1. Contract Law - Levy as Liquidated Damages vs Penalty

Definition: Levy Restaurants type clause (General Terms 2023) is standard: In case of non-occurrence due to reasons attributable to Client, as consequence of cancellation or reduction in persons, Levy receives upon notification: as of contract closure until 31 days prior 50%, as of 30 days prior 100% of event price

This is a cancellation administration charge.

Test of Enforceability - Case Law:

A. Blu-Sky Solutions Ltd v Be Caring Ltd [English High Court 2021]
Supplier's standard T&Cs referenced in electronic order form included cancellation administration charge. Court held: cancellation charge was onerous and unfair and unenforceable as it had not been drawn to attention of customer. Must pass UCTA reasonableness + transparency.

Principle: If levy not brought to notice at formation, void.

B. Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd AC 32 - House of Lords
Issue of fairness on event cancellation. No benefit = recovery of deposit. Even smallest benefit = vendor gets to retain entire deposit. Basis of modern Frustrated Contracts Act - allocation of losses: amount due or paid may be retained or recovered but no more than amount paid or due.[1943]

This is foundation for event cancellation - if event frustrated (COVID), levy not enforceable beyond actual costs.

C. Indian Law - Sec 74 Indian Contract Act - Fateh Chand v Balkishan Dass AIR 1963 SC 1405
Cancellation fee cannot be penal - must be genuine pre-estimate of loss. If 100% fee for cancellation 6 months before, courts reduce to actual loss.

NZLS Lawyers Standards Committee case 2023: $120,000 cancellation fee when trial did not go ahead not fair or reasonable. Ordered reduction to $40,000. Committee observed cancellation fee payable only where lengthy commitment does not eventuate after considerable preparation and exclusion of other work.

Accounting implication: If levy is penal, not enforceable - cannot recognise as receivable.

2. Accounts - Ind AS / IFRS Treatment

Ind AS 115 / IFRS 15 - Revenue from Contracts:

Event is performance obligation satisfied at point-in-time (day of event).

• Scenario 1 - Event happens: Levy not relevant - recognise full contract price on event date.
• Scenario 2 - Client cancels, levy charged: This is consideration for termination. Under Ind AS 115 Para B60-B62, termination fee is revenue only when termination occurs, to extent of enforceable right. Measure at amount you are entitled to after deducting expected credit loss.

Journal:

Code

Dr Trade Receivable / Bank (levy amount)   Cr Revenue - Cancellation Charges   Cr GST Payable (if applicable)

If advance received:

Code

Dr Advance from Customer   Cr Revenue - Cancellation Charges   Cr Refund Liability (balance)

Ind AS 37 - Provision:
If YOU cancel event, you must provide for refund + damages. Cannot net levy.

Disclosure: As per Schedule III, cancellation income to be shown under Other Operating Revenue if core activity, else Other Income.

3. Tax - Most Litigated Part

A. GST - Circular No. 178/10/2022-GST dated 3 Aug 2022 - Landmark Clarification

Question: Is cancellation charge supply under Para 5(e) Schedule II - "agreeing to obligation to refrain from act or to tolerate act or situation, or to do an act"?

Circular distinguishes:

Taxable:

• Cancellation charges by hotel/tour operator, airline, event organiser - liable to GST at rate applicable to principal intended supply

Example given: Cancellation charge for AC coach ticket attracts GST at 5%, same rate as ticket. Same logic extends to cancellation of air travel or hotel accommodation.

So: Event management cancellation levy 18% if event service is 18%.

Not Taxable:

• Liquidated damages for breach, notice pay recovery, forfeiture of salary, penalty for cheque dishonour, compensation for cancellation of coal blocks.

Confusion led to case laws:

Case 1: CESTAT Delhi - Lalit Mumbai Vs Commissioner CGST Delhi East - Appeal No ST/51668/2019 (CESTAT Delhi)

Dept treated notice-period recovery as consideration and cancellation charges retained by hotel when customers cancelled room bookings or no-show as taxable.

CESTAT: Both not taxable as declared service. Cancellation amount retained is not consideration for service but compensation for non-performance.

However this was overruled by 2022 Circular prospectively - now taxable.

Case 2: Delhi Bench CESTAT - Cancellation fee paid on termination of agreement cannot be treated as consideration for taxable service (PWC case note)

Cancellation fee paid by appellant on termination was not towards any consideration for taxable service, therefore not liable to service tax. While decision pertains to pre-negative list regime, rationale that payments made in pursuance of termination agreement cannot be attributed to service would be relevant for GST.

This view now changed - post 2022 circular, cancellation = deemed service under 5(e).

Case 3: Maharashtra AAR - Liquidated Damages for Cancellation of Contract (LiveLaw AAR)

Maharashtra State Power Generation Company - liquidated damages for delay in operation of power plant. AAR held levy of liquidated damages attracts GST for supply of services under Para 5(e) Schedule II at 18% HSN 9997 - Other Services.

B. Income Tax - Compensation for Cancellation

Goldcrest Exports Vs ITO (ITA No 442/Mum/2009)

Compensation payable due to cancellation of contract arising out of trading contract - nature is business profit under Article 7 India-UK treaty. In absence of PE of UK entity in India, not taxable in India.

Principle: Event cancellation compensation taxed as business income, not capital receipt, if contract is trading contract.

EU VAT Case C-277/05 - Société Thermale d'Eugénie-les-Bains

Deposits paid in context of contracts relating to supplies of services subject to VAT, retained by provider in event of cancellation - classification as taxable. ECJ held retention is taxable as consideration for right granted to client.

This is origin of Indian GST rule.

4. Practical Model for Event Company Accounts

Policy Draft:

1. Contract: Cancellation slab must be signed, highlight onerous term - else void per Blu-Sky
2. Accounting: Recognise levy on cancellation date, not booking date. If advance > levy, refund balance as liability.
3. GST: Charge GST at same rate as event. Issue tax invoice under Sec 31 - date of levy.
4. TDS: Under Sec 194C? No, cancellation levy not works contract, no TDS.
5. If Force Majeure (COVID): Under Sec 56 Contract Act frustration - levy limited to actual costs per Fibrosa principle, else court will reduce.

Example:

Event price ₹10 lakh, cancelled 20 days before, clause 100% levy.

Accounts:

• Revenue: ₹10 lakh
• GST 18%: ₹1.8 lakh
• Receivable: ₹11.8 lakh

If client already paid ₹5 lakh advance:
Dr Advance 5 lakh
Dr Receivable 6.8 lakh
Cr Revenue 10 lakh
Cr GST 1.8 lakh