Company A purchased electronic parts from Company B for resale of those parts to its Japanese customer. Later, it was discovered that the electronic parts sold/delivered do not meet the quality standard/requirements set by the Japanese customer for its own production use as the parts delivered contained dust particles. Accordingly, Company A was required to make compensation payment for damages to its Japanese customer. Company A subsequently sought to reclaim the compensation amount from its supplier, Company B even though the compensation claims are not covered in the contractual agreement between Company A and Company B.
The TRD ruled that the compensation received by Company A from Company B is not a consideration received from the sale of goods or provision of services. Therefore, the compensation received is not subject to VAT.