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TMI Blog2025 (2) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... umerated 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 aforementioned arbitration proceedings, requested ANP [ANP Autoridade Nacional do Petroleo E Minerais] is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * 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 the appeal. He 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 * Ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 due to one or more of the relevant grounds identified in sub-paragraphs 2.4(a)(i)-(iv) unless there has been a material breach by the Contractor of one of those grounds. (c) Where this Agreement expressly grants the Designated Authority a right to terminate this Agreement, that right shall be exercised in accordance with the requirements of sub-Articles 2.4 and 2.5. 4.5 Consequences of Non-Performance (a) If, in a Contract Year, the Contractor carries out less Exploration th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee 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 for 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. Therefore, 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 for which the contract is signed, they shall be eligible to be assessed as the principal supply, as discussed in detail in the later paragraphs. Naturally ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Third, Fourth and Fifth Respondents. Settlement Sum means the amount of USD 8,000,000. 2. SETTLEMENT Payment of Settlement Sum 2.1 The parties agree, in full and final settlement of the Dispute and the Proceedings and without admission by any party as to liability in respect of the claims or counterclaims, that the Respondents shall pay to the Claimant the Settlement Sum in accordance with clauses 2.2 to 2.5 of this deed. 2.2 The Respondents shall each pay their proportionate share of the Settlement Sum to the Claimant in accordance with the proportions in clause 2.2(a) to (f). The liability of the Respondents to pay the Settlement Sum is several and each Respondent is obliged to pay only its proportionate share of the Settlement Sum as set out in clause 2.2(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging 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. 21. 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 be an express or implied agreement to do or abstain from ..... X X X X Extracts X X X X X X X X Extracts X X X X
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