Month: November 2025

Compensation retained by ONGC for short off-take of natural gas under an MGO clause is not consideration for tolerating an act

Citation:

Oil and Natural Gas Corporation Ltd., In re.

[2025] 180 taxmann.com 234 (AAR – TAMILNADU)

Facts of the Case:

  1. Applicant manufactures and supplies crude oil and natural gas.
  2. Under a Sales & Transportation Agreement with GAIL, natural gas which falls under VAT/CST is being supplied, with ownership transferring at the designated delivery points.
  3. The agreement includes a Minimum Guaranteed Off-take (MGO) clause requiring GAIL to lift at least 90% of the annual contracted quantity, with MGO charges collected quarterly and adjusted annually against the actual off-take.

Arguments:

Applicant contended that any MGO shortfall retained represents compensation for breach of contract due to failure to lift the minimum quantity and does not constitute consideration for tolerating an act under GST law.

Findings:

AAR observed that:

  1. MGO charges arise solely from a breach of obligation and are not the main object of the contract.
  2. The payment has no nexus with any agreement to tolerate an act or omission.
  3. It serves as liquidated damages to compensate for loss and deter non-performance rather than as consideration for a taxable service.

Order:

It was held that

  1. MGO charges retained for short-lifting of natural gas are in the nature of liquidated damages and not consideration for any supply of service.
  2. Therefore, they are not liable to GST under Section 9 of the CGST Act and the corresponding provisions of the Tamil Nadu GST Act.

Provisions Involved:

As per Serial No. 5(e) of Schedule II to the CGST Act,

Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is deemed to be a supply of service.