In re GSPC (JPDA) Ltd. (AAAR Gujarat)

Gujarat Appellate Authority for Advance Ruling (AAAR) reviewed the taxability of a settlement payment made by GSPC (JPDA) Ltd. to the National Petroleum and Minerals Authority (ANP). The case involved the termination of a Production Sharing Contract (PSC) for petroleum exploration in the Joint Petroleum Development Area (JPDA) shared by Timor-Leste and Australia. The Gujarat Authority for Advance Ruling (GAAR) had ruled that the settlement payment of USD 80 million, representing GSPC’s share, was subject to GST under the reverse charge mechanism. This decision was based on the view that the payment was for services provided by ANP to GSPC, rather than compensation for breach of contract.

GSPC contested the ruling, arguing that the payment arose due to a breach of PSC terms and not as consideration for any service. The AAAR examined the contract provisions and supporting documents, concluding that the payment represented liquidated damages for breach of exploration obligations. It referred to a circular clarifying that such payments, made solely as compensation without any service component, are not taxable under GST. As the settlement payment was compensation for contractual non-performance, the AAAR overturned GAAR’s decision, ruling that GST was not applicable to the amount paid.

Read AAR Order: IGST Payable on supply of Import services under RCM

FULL TEXT OF THE ORDER OF AUTHORITY FOR APPELLATE ADVANCE RULING, GUJARAT

At the outset we would like to make it clear that the provisions of the Central Goods and Services ‘Fax Act, 2017 and Gujarat Goods and Services Tax Act, 2017 (hereinafter referred to as the `CGST Act, 2017′ and the `GGST Act, 2017’) arc pari materia and have the same provisions in like matter and differ from each other only on a few specific provisions. Therefore, unless a mention is particularly made to such dissimilar provisions, a reference to the COST Act, 2017 would also mean reference to the corresponding similar provisions in the GGST Act, 2017.

2. The present appeal is filed under Section 100 of the CGST Act, 2017 and the GGST Act, 2017 by M/s. GSPC (JPDA) Ltd., (for short — ‘Appellant’) against the Advance Ruling No. GUJ/GAAR/R/50/2021 dated 6.9.2021.

3. Briefly, the facts are enumerated below for ease of reference:

3.1. M/s. GSPC PPDA1, holding 20% participating interest [PI1, along with 5 other concessionaries, entered into a Joint Operating Agreement IJOA I. The appellant along with the concessionaries also entered into a Production Sharing Contract I PSCI with Timor Sea Designated Authority for undertaking exploration activities in Block JPDA 06-103 in the Joint Petroleum Development Area 1JPDA J. One amongst the concessionaries, M/s. Oilex Ltd, was appointed as the operator under the JOA.

3.2. JPDA is an area of Timor-Leste & Australia & the petroleum existing within JPDA is a resource exploited jointly by Governments of Timor-Leste and Australia.

3.3. Timor-Leste Government, initiated arbitration proceedings against Government of Australia to have certain Maritime Agreements in Timor Sea Treaty to be declared as void-ab-initio. This termination would result in automatic termination of Timor Sea Treaty governing petroleum operations in JPDA & the production sharing contract entered into for JPDA 06-103.

3.4. The six concessionaries in view of the aforementioned arbitration proceedings, requested ANP’ for termination of the PSC by mutual agreement. ANP, issued a notice of intention to terminate PS;.: to the operator. ANP thereafter terminated the PSC with a demand of payment of estimated cost of exploration not carried out & damages for breach of its local content obligations in terms of article 4.5(a)(iii) of PSC.

3.5. ANP further filed a request for arbitration; settlement was reached by the parties regarding the amount to be payable by the concessionaries to ANP; the Arbitral Tribunal was thereafter notified of the settlement so arrived; the Arbitral Tribunal, in view of the settlement agreement between the parties, declared the proceedings closed in accordance with the rules.

3.6. The Arbitral Tribunal, directed payment of an amount of USD 80,00,000/- of which the GSPC (IPDA)’s share was 20%.

4. In view of the foregoing facts, the appellant had sought Advance Ruling on the following questions, viz:

“Whether payment of settlement lees against demand made by ANP vide letter dated 15. 7.20/5 attract levy of GST under GST regulations.”

5. Consequent to hearing the applicant, the Gujarat Authority for Advance Ruling I GAARI, recorded the following findings viz

• that the reason GSPC along with other concessionaries sought termination was due to uncertainty arising out of arbitration initiated by Timor-Leste Government against Government of Australia to have certain maritime agreements in Timor Sea declared as void ab initio;
• that in this case, GSPC is paying the amount to ANY & not the other way round;
• that the amount paid is not an exploration cost/reimbursement as contended by the appellant;
• the appellant is obliged to pay only its proportionate share and not jointly/severally, as is being contended;
• that in pursuance of the deed of settlement & release, there was an agreement between the appellant and ANP; that it was related to ANY agreeing to .do an act, tolerate the situation and refraining from pursuing the arbitration proceedings;
• that the payment of USD 80,00,000/- is not arising as a condition to the PSC but is made on account of services provided by ANP to GSPC(IPDA);
• that ANP has supplied the service from non taxable territory to a taxable territory;
• that the subject settlement amount is not due to breach of PSC but due to ANI”s obligation to supply said services to GSPC.

6. The GAAR, thereafter, vide the impugned ruling dated 18.10.2021, held as follows:

“GSPC (I) is liable to pay IGST, vide Reverse Charge Mechanism on import of subject supply of service from ANP.”

7. Aggrieved by the aforesaid advance ruling, the appellant is before us, raising the following contentions, viz

• the payment to ANY is on account of breach of condition of production sharing contract;
• that the production sharing contract is for a block in JPI/A which is in non taxable territory;
• that the amount payable by the appellant to ANY is for a period prior to GST regime;
• that the production sharing contract is not akin to a service contract.

8. Personal hearing in the matter was held on 8.11.2024 wherein Shri Anil Chauhan, appeared and reiterated the submissions made in the appeal. Ile submitted additional submission during the course of personal hearing, reiterating the submissions already made. In the additional submission, the appellant has enclosed the copies of the following circular, judgements and advance ruling, viz

• Circular No. 178/10/2022-GST dated 3.8.22
• Northern Coaltields²
• Krishnapatnam Port Company Ltd³
• K N Food Industries P Ltd⁴
• Neyveli Lignite Corporation Ltd⁵
• Steel Authority of India f.td⁶
• Amit Metaliksl.td ⁷
• Achampet Solar Ltd

FINDINGS

9. We have carefully gone through and considered the appeal papers, written submissions filed by the appellant, submissions made at the time of personal hearing, the Advance Ruling and other materials available on record.

10. The list of important dates, qua this contract is mentioned below for ease of reference:

11. The appellant’s primary contention is that ANP vide its notice dated 15.7.2015, terminated the PSC with a demand of payment of penalty on account of breach exploration not carried out and damages for breach of its local content obligations. On the other hand, GAAR vide its impugned ruling has held that the settlement amount payable to ANP is not due to breach of PSC but due to ANP’s obligation to supply services to appellant.

12. We would like to reproduce some relevant extracts of the Production Sharing Contract I PSC I for the Joint Development Area JPDA 06-103

13. on going through the notice of intention to terminate dated 13.5.2015, issued by ANP to the concessionaires, we observe the following viz [relevant extracts]

1. NOTICE OF INTENTION TO TERMINATE

1.2 The ANP’s right to terminate the PSC arises in accordance with articles 2.4 & 4.5 (a)(iii) of the PSC of the contractor’s material breach of the terms of the PSC, in particular, the contractor’s failure to meet the Exploration Work Program by 15.1.2014 & deliver the third well.

2. BASIS FOR ISSUANCE

2.2

A Contractors breach of its Exploration work Program

2.3 As the matter currently stands:

2.3.4 in such circumstances, Article 4.5(a)(11) provides the ANP with the express right to terminate the PSC & require from the Contractor payment of the estimated cost of the Exploration not carried out in that Contract year.

2.4   For completeness, the relevant terms of Article 4.5(a)(iii) provide: (a)

(iii) terminate this Agreement and  require payment of the estimated cost of the Exploration not carried out in that Contract year.”

14. A conjoint reading of the extracts reproduced above, leads Hus I to conclusion, 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.

15. We would next examine the taxability of the amount so paid by the appellant to ANP for breach of PSC. The appellant after relying on the circular dated 3.8.2022 and numerous case laws, etc has averred that settlement amount payable by the appellant is not taxable under GST since the payment is towards breach of condition of contract & the liability arises out of the terms and conditions stipulated in the PSC.

16. The circular dated 3.8.2022, relied upon by the appellant, clarifies liquidated damages as under:

7.1.1 It is common for the parties entering into a contract, to specify in the contract itself the compensation that would be payable in the event of the breach of the contract. Such compensation .specified in a written contract for breach of non-performance of the contract or parties of the contract is referred to as liquidated damages. Black‘s Law Dictionary defines ‘Liquidated Damages’ as cash compensation agreed to by a signed, written contract for breach of contract, payable to the aggrieved party.

On the question of taxability of liquidated damages, the circular further clarifies as under

7.1.4 In this background a reasonable view that can be taken with regard to taxability of liquidated damages is that where the amount paid as ‘liquidated damages’ is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement  express or  implied, by the aggrieved party receiving the liquidated damages, to refrain _from or tolerate an act or to do anything for the  party paving the liquidated damages in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute  consideration for a supply and are not taxable.

……  The key in such cases is to consider whether the impugned payments constitute consideration far another independent contract envisaging tolerating an act or situation or  refraining from doing any act or situation or simply doing an act. If the answer is yes, then it constitutes a ‘supply’ within the meaning of the Act other wise it is not a “supply”.

7.1.6 If a payment constitutes a consideration for a supply, then it is taxable irrespective of by what name it is called; it must he remembered that a “consideration” cannot he considered de hors an agreement/contract between two persons wherein one person does something for another and that other pays:411e first in return. If the payment is merely an event in the course of the perjbrmance of the agreement and it does not represent the ‘object’, as such, of the contract then it cannot be considered `consideration’. For example, a contract may provide that payment by the recipient of goods or services shall be made before a certain date and failure to make payment by the due date shall attract late fee or penalty. A contract for transport of passengers may stipulate that the ticket amount shall be partly or wholly forfeited if the passenger does not show up. A contract for package tour may stipulate forfeiture of security deposit in the event of cancellation of tour by the customer. Similarly, a contract for lease of movable or immovable property may stipulate that the lessee shall not terminate the lease before a certain period and if he does so he will have to pay certain amount as early termination fee or penalty. Some banks similarly charge pre payment penalty if the borrower wishes to repay the loan before the maturity of the – loan period. Such amounts paid for acceptance of late payment, early termination of lease or for pre-payment of loan or the amounts forfeited on cancellation of’ service by the customer as contemplated by the contract as part of commercial terms agreed to by the parties, constitute consideration fbr the supply of a facility, namely, of acceptance of late payment, early termination of a lease agreement, of pre-payment of loan and of making arrangements for the intended supply by the tour operator respectively. Therelbre„ such payments, even though they may be referred to as fine or penalty, are actually payments that amount to consideration _.for supply, and are subject to GST, in cases where such supply is taxable. Since these supplies are ancillary to the principal supply fbr which the contract is signed, they shall be eligible to he assessed as the principal supply, as discussed in detail in the later paragraphs. Naturally, such payments will not be taxable if the principal supply is exempt.

[emphasis supplied]

17. What the circular contemplates is that liquidated damages paid to compensate for loss or damage due to breach of the contract sans an agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain ^–from or tolerate an act or to do anything for the party paying the liquidated damages, and where the liquidated damages are mere flow of money and do not constitute consideration for a supply arc not taxable. What needs examination is whether 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. If the answer is yes, then it constitutes a ‘supply’ within the meaning of the Act, otherwise it is not a “supply”.

18. The appellant’s liability as worked out in the notice of intention to terminate dated 13.5.2015, is as under

19. Thereafter, the ‘deed of settlement and release’ dated 15.7.2020, signed between AM) and the concessionaires state as follows:

20. As is’ evident in this case liquidated damages are paid only to compensate for loss due to breach of PSC in terms of clause 4.5(a)(iii). We have not been in a 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 before us, 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.

20.1. We further find that the issue was clarified vide circular no. 178/10/2022- GST dated 3.8.2022 which has been issued consequent to the impugned ruling dated 6.9.2021.

The appellant has relied upon numerous case laws. We would like to reproduce the relevant extract from the judgement in the case of Northern Coalfields Ltd, supra, which substantiates our findings above viz

20. In this connection it would also be pertinent to refer to the Circular dated 03.08.2022 issued by the Department of Revenue regarding applicability of goods and service tax on liquidated damages, compensation and penalty arising out of breach of contract in the context of „agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act This Circular emphasizes that there has to he an express or implied agreement to do or abstain from doing something against payment of consideration _.for a taxable supply to exist an act or a situation cannot be imagined or presumed to exist^– merely becal4e is a flow of money from one party to another. It also mentions that unless payment has been made ,for an independent activity of tolerating an act under^. -an independent arrangement entered into for such activity or tolerating an act, such payment will not constitute „consideration Li and such activities will not constitute „supply The relevant portion of the Circular is reproduced below..

” Agreement to do or refrain from an act should not be presumed to exist

There has to he an express or implied agreement: oral or written, to do or abstain from doing something against payment of consideration for doing or abstaining from such act, for a taxable supply to exist. An agreement to do an act or abstain from doing an act or to tolerate an act or a situation cannot he imagined or presumed to exist just because there is a flow of money from one party to another. Unless there is an express or implied promise by the recipient of money to agree to do or abstain from doing something in return for the money paid to him, it cannot he assumed that such payment was for doing an act or for refraining from an act or for tolerating an act or situation. Payments such as liquidated damages for breach of contract, penalties under the mining act for excess stock found with the mining company, forfeiture of salary or payment of amount as per the employment bond for leaving the employment before the minimum agreed period, penalty for cheque dishonour etc. are not a consideration for tolerating an act or situation. They are rather amounts recovered for not tolerating an act or situation and to deter such acts; such amounts are for preventing breach of contract or nonperformance and are thus mere “events’ in a contract. Further, such amounts do not constitute payment (or consideration) for tolerating an act, because there cannot be any contract: (a) for breach thereof, or (b) for holding more stock than permitted under the mining contract, or (c) for leaving the employment before ^–the agreed minimum period or (d) for doing something leading to the dishonour of a cheque. As has already been stated, unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into fen- such activity of tolerating an act, such payments will not constitute ‘consideration’ and hence such activities will not constitute “supply” within the meaning of the Act.”

(emphasis supplied)

Since we have already ruled in favour of the appellant, we do not wish to discuss the other case laws, rulings etc., relied upon by the appellant, it being a mere academic exercise.

22. In view of the foregoing, we set aside the Advance Ruling No. G111/GAAR/R/50/2021 dated 6.9.2021 of the GAAR in the case of M/s. GSPC (JPDA) Ltd. We modify the ruling and hold that GSPC (JPDA) Ltd., is not liable to pay GST on settlement fees against demand made by ANP vide letter dated 15.7.2015, subsequently settled vide Deed of Settlement and Release dated 15.7.2020 in terms of circular no. 178/10/2022-GST dated 3.8.22 since it is liquidated damages.