MGO Short-Offtake Compensation Not Taxable under GST | AAR

Case Details: Oil and Natural Gas Corporation Ltd., In re [2025] 180 taxmann.com 234 (AAR-TAMILNADU)

Judiciary and Counsel Details

• C. Thiyagarajan & B. Suseel Kumar, Member

Facts of the Case

The applicant is engaged in the manufacture and supply of crude oil and natural gas. Under a Sales & Transportation Agreement with GAIL, the supply of natural gas falls under VAT/CST, outside the ambit of GST, and title passes at delivery points. The agreement mandates a Minimum Guaranteed Off-take (MGO) of 90% of the adjusted annual contract quantity, with MGO charges collected quarterly as a deposit and adjusted annually against actual off-take. It was contended that the shortfall retained under the MGO constitutes compensation for breach of contract and not consideration for tolerating an act. The matter was placed before the Authority for Advance Ruling (AAR).

AAR Held

The AAR held that MGO charges retained for short-lifting arise solely on account of breach of the contractual obligation to lift the minimum quantity and are intended to compensate the applicant for loss rather than as consideration for tolerating any act. It was observed that the payment is a mere incidental money flow and not the object of the contract, noting that statutory entries deeming agreements to tolerate an act require contractual consideration and nexus, which is absent here. It was further held that MGO charges function as liquidated damages to deter non-performance and are not consideration for toleration. Thus, the charges retained for short-lifting of natural gas are not liable to GST under Section 9 of the CGST Act/Tamil Nadu GST Act.

List of Cases Referred to

• Bhayana Builders (P.) Ltd. v. CST [2013] 38 taxmann.com 221/42 GST 76 (New Delhi – CESTAT) (para 3)
• CST v. Bhayana Builders (P.) Ltd [2018] 91 taxmann.com 109/66 GST 320/10 GSTL 118 (SC) (para 3)
• CST v. Repco Home Finance Ltd [2020] 117 taxmann.com 755/42 GSTL 104 (Chennai – CESTAT) (LB) (para 3)
• South Eastern Coalfields Ltd. v. CCE & ST [2021] 124 taxmann.com 174/55 GSTL 549 (New Delhi – CESTAT) (para 3)
• Amit Metaliks Ltd. v. Commissioner of CGST [2021] 127 taxmann.com 248 (Kolkata – CESTAT) (para 3)
• Paradip Port Trust v. Commissioner of CGST & Excise [2022] 138 taxmann.com 247/62 GSTL 186 (Kolkata – CESTAT) (para 3)
• K.N. Food Industries (P). Ltd. v. Commissioner of CGST & CE [2020] 38 GSTL 60 (All) (para 3)
• M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. v. Principal Commissioner CGST & CE [2021] 126 taxmann.com 182/46 GSTL 409 (New Delhi – CESTAT) (para 3).