021 (46) G.S.T.L. 409 (Tri.- Del.),
  2. South Eastern Coalfields Ltd. –v- Commissioner of Central Excise and Service Tax (CESTAT Delhi) [Appeal Number: Service Tax Appeal No. 50567 of 2019 Date of Judgment/ Order: 22/12/2020],
  3. K.N. Food Industries Pvt. Ltd. -v.- Commissioner of CGST and Central Excise Kanpur [2019-TIOL-3651-CESTAT-ALL-2020(38) G.S.T.L. 60(Tri. – All.)],
  4. Lemon Tree Hotel –v.- Commissioner, Goods and Service Tax [2020-TIOL- 1114-CESTAT-DEL (2020) (34) G.S.T.L. 220 (Tri. – Del.)].
  5. Neyvali Lignite Corporation Lt.-v.- Commissioner of Customs, Central Excise & Service Tax, Chennai [2021] 128 405 (Cennai CESTAT),
  6. AmitMetaliks Limited-v.- Commissioner of CGST, Bolpur – 2020 (41) GSTL 325 (Tri. Kolkata),
  7. Mormugao Port Trust-v.- Commissioner of Customs, Central Excise & ST, Goa – 2017 (48) STR 69 (Tri. Mumbai) which was confirmed by the Hon’ble Supreme Court reported in Commissioner- v.- Mormugao Port Trust – 2018 (19) GSTL J118 (SC),
  8. GE T&D India Limited (Formerly Alstom T&D India Limited)-v.- Dy. Commissioner of Central Excise – 2020 (1) TMI 1096 – Madras High Court,
  9. CST, Chennai v. Repco Home Finance Limited – 2020 (7) TMI 472 – CESTAT Chennai,
  10. Ruchi Soya Industries Ltd –v.- Commissioner of Customs (CESTAT Delhi),
  11. Central Board of Excise and Customs -v.- Larsen & Toubro Ltd. (2015) 39S.T.R. 913 (SC).

In case of South Eastern Coal Fields Ltd-v.-Commissioner of Central Excise & Service Tax (CESTAT, Delhi) it has been observed as under:-

“It is in this context and in the context of section 74 of the Contract Act, which the Supreme Court observed:

Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of parties pre- determined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract for predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated.

The Supreme Court also noticed that section 74 of the Contract Act merely dispenses with the proof of – actual loss or damages. It does not justify the award of compensation, when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good the loss or damage which actually arose or which the parties knew when they made the contract to be likely to result from the breach’. The Supreme Court also found that there was no evidence that any loss was suffered by the plaintiff in consequences of the default by the defendant, save as to the loss suffered by being kept out of possession of the property. The Supreme Court, therefore, held that plaintiff would be entitled to ST/50567/2019 retain only an amount of Rs. 1000/- that was received as earnest, out of amount of Rs. 25,000/-.

The conclusion drawn by the learned authorized representatives of the Department from the aforesaid decision of the Supreme Court that compensation received is ‘synonymous’ with ‘tolerating’ or that the Supreme Court acknowledged that in a breach of contract, one party tolerates an act or situation is not correct.

It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards consideration for tolerating an act leviable to service tax under section 66E(e) of the Finance Act.

The impugned order dated December 18, 2018 passed by the Commissioner, therefore, cannot be sustained and is set aside. The appeal is, accordingly, allowed.”

From the foregoing discussions it is thus open to the readers to argue their cases before the competent authority that GST is not leviable on incentives/ discounts/ liquidated damages as neither they can be termed as ‘goods’nor ‘services’ under the relevant provisions of GST Law. For the present it is a debatable question.

Hence, Indirect Tax (GST) Representation Committee of AIFTP is requested to bring the above matter to the knowledge of the FINMIN/CBIC/GST Council,as the case may be, for an amendment in the statute on the above aspects in order to avoid unnecessary disputes in future by misinterpreting the provisions of Law.

(This Article was published in Souvenir of National Tax Conference held on 26th & 27th February 2022 at Kolkata)

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