Applicability of GST on Settlement Fees Paid for Termination of Contract
(15)
Name of
Party: M/s. GSPC (JPDA) Ltd.
Name of
Ruling Authority: Gujarat Appellate Authority for Advance
Ruling (GAAAR)
Ruling
Number: GUJ/GAAAR/APPEAL/2025/02
Date of
Ruling: 17.01.2025
Summary of
Ruling:
The Gujarat Appellate Authority
for Advance Ruling (GAAAR) overturned the previous ruling by the Gujarat
Authority for Advance Ruling (GAAR). It held that settlement fees paid by GSPC
(JPDA) Ltd. to the Autoridade Nacional do Petróleo e Minerais (ANP) in
Timor-Leste are not taxable under GST. The payment was determined to be
liquidated damages for breach of contract, not a consideration for any service.
Facts of
Advance Ruling:
- M/s. GSPC (JPDA) Ltd., along with
five other concessionaries, held a 20% participating interest in a Joint
Operating Agreement (JOA) for petroleum exploration in the Joint Petroleum
Development Area (JPDA) under a Production Sharing Contract (PSC).
- The Timor-Leste Government initiated
arbitration proceedings against the Government of Australia to declare
certain maritime agreements void.
- Due to legal uncertainties, GSPC
(JPDA) Ltd. and its partners requested termination of the PSC, which ANP
accepted.
- ANP issued a notice of termination
and demanded payment for exploration activities not carried out and
damages for breach of local content obligations.
- A settlement was reached where GSPC
(JPDA) Ltd. was required to pay its 20% share of the USD 8,000,000
settlement amount.
Question
Raised:
1. Whether
the payment of settlement fees made to ANP for termination of the PSC is liable
to GST under reverse charge mechanism (RCM)?
Submission
Made by Applicant:
- The applicant argued that the payment
to ANP was a penalty/liquidated damages for breach of contract, not a
consideration for a service.
- The PSC was related to a block in
JPDA, which is a non-taxable territory, so GST should not apply.
- The amount was payable before the GST
regime came into force.
- The PSC was not a service contract,
and no supply of service was involved.
Relevant
Sections:
- Section 100 of CGST Act, 2017 –
Governing appeals against advance rulings.
- Section 2(31) of CGST Act, 2017 –
Definition of "consideration."
- Section 7 of CGST Act, 2017 –
Definition of "supply."
- Circular No. 178/10/2022-GST dated
3.8.2022 – Clarification on taxability of liquidated damages.
Discussion
and Finding of Ruling Authority:
- The ruling authority examined the
Production Sharing Contract (PSC) and the notice of termination issued by
ANP.
- It was observed that ANP terminated
the PSC due to GSPC (JPDA) Ltd.’s failure to fulfill exploration
commitments, resulting in a penalty demand.
- The Gujarat Authority for Advance
Ruling (GAAR) had earlier ruled that the payment was for services provided
by ANP, making it subject to GST under RCM.
- However, the appellate authority
disagreed, ruling that liquidated damages do not constitute consideration
for any supply, and therefore GST is not applicable.
- Reference was made to Circular No.
178/10/2022-GST, which clarifies that payments made purely as compensation
for contract breaches are not subject to GST.
Final
Ruling and Conclusion:
- The Gujarat Appellate Authority for
Advance Ruling set aside the previous ruling (GAAR No. GUJ/GAAAR/R/50/2021
dated 6.9.2021).
- It was held that GSPC (JPDA) Ltd. is
not liable to pay GST on settlement fees paid to ANP as the amount
represents liquidated damages and not consideration for a service.
This ruling clarifies
that penalties and damages paid for contractual breaches do not attract GST
unless there is an element of service being provided.
Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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