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2025 (2) TMI 60 - AAAR - GSTSupply or not - levy of GST - payment of settlement fees against demand made by ANP - HELD THAT - The payment by the appellant of USD 80, 00, 000/- to ANP is a consequence of breach of PSC and not in pursuance of the deed of settlement release agreement between the appellant and ANP and certainly not related to ANP s obligation to supply services to GSPC viz ANP performing certain obligations towards GSPC such as release of its performance guarantee. The liquidated damages are paid only to compensate for loss due to breach of PSC in terms of clause 4.5(a)(iii). There is no position to pinpoint any agreement express or implied between ANP and the six concessionaire that on receiving the liquidated damages ANP will refrain from or tolerate an act or do an act for the concessionaires including the appellant paying the liquidated damages. This being the factual matrix the liquidated damages in terms of the aforementioned circular are merely a flow of money and such payments do not constitute consideration for a supply and hence are not taxable. On going through the documents produced it is difficult to establish that the impugned payments constitute consideration for another independent contract envisaging tolerating an act or situation or refraining from doing any act or situation or simply doing an act. Nonetheless we also find that the impugned ruling dated 6.9.2021 erred in holding that the settlement amount liquidated damages is not due to breach in PSC but due to ANPs obligation to supply services to the appellant. Conclusion - GSPC (JPDA) Ltd. is not liable to pay GST on the settlement fees demanded by ANP.
ISSUES PRESENTED and CONSIDERED
The primary legal issue considered in this judgment was whether the payment of settlement fees by GSPC (JPDA) Ltd. to ANP, as a result of the termination of a Production Sharing Contract (PSC), constitutes a supply under the Goods and Services Tax (GST) regulations, thereby attracting GST liability. ISSUE-WISE DETAILED ANALYSIS Relevant Legal Framework and Precedents The legal framework involved the interpretation of the Central Goods and Services Tax Act, 2017, and the Gujarat Goods and Services Tax Act, 2017, particularly concerning the definition of "supply" and the applicability of GST on liquidated damages. The analysis also considered various precedents and a circular issued by the Department of Revenue regarding the taxability of liquidated damages. Court's Interpretation and Reasoning The Tribunal examined whether the settlement amount paid by GSPC (JPDA) Ltd. to ANP was due to a breach of the PSC or if it was a consideration for services provided by ANP. The Tribunal found that the payment was a consequence of the breach of the PSC, specifically related to the failure to meet exploration obligations, and not for any service provided by ANP. Key Evidence and Findings The Tribunal reviewed the terms of the PSC, particularly Articles 2.4 and 4.5, which outlined the grounds for termination and consequences of non-performance. The Tribunal also considered the notice of termination and the deed of settlement and release, which clarified that the payment was for breach of contract obligations. Application of Law to Facts The Tribunal applied the principles outlined in the circular dated 3.8.2022, which clarified that payments made purely as compensation for breach of contract, without any agreement to tolerate an act or refrain from an act, do not constitute a supply under GST law. The Tribunal concluded that the payment was a flow of money due to breach and not a consideration for any service. Treatment of Competing Arguments The appellant argued that the payment was for a breach of the PSC, which occurred in a non-taxable territory and before the GST regime. The Tribunal agreed with the appellant, finding no evidence of an agreement for ANP to perform any service for the payment received. The Tribunal also noted that the GAAR ruling erred in interpreting the payment as consideration for services. Conclusions The Tribunal concluded that the settlement amount paid by GSPC (JPDA) Ltd. to ANP was not subject to GST, as it was not a consideration for a supply but rather compensation for breach of contract. SIGNIFICANT HOLDINGS Core Principles Established The Tribunal reinforced the principle that liquidated damages paid solely as compensation for breach of contract do not constitute a supply under GST law. It emphasized that for a payment to be taxable, there must be a consideration for an independent contract involving an agreement to tolerate an act or refrain from an act. Final Determinations on Each Issue The Tribunal set aside the Advance Ruling No. GUJ/GAAR/R/50/2021, holding that GSPC (JPDA) Ltd. is not liable to pay GST on the settlement fees demanded by ANP. The Tribunal modified the ruling, concluding that the payment was liquidated damages and not taxable under GST regulations.
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