Sale of LPG and collection of Take or Pay Charges would not form a composite supply: AAR

Case details: Authority for Advance Rulings, Telangana SHV Energy (P.) Ltd., In re - [2021] 131 taxmann.com 208 (AAR- TELANGANA)

Judiciary and Counsel Details

• • B. Raghu Kiran and S.V. Kasi Visweshwar Rao, Member

Facts of the Case

The applicant was engaged in business of sale of LPG to industrial customers. It entered into LPG supply agreement with industrial users for longer period ranging from 5 to 10 years. As per agreement, a minimum quantity of LPG had to be necessarily purchased by buyer and if such minimum amount would not be purchased, they shall pay by way of commitment charges i.e., ‘Take or Pay’ Charges of such shortfall in quantity. The applicant filed an application of advance ruling to determine whether sale of LPG and ‘Take or Pay’ charges together would form a composite supply.

AAR Held

The Authority for Advance Ruling observed that ‘Take or Pay’ contract is a contract which requires the buyer to either purchase and receive a minimum amount of product at a set price (“take”) or pay for this minimum without taking immediate delivery(“pay”). ‘Take or Pay’ clauses in a contract ensure compensation for the seller in the event buyer does not purchase a specified quantity of goods or services in the course of a continuous supply. The ‘Take or Pay’ Charges will be evidently compensation for breach of contract and a penalty stipulated to be paid to the applicant by his buyer for not purchasing the minimum quantity specified in the agreement. These charges would come into existence only when there shall be no supply of LPG. Therefore, it would mean that supply of LPG and ‘Take or Pay’ Charges shall be mutually exclusive and can never exist together and it would not be treated as composite supply.

List of Cases Referred to

• • Diebold Systems (P.) Ltd. v. CST [2008] 12 STT 346 (Chennai – CESTAT) (para 6)
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  • Abott Health Care (P.) Ltd. v. CST [2020] 74 GSTR 37 (Ker.) (para 7)
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