GST Not Payable On MGO Charges Collected By ONGC From GAIL For Shortfall In Gas Offtake: Tamil Nadu AAR
The Authority for Advance Ruling of Tamil Nadu recently held that Minimum Guaranteed Off-take (MGO) charges collected by ONGC from GAIL for short-lifting natural gas are not liable to Goods and Services Tax (GST).In a clarification key for the oil and gas sector, the authority ruled that these charges are in the nature of liquidated damages for breach of contract and do not constitute a...
The Authority for Advance Ruling of Tamil Nadu recently held that Minimum Guaranteed Off-take (MGO) charges collected by ONGC from GAIL for short-lifting natural gas are not liable to Goods and Services Tax (GST).
In a clarification key for the oil and gas sector, the authority ruled that these charges are in the nature of liquidated damages for breach of contract and do not constitute a taxable “supply” under GST law.
The coram, comprising C Thiyagarajan, IRS (Additional Commissioner, CGST) and B Suseel Kumar, (Joint Commissioner, SGST), observed that the MGO charges are not paid in exchange for any supply of goods or services, but are instead compensation for the failure to meet contractual obligations.
The members noted, “We are of the view that the amount of MGO charges which is paid as liquidated damages' is an amount paid only to compensate for injury, loss or damage suffered by the applicant due to breach of contract and shall not be construed as the activity of refraining from or tolerating an act or to do anything",
"We are of the view that the amount of MGO charges which is paid as liquidated damages' is an amount paid only to compensate for injury, lossor damage suffered by the applicant due to breach of contract and shall not be construed as the activity of refraining from or tolerating an act or to do anything", they added.
The ruling came in response to a request filed by Oil and Natural Gas Corporation Limited (ONGC), a public sector undertaking engaged in the production and supply of crude oil and natural gas. ONGC had entered into a nationwide Gas Sales and Transportation Agreement (GSTA) with GAIL (India) Limited in July 2021 for the sale and transportation of natural gas.
The agreement included a clause requiring GAIL to lift at least 90% of the contracted quantity of gas annually. If it failed to do so, ONGC would levy MGO charges. ONGC argued that these charges are not consideration for any supply, but are liquidated damages for breach of contract.
They submitted that GST should not apply, as there is no reciprocal supply or contractual obligation to tolerate non-performance. They also referred to the CBIC Circular No. 178/10/2022-GST, which clarified that such damages are not considered taxable supplies under the GST framework.
The Authority accepted ONGC's submissions and ruled that GST is not applicable on MGO charges, stating unequivocally, “Such payments do not constitute consideration for a supply and are not taxable.
Advance Ruling No. 37/ARA/2025
ONGC was represented by by Advocate Nimrah Ali, Lakshmikumaran and Sridharan Attorneys
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