Nidhi | Oct 15, 2025 |
MGO Charges are Liquidated Damages and Not Consideration: Tamil Nadu AAR Clarifies to ONGC
The applicant, M/s Oil and Natural Gas Corporation Limited (ONGC), manufactures and supplies crude oil and natural gas through pipelines across India. The delivery points in Tamil Nadu are primarily Narimanam, Madanam, Kuthalam, Ramnad, Nannilam, Adikyamangalam, and Kand Kandamalapuram. The applicant has signed a contract named Pan India Gas Sales and Transportation Agreement (GSTA) with GAIL, where the applicant has promised to sell and deliver Administered Price Mechanism (APM) and Non-APM Natural Gas from Government-nominated fields to GAIL.
As per the agreement, GAIL is required to pay the price of the actual quantity of gas taken by the applicant. But, if they fail to pay for at least 90% of the agreed contracted quantity under GSTA, then the applicant will levy Minimum Guaranteed Off-take (MGO) charges on GAIL.
ONGC filed the appeal before the Tamil Nadu Authority for Advance Ruling (Tamil Nadu AAR) to seek an advance ruling for the following questions:
“(i) Whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.
(i) Whether, in the facts and circumstances of the case, GST is leviable on the Minimum Guaranteed Off-take (MGO) Charges imposed on M/s. GAIL (India) Limited for short-lifting Natural Gas from the contracted quantity i.e., Adjusted Annual Contract Quantity under the Gas Sales and Transportation Agreement(GSTA) dated 02.07.2021.”
The Tamil Nadu AAR examined the contract in detail and observed that MGO charges are imposed for the failure to take off the required quantity as promised. The MGO charge is the penalty for violating the contract and not a consideration. Therefore, it is not a supply, and the amount cannot be treated as consideration. The authority also referred to the CBIC Circular No. 189/10/2022-GST, which says that liquidated damages for violating a contract are not a consideration and are not taxable under GST.
The Authority held that MGO Charges collected by ONGC from GAIL are liquidated damages and are not subject to GST.
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