ONGC’s MGO Charges from GAIL for Gas Shortfall not Subject to GST: AAR [Read Order]

The applicant, Oil and Natural Gas Corporation Limited,was a Maharatna Public Sector Enterprise under the Ministry of Petroleum and Natural Gas, engaged in producing and supplying crude oil and natural gas across India.

Its operations were carried out at onshore and offshore locations, and the main delivery points in Tamil Nadu included Narimanam, Madanam, Kuthalam, Ramnad, Nannilam, Adikyamangalam, and Kamalapuram. Natural gas was delivered to customers through pipelines at these and other points across the country.

The applicant had entered into a Pan India Gas Sales and Transportation Agreement (GSTA) dated 02.07.2021 with GAIL to sell APM and Non-APM natural gas produced from government-nominated fields.

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Under the agreement, gas was delivered at specified points where ownership passed to GAIL. Supply was subject to availability, and fallback arrangements were permitted. The applicant also provided tentative annual production quantities each year based on its production plan.

Gas supply was not subject to GST under Section 9(2) of the CGST Act, though pre-GST levies such as VAT or CST applied. GAIL paid for the actual quantity of gas taken. If GAIL failed to off-take 90% of the agreed quantity, the applicant imposed MGO charges.

These charges were collected quarterly as deposits, adjusted annually based on the total quantity taken, and any excess was refunded. MGO charges were calculated separately for APM and Non-APM gas.

The applicant stated that the “minimum take or pay” or “minimum guaranteed off-take” practice was common in the oil and gas industry. It ensured that the company could recover losses in case the buyer failed to take the agreed quantity of gas. The present application sought an advance ruling on the GST implications of imposing Minimum Guaranteed Off-take charges on GAIL.

The applicant claimed that the MGO charges imposed on GAIL for short-lifting from the Adjusted Annual Contract Quantity were in the nature of liquidated damages, paid as compensation for breach of contract. They submitted that these charges did not amount to ‘consideration’ for any supply and, therefore, no GST was payable on them.

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The applicant explained that, under the CGST Act, GST applied only to a supply of goods or services made for consideration in the course of business. For an activity to qualify as a supply, it had to be done for another person, in return for consideration, and in furtherance of business. They argued that MGO charges arose solely from GAIL’s failure to meet contractual obligations and were not desired by the applicant as consideration for any service.

Relying on Indian contract law and previous case laws, the applicant submitted that liquidated damages or penalties for breach of contract could not be treated as consideration for a supply. They emphasized that only payments made voluntarily in exchange for a service qualified as consideration, while payments imposed due to breach of contract did not.

During the personal hearing, the applicant’s authorized representative explained that 90% of the Adjusted Annual Contract Quantity was collected from GAIL as MGO on a quarterly basis and adjusted at the end of the financial year, with any excess refunded.

These charges were recorded as a ‘deposit’ in the applicant’s books and accounted as ‘Other Income’ if GAIL failed to fulfil its obligations. The AAR requested proof of the accounting treatment, which the applicant submitted for at least two financial years.

The AAR bench comprising of B.Suseel Kumar (SGST) and C.Thiyagarajan (CGST) examined the advance ruling application, the additional submissions made during the personal hearing on 24.07.2025, and documents submitted later via email. The applicant had imposed MGO Charges on M/s. GAIL if they failed to off-take 90% of the contracted quantity quarterly. These charges were adjusted annually based on the Adjusted Annual Contract Quantity, with any excess refunded as per the Gas Sales and Transportation Agreement (GSTA).

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The bench considered whether these MGO Charges were ‘consideration’ under the CGST Act, whether they represented payment for tolerating an act, and whether they constituted a ‘supply’ of service. It noted that under the Act, agreeing to tolerate or refrain from an act can be a supply only if linked to a contractual agreement with consideration.

The bench observed that MGO Charges were liquidated damages under the Indian Contract Act, meant to compensate for breach of contract. They were not received for tolerating a breach but to enforce contract performance and prevent non-performance.

Since these payments were tied to non-performance and not a separate supply of service, they did not count as ‘consideration’. The principal supply under the contract was natural gas, which was outside GST. CBIC Circular No. 189/10/2022-GST also clarified that liquidated damages are not a supply.

The bench ruled that GST was not payable on MGO Charges imposed on M/s. GAIL for short-lifting natural gas under the GSTA dated 02-07-2021. The charges were liquidated damages and did not constitute consideration for a supply of service.

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