The Tamil Nadu Authority for Advanced Ruling (AAR) clarified that no GST is leviable on the Minimum Guaranteed Off-take (MGO) charges imposed by Oil and Natural Gas Corporation (ONGC) on Gas Authority of India Limited (GAIL) for short-lifting Natural Gas from the contracted quantities, i.e, Adjusted Annual Contract quantity under the Gas Sales and Transportation Agreement.
The AAR held that the amount of MGO charges, which is paid as liquidated damages, is an amount paid only to compensate for injury, loss, or damage suffered by the applicant due to breach of contract and shall not be construed as the activity of refraining from or tolerating an act or doing anything.
In the present case, the AAR noted that the MGO Charges are merely a flow of money from GAIL, which causes breach of the contract to the applicant who suffers loss or damage due to such breach. The activity of the applicant would not fall within the scope of supply under Section 7(1A) of the CGST Act, and accordingly, such payments do not constitute consideration for a supply and are not taxable.
The Division Bench comprising Thiyagarajan, Additional Commissioner CGST, and B. Suseel Kumar, Joint Commissioner SGST, observed that the Gas Sales and Transportation Agreement (GSTA) entered into with GAIL by the applicant is for execution and performance of the contract, and the intended purpose of the contract is only for execution of the agreement and not for its breach.
Thus, the MGO charges/Liquidated damages cannot be said to be a consideration received for tolerating the breach or non-performance of the contract, and they are rather payments for not tolerating the breach of contract, added the Bench.
The Bench further emphasized that the imposition of MGO charges/liquidated damages stipulated in the contract is to ensure performance and to deter non-performance, unsatisfactory performance, or delayed performance. Liquidated damages are a measure of loss and damage that the parties agree on, which would arise due to breach of contract. They do not act as a remedy for the breach of contract.
Therefore, MGO charges/liquidated damages are nothing but a penalty imposed and not the desired outcome of the contract. By charging and accepting the MGO charges/liquidated damages, the applicant aggrieved by breach of contract cannot be said to have permitted or tolerated the deviation or non-fulfilment of the promise by GAIL.
Briefly, the ONGC, a Maharatna Public Sector Enterprise engaged in producing and supplying crude oil and natural gas across India, entered into a Pan-India Gas Sales and Transportation Agreement (GSTA) with GAIL to sell APM and Non-APM natural gas produced from government-nominated fields. Under the agreement, gas was delivered at specified points where ownership passed to GAIL. Supply was subject to availability, and fallback arrangements were permitted.
Gas supply was not subject to GST under Section 9(2) of the CGST Act, though pre-GST levies such as VAT or CST applied. GAIL paid for the actual quantity of gas taken. If GAIL failed to off-take 90% of the agreed quantity, the applicant imposed MGO charges. These charges were collected quarterly as deposits, adjusted annually based on the total quantity taken, and any excess was refunded. MGO charges were calculated separately for APM and Non-APM gas.
The applicant stated that the “minimum take or pay” or “minimum guaranteed off-take” practice was common in the oil and gas industry. It ensured that the company could recover losses in case the buyer failed to take the agreed quantity of gas. Accordingly, the present application sought an advance ruling on the GST implications of imposing Minimum Guaranteed Off-take charges on GAIL.