Compensation for transit defaults is not taxable as a service supply under GST when it is merely compensatory recovery.

Compensation recovered from transporters for transit loss, damage, shortage, delay, leakage, theft, contamination or similar defaults was held not to be a supply of services under para 5(e) of Schedule II read with Section 7 of the CGST Act. The recovery arose from breach or non-performance of the transport contract and was compensatory or in the nature of liquidated damages, not consideration for any independent promise to refrain from, tolerate, or do an act. It therefore did not satisfy the essential requirement of supply under GST law and was not taxable.

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Issues: Whether compensation recovered from transporters for loss, damage, shortage, delay, leakage, theft, contamination, or similar transit defaults amounts to a supply of services under para 5(e) of Schedule II read with Section 7 of the Central Goods and Services Tax Act, 2017.

Analysis: The compensation arises from breach or non-performance of the transport contract and is linked to loss suffered by the applicant, not to any independent promise by the applicant to refrain from, tolerate, or do any act for the transporters. The amounts are in the nature of liquidated damages or compensatory recoveries, intended to ensure performance and deter default. Such receipts do not represent consideration for a separate service and do not satisfy the essential requirement of supply under the GST law.

Conclusion: The compensation recovered from transporters is not a supply of services and is not taxable under para 5(e) of Schedule II read with Section 7 of the Central Goods and Services Tax Act, 2017.

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