TaxTMI 
TaxTMI 
2025 (2) TMI 60
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.... 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 [JPDA], holding 20% participating interest [PI], along with 5 other concessionaries, entered into a Joint Operating Agreement [JOA]. The appellant along with the concessionaries also entered into a Production Sharing Contract [PSC] with Timor Sea Designated Authority for undertaking exploration activities in Block JPDA 06-103 in the Joint Petroleum Development Area JPDA]. 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 aforemention....
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....sing as a condition to the PSC but is made on account of services provided by ANP to GSPC(JPDA); • 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 ANP's obligation to supply said services to GSPC. 6. The GAAR, thereafter, vide the impugned ruling dated 18.10.2021, held as follows: "GSPC (J) 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 ANP is on account of breach of condition of production sharing contract; • that the production sharing contract is for a block in JPDA which is in non taxable territory; • that the amount payable by the appellant to ANP 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 ....
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....h 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 [PSC] for the Joint Development Area JPDA 06-103 2.4 Grounds for Termination (a) Where a Contractor: (i) has not complied with any plan, approval, condition or term to which this Agreement is subject; (ii) has not complied with the Code; (iii) has knowingly provided false information to the Designated Authority in connection with this Agreement; (iv) has not paid any amount payable by it under the Code or under this Agreement within a period of three (3) months after the day on which the amount became payable; or (v) is subject to or commits an Insolvency Event, the Designated Authority may, with the approval of the Joint Commission, on that ground, by instrument in writing served on the Contractor terminate this Agreement. (b) The Designated Authority shall not terminate this Agreement ....
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....e 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 us to a 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 ....
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....#39;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, co....
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....ts have been calculated as follows. 3.3 The Exploration Work Programme and Budget for Contract Year 2013 stipulates that a budget of US$ 18,000,000 was allocated towards the drilling of the third committed well. 3.4 The Contractor did not drill the third committed well in Contract Year 2013 but expended the following amounts towards the same: 3.4.1 Planning and Supervision US$ 262,641.37; and 3.4.2 Well 3 US$ 1,151,569.12. 3.5 Therefore, the Contractor's liability for the estimated cost of Exploration not carried out in the 2013 Contract Year is US$ 18,000,000 (US$ 262,641.37 + US$ 1,151,569.12) is US$ 16,585,789.72. 19. Thereafter, the 'deed of settlement and release' dated 15.7.2020, signed between ANP and the concessionaires state as follows: BACKGROUND A. The Claimant and the Respondents are parties to the PSC. B. The Claimant commenced the Proceedings. C. The parties have agreed to settle the Dispute, and discontinue the Proceedings, on the terms set out in this deed. D. The First Respondent warrants that the First Respondent has authority to sign this deed on behalf of the....
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.... A. 2.7 Upon the Execution Date, the Claimant shall promptly seek orders from the Tribunal in the form of the Consent Award. 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 du....