MGO Short-Offtake Compensation Not Taxable under GST | AAR

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  • Last Updated on 21 November, 2025

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MGO charges for short off-take of natural gas

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

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied