In re Pon Pure Chemical India Private Limited (GST AAR Gujarat)
The Gujarat Authority for Advance Ruling (AAR) examined whether compensation received by a company from transporters for losses arising during transportation of goods constitutes a taxable supply of services under paragraph 5(e) of Schedule II read with Section 7 of the Central Goods and Services Tax Act, 2017. The applicant transported chemicals through various transporters and recovered compensation where losses exceeded agreed tolerance limits or where defaults resulted in material shortages, quality deterioration, colour issues, tanker rust, damage or destruction of goods, theft or pilferage, failure to deliver goods on time, or negligence during handling, loading or unloading. The applicant contended that these recoveries represented compensation for actual losses and not consideration for any supply of services.
The Authority examined the transportation agreements and noted that they contained clauses providing for liquidated damages, deduction of compensation from transporters’ payments, transporter liability for losses, and tolerance limits for shortages during transit. Although the applicant had initially stated that no formal compensation agreement existed, the AAR found that the transportation contracts expressly contemplated claims for damages and liquidated damages arising from breaches of contractual obligations.
The AAR considered the definitions of “supply” and “consideration” under the CGST Act and the clarification contained inCBIC Circular No. 178/10/2022-GST. dated 3 August 2022 relating to liquidated damages. The Circular states that compensation paid solely for injury, loss or damage suffered due to breach of contract, without any agreement by the aggrieved party to refrain from an act, tolerate an act or situation, or do an act, is merely a flow of money and does not constitute consideration for a supply.
