TaxTMI 
TaxTMI 
2026 (7) TMI 55
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....t make them susceptible to certain unavoidable losses during transportation. These inherent losses arise due to evaporation, spillage, leakage due to factors like temperature fluctuations, pressure changes, or mechanical stress during transit and weight loss due to moisture absorption or desorption, compaction, or other physical transformation during transportation. Industry practices often establish an agreed tolerance limit for such issues. Losses within tolerance limit are anticipated and accepted and generally no recovery is made by the applicant against the agreed tolerance limit. However, losses exceeding this agreed threshold are considered breaches of contractual terms, prompting the applicant to seek compensation from transporters for the excess loss. The various circumstances under which the compensation is received from the transporters as well as the quantum of compensation are described hereunder: S.No. List of various circumstances Quantum of loss or basis for compensation. 01. Material shortage during transportation and any kind of loss in transit beyond a specific level on account of default by the transporter including tanker leakages. Pursuant to....
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....pensation. 4. In view of the above, the applicant seeks an advance ruling on the following question: "Whether the amount from the transporters as a compensation for loss would be considered as a "Supply of services" by the applicant as per para 5(e) of Schedule II of Section 7 of Central Goods and Services Tax Act, 2017?" 5. Statement containing the applicant's interpretation of legislative provisions with respect to the issue is as under: (i) The applicant engages various transporters for transportation of goods and the transporter shall be responsible for handling the goods and in case of any defaults or mistakes committed by such transporters, the company recovers damages or receives compensation from the transporters. The amount received from the transporters against the above defects in goods transported, cannot be considered as 'supply of service' under Para 5(e) of Schedule II read with Section 7 of the Central Goods and Service Tax Act, 2017 therefore, GST cannot be levied on such activity. (ii) Firstly, it is required to analyse whether compensation received from transporters would be considered as 'Supply of Service'. In order to levy tax ....
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....ch deposit as consideration for the said supply. (v) As per the above definition, the meaning of the word consideration is very broad. It includes any payment made or to be made, whether in money or otherwise, a) In respect of b) In response to c) For Inducement of supply of goods of services. (vi) A plain reading of the aforesaid provisions under GST indicates that for a transaction to qualify as a "supply of service', there has to be an underlying activity' performed by one person for another for consideration and there has to be a service provided and a service recipient who has agreed to perform/receive specified services. The contract/agreement should involve contractual reciprocity. (vii) Circular No.178/10/2022-GST dated 03.08.2022 clarified that liquidated damages are a mere flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach, that such payments do not constitute consideration for a supply and are not taxable. (viii) The compensation received from the transporters are in the nature of liquidated damages. The term 'liquidated damages' is define....
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.... of Schedule II of CGST Act. The relevant extracts of the Circular are reproduced below: - "7.1 Breach or non-performance of contract by one party results in loss and damages to the other party. Therefore, the law provides in Section 73 of the Contract Act, 1972 that when a contract has been broken, the party which suffers by such breach is entitled to receive from the other party compensation for any loss or damage caused to him by such breach. The compensation is not by way of consideration for any other independent activity; it is just an event in the course of performance of that contract ... 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 paying the liquidated damages, in such cases liquidated damages are a mere flow of money from the party who causes bre....
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....ation or simply doing an act. • The payment received should be merely an event in the course of the performance of the agreement. (xiii) If a payment encompasses all the above, then it can be considered as liquidated damages which is a mere flow of money and would not constitute as a consideration. (xiv) Hence, from the above circular, it is clear that GST is not applicable on liquidated damages because the same is not covered under the scope of supply as the amount paid is only to compensate for injury, loss or damage and such payments do not constitute consideration for a supply. (xv) In the present case, the compensations received from transporters would satisfy the definition of liquidated damages for the reasons stated above. Hence, the recoveries made from transporters is akin to liquidated damages as referred in CBIC Circular. In addition, the amount received as compensation is unconditional and based on actual loss/damage incurred and not based on any mathematical formula. The arrangement between the transporters and applicant is to deliver the goods as agreed, if there is any default in the hands of transporters, the same shall be co....
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.... under Section 66(E)(e) of the Act. (c) Case of Steel Authority of India vs. Comm, of GST & C.Ex., Salem, 2021 (55) GSTL.34 (Tri., Chennai) wherein it was held that liquidated damages cannot be said to be towards any service per se, since neither appellant is carrying on any activity to receive compensation nor can there be any intention of other party to breach or violate contract and suffer a loss-Service Tax not leviable under Section 65B, read with Section 66E(e ) of the Finance Act, 1994-Demand, interest and penalty not sustainable. (d) South Eastern Coal fields Itd. Vs. Commr. Of C.Ex. & ST, Raipur - 2021 (55) GSTL.549 (Tri .- Del.) wherein it was held that liquidated damages cannot be said to be towards any service per se, since neither appellant is carrying on any activity to receive compensation nor can there be any intention of other party to breach or violate contract and suffer a loss ........ It is therefore not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards 'consideration' for 'tolerating an act' leviable to se....
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....harge was within the permissible limits and there was no legal obligation upon the individual unit to do so. (xx) It was further clarified that all the 3 activities must be under an 'agreement' or a 'contract' (whether express or implied) to fall within the ambit of the said entry i.e. one of the parties to such agreement/contract (the first party) must be under a contractual obligation to either: (a) Refrain from an act, or (b) To tolerate an act or a situation or (c) To do an act. (xxi) Further, some "consideration" must flow in return from the other party to this contract/agreement (the second party) to the first party for such (a) refraining or (b) tolerating or (c) doing. Such contractual arrangement must be an independent arrangement in its own right. Such arrangement or agreement can take the form of an independent standalone contract or may form part of another contract. Thus, a person (the first person) can be said to be making a supply by way of refraining from doing something or tolerating some act or situation to another person (the second person) if the first person was under an obligation to do so and then performed accordi....
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.... Steel & Power Limited vs. Principal Commissioner of CGST & Cex, Ranchi Commissionerate. (d) M/s. Bharat Heavy Electricals Limited PSWR vs. Commissioner of Central Excise and Service Tax, Nagpur 2023 (5) TMI 11 - CESTAT Mumbai. (xxvii) The applicant has concluded his submission by stating that considering the above provisions and facts of the case, the applicant is allowed not to pay tax on the compensation received from Transporters in the present case. 6. The applicant vide their additional submission dated 04.02.2026 has reiterated the submissions given along with their application dated 01.08.2025. The applicant has also relied on the following judgements/decisions to support their cause: (i) JBM Ecolife Mobility Surat Pvt. Ltd., Surat vs. Surat Sitilink Ltd., (SSL), Gujarat AAR GUJ/R/2025/47 dated 03.11.2025-2025-VIL-180-AAR. (ii) Maharashtra State Electricity Transmission Col .Ltd. (MSETCL)-Maharashtra AAR No.GST-ARA-31/2024-25/B-208, dated 28.04.2025-2025-VIL-78 AAR/2025-VIL-20-AAR (same order text). (iii) Oil and Natural Gas Corporation Ltd.(ONGC)-Minimum Guaranteed Off-take (MGO) Charges-Tamil Nadu AAR, Advance Ruling No. 37/....
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....t the loss in transit transactions correctly and that the customers also reverse input tax credit to the extent of GST charged in the credit notes. The applicant has enclosed copies of 2 contracts for transportation with two different transporters i.e. (i) between M/s. Pon Pure Chemical India Pvt. Ltd. (office located at Chennai, Tamil Nadu) & Bansidhar Transport, Gandhidham, Kutch (covering various destinations across India) and (ii) between M/s. Pon Pure Chemical India Pvt. Ltd. (office located at Chennai, Tamil Nadu) & Satya Bizcon India Pvt. Ltd., Mumbai (covering various destinations across India). Some of the relevant extracts of the contracts are reproduced hereunder for reference: 1. That the Transporter as owners/hirers of Tankers will maintain the same in good working order during the period of contract. Tankers provided by Transporter for loading the PRODUCTS must be neat, tidy and fitted with rear/side unloading valve and all the top openings to be with sealing arrangement.. 2. Timely reporting of the Tanker/s is the essence of contract. Seals of the Tankers must remain intact and should co-relate with those mentioned in challans. The Company shall be ....
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....t of halting, the Transporter has to intimate the same in an email on the same day to the company, and for claiming the halting charges, along with freight bill, the transporter shall annex the GPS report and a confirmation from the customer covering the timing and date of tanker reported. The transporter understands that in the absence of an email from the transporter as mentioned above, no halting charges will be paid to the transporter. 11. Loss in Transit: Annexure-E Tolerance clause: A Hexane & MDC 0 .75% and if shortage exceeds more than 1% will be deducted entire shortage. B Other Products (other than Phenol) 0.30% and if shortage exceeds more than 0.5% will be deducted entire shortage quantity. C Warehouse Physical Weighment only (Drum unloading) will be considered in our all warehouse. Note: Physical weighment will be considered only if the drum wise weight (Drum wise weighment chart) provided by our warehouse, if not provided we will proceed as per weighbridge. 12........ 13. Liability of Transporter Transporter will be liable for any loss or damage to the Company's employee, the Transporter'....
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....nsporter understands that in case the claim on pilferage or shortage or quality deterioration is rejected by the insurance company due to Poor Quality of the tanker, Poor Packing, shortage of required documents, theft, fake Accident, negligence of transporter and/or his representative, then the entire value of the Product loss/ damaged will be deducted from the transporter's bill. 21........ 22........ 23........ 24........ 25. That the Transporter will make good to the Company any losses arising from due to negligence of Transporter or their representatives: a. The confiscation by government or local authorities of any quantities of the product delivered to the Transporter for transportation; and b. Loading, unloading or in transit for reasons other than the acts of God, riots or civil commotion. c. The liability of proving that any loss or damage caused by any accident or fire resulting from the acts of God or an act or Sate i.e. due to natural calamities such as earthquakes, floods and riots, Mob violation and Looting is solely upon the Transporter. The Company will also be entitled to compute the amount of ....
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....lso considered the issue involved, the relevant facts and the applicant's submission/interpretation of law in respect of question on which the advance ruling is sought. 11. The applicant has submitted that they have engaged various transporters for transportation of goods involving both inward and outward supplies: (i) Movement of goods from Supplier's location to location of the applicant; (ii) Movement of goods from the applicant's place of business to Customer's place of business. (iii) Movement of goods from port to location of the applicant or customer as the case may be. They have also submitted that majority of the chemicals transported by the transporters possess properties that make them susceptible to certain unavoidable losses during transportation and these inherent losses arise due to evaporation, spillage, leakage due to factors like temperature fluctuations, pressure changes, or mechanical stress during transit and weight loss due to moisture absorption or desorption, compaction, or other physical transformation during transportation; that Industry practices often establish an agreed tolerance limit for such issues and losses within tole....
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....erials or manufacturing of the finished goods and that there is no formal contract or agreement between the applicant and the transporters for such compensation; that since the above mentioned circumstances are not anticipated during the transportation of goods, there is no possibility of entering into prior contract or agreements in order to safeguard any losses on account of default that may be committed by the transporters while transporting the goods. After transportation of goods, the details of actual loss are communicated to the respective transporters on a case-to-case basis seeking their compensation. 12. We find that the applicant wants a ruling on "Whether the amount from the transporters as a compensation for loss would be considered as a "Supply of services" by the applicant as per para 5(e) of Schedule II of Section 7 of Central Goods and Services Tax Act, 2017." 13. We have also gone through the detailed submission of the applicant wherein they have referred to the definition of 'supply' as mentioned in Section 7 of the CGST Act, 2017, the definition of 'consideration' as defined in Section 2(31) of the said Act and explained in detail that the compensation cla....
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....sulting from fire, leakage, negligence, explosion, accident or any other cause in operating the said tanker/s at the time of loading, unloading and/or during transit and the transporter shall indemnify and keep indemnified the Company against any such loss or damage and shall pay to the Company such amount as the Company may be called upon by the law to pay. The Transporter shall remain at all times liable and responsible to the Company for any loss or damage caused at loading, locations, unloading locations of the Company by any carelessness, negligence, inexperience by the respective employees, of any of which the Company shall be at liberty to debit any cost of repairs or loss or damage to the account of the Transporter for losses suffered directly or indirectly. This will also cover short receipts, contamination of PRODUCTS, on the-basis of a certificate issued by the Company's receiving person. Further, we also find that the details given in the table in para 11 above (as listed from Sr.No.1 to 7 in table) amply describes the circumstances under which the compensation is to be paid by the transporters. The applicant has also submitted that the claims for such defects resulting....
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....r party compensation for any loss or damage caused to him by such breach. The compensation is not by way of consideration for any other independent activity; it is just an event in the course of performance of that contract. 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. 7.1.2 Section 74 of the Contract Act, 1972 provides that when a contract is broken, if a sum has been named or a penalty stipulated in the contract as the amount or penalty to be paid in case of breach, the aggrieved party shall be entitled to receive reasonable compensation not exceeding the amount so named or the penalty so stipulated. 7.1.3 It is argued that performance is the essence of a contract. Liquidated damages cannot be said....
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.... as the buyer or the successful bidder does not get anything in return for such forfeiture of earnest money. Forfeiture of Earnest money is stipulated in such cases not as a consideration for tolerating the breach of contract but as a compensation for the losses suffered and as a penalty for discouraging the non-serious buyers or bidders. Such payments being merely flow of money are not a consideration for any supply and are not taxable. The key in such cases is to consider 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". 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 be remembered that a "consideration" cannot be considered de hors an agreement/contract between two persons wherein one person does something for another and that other pays the first in return. If the payment is merely an event in the course of the performance of ....
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.... compete with the other party in a product, service or geographical area against a consideration paid by the other party. Another example is a builder refraining from constructing more than a certain number of floors, even though permitted to do so by the municipal authorities against a compensation paid by the neighbouring housing project which wants to protect it's sunlight, or an industrial unit refraining from manufacturing activity during certain hours against an agreed compensation paid by a neighbouring school, which wants to avoid noise during those hours. (b) Agreeing to the obligation to tolerate an act or a situation: Example is a shopkeeper allowing a hawker to operate from the common pavement in front of his shop against a monthly payment by the hawker, or a Resident Welfare Association (RWA) tolerating the use of loudspeakers for early morning prayers by a school located in the colony subject to the school paying an agreed sum to the RWA as compensation. (c) Agreeing to the obligation to do an act: Example is an industrial unit agreeing to install equipment for zero emissions/discharge at the behest of the RWA of a neighbouring residential complex ag....
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....y a compensation for the injury, loss or damage suffered by the applicant and payment of such compensation amount does not constitute consideration for a supply. 17. We also find that in similar situations in the case of Re: GSPC ([2025] 172 taxmann.com 325), the Gujarat Appellate Authority for Advance Ruling had held that the settlement fees on termination of the contract is a consequence of breach of Production sharing Contract and not taxable. Further, Gujarat Authority of Advance Ruling vide Order No. GUJ/GAAR/R/2025/47 dated 03.11.2025 in the case of JBM Ecolife Mobility Surat Pvt. Ltd. held that where amounts are paid merely to compensate for loss due to breach and there is no agreement by Surat Sitilink Ltd. (SSL) to tolerate an act or do anything in return for such payment, these are liquidated damages not constituting consideration for a supply, hence not taxable. In Re: Achampet Solar (P) Ltd, ([2023]148 TAXMANN.COM 222 (AAAR-Telangana)), the Telangana Appellate Authority for Advance Ruling held that the recovery of liquidated damages for delay in the construction of solar power project is not taxable in view of CBIC's Circular No. 178/10/2022-GST, dated 3-8-2022. In S....