In re Oil and Natural Gas Corporation Limited (GST AAR Tamilnadu)
The Authority for Advance Ruling (AAR) in Tamil Nadu addressed an application filed by Oil and Natural Gas Corporation Limited (ONGC) regarding the Goods and Services Tax (GST) implications on Minimum Guaranteed Off-take (MGO) Charges. ONGC, a major public sector enterprise, supplies crude oil and natural gas—products presently outside the scope of GST, being subject to pre-GST levies like VAT/CST under Section 9(2) of the CGST Act.
Factual Background and Applicant’s Contention
ONGC had entered into a Pan India Gas Sales and Transportation Agreement (GSTA) with GAIL (India) Limited for the sale and delivery of natural gas. The GSTA included a standard industry clause stipulating that GAIL must “Take or Pay” for at least 90% of the Adjusted Annual Contract Quantity (AACQ). If GAIL fails to off-take the minimum committed quantity, ONGC imposes MGO charges. These charges are initially collected quarterly as a deposit and are adjusted annually against the AACQ, with any excess refunded. ONGC accounts for any retained MGO charges as “Other Income” at the end of the financial year.
ONGC contended that the MGO charges imposed for short-lifting the contracted quantity are essentially ‘liquidated damages’ paid as compensation for a breach of contract, and therefore, they do not constitute ‘consideration’ for any supply of goods or services. For an activity to be a ‘supply’ under GST, it must be for a consideration, and the payment must be the result of a contractual reciprocity where one party performs an act at the desire of the other in exchange for that payment. ONGC argued that payments for breach of contract, such as liquidated damages, are penalties for a non-desired event and lack the essential nexus to a reciprocal contractual action. Citing various Service Tax precedents, ONGC maintained that MGO charges do not fall under the definition of ‘supply,’ nor are they a consideration for “agreeing to the obligation to tolerate an act or situation” under Para 5(e) of Schedule II to the CGST Act. They asserted that ‘tolerating an act’ must be an agreement made at the desire of the obligating party, which is not the case for a breach.
