2025-VIL-160-AAR
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SGST Advance Ruling Authority

GST – Tamil Nadu AAR - Liquidated Damages, Minimum Guaranteed Off-take (MGO) Charges – Applicant is engaged in the manufacture and supply of crude oil and natural gas, which are supplied through pipelines located at delivery points across India – Applicant entered into a Gas Sales and Transportation Agreement with GAIL (India) Limited wherein in case GAIL fails to off-take 90% of the agreed contracted quantity, the applicant imposes Minimum Guaranteed Off-take (MGO) charges on GAIL - Whether the MGO charges imposed for short-lifting the contracted quantity of natural gas is liable to GST - HELD - The MGO charges are in the nature of liquidated damages for breach of contract and do not constitute consideration for any supply - The intended purpose of the contract is only for execution of the agreement and not for its breach. MGO charges/Liquidated damages cannot be said to be a consideration received for tolerating the breach or non-performance of contract - The MGO charges/liquidated damages is 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 - The CBIC Circular No. 178/10/2022-GST clarified that liquidated damages for breach of contract are not liable to GST as they do not represent consideration for any supply. The MGO charges are merely a flow of money from GAIL to applicant to compensate for the loss or damage suffered due to the breach of contract and do not represent the object of the contract between the parties. Therefore, the MGO charges are not liable to GST - The Minimum Guaranteed Off-take charges imposed for short-lifting the contracted quantity of natural gas is not liable to GST – Ordered accordingly
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