Facts of the Case:

In this case, the applicant is engaged in the manufacture and trading of chemicals and is registered under the GST law. For transportation of its goods, the applicant engaged various transporters for inward movement of raw materials from suppliers and ports as well as outward movement of finished goods to customers. Owing to the inherent characteristics of chemicals, certain normal transit losses such as evaporation, moisture loss and minor leakage were contractually accepted within specified tolerance limits. However, where the transporter’s negligence or contractual default resulted in shortages beyond permissible limits, contamination, colour deterioration, tanker rust, leakage, damage or destruction of goods, theft or pilferage, delayed delivery, failure to deliver at the agreed destination, or negligence during loading and unloading, the applicant recovered compensation equivalent to the actual loss suffered or the additional processing, job work or alternate transportation costs incurred.

The applicant contended that these recoveries were compensatory in nature and represented liquidated damages arising from breach of contractual obligations rather than consideration for any supply of goods or services. Accordingly, the applicant sought an advance ruling on whether such compensation recovered from transporters would be treated as a taxable supply of services under paragraph 5(e) of Schedule II read with Section 7 of the CGST Act, 2017.

Issue:

Whether compensation recovered by the applicant from transporters for shortages, leakage, contamination, damage, theft, delayed delivery, negligence and other transit-related losses arising from breach of transportation contracts constitutes a taxable supply of services under paragraph 5(e) of Schedule II read with Section 7 of the CGST Act, 2017, or whether such recoveries are merely liquidated damages and therefore outside the scope of GST.

Held That:

The Gujarat Authority for Advance Ruling held that the compensation recovered by the applicant from transporters was in the nature of liquidated damages payable for breach of contractual obligations and did not constitute consideration for any independent supply of services.  . The Authority observed that although the transportation agreements contained clauses relating to liquidated damages, indemnity, transporter liability and deduction of losses from freight bills, these clauses merely provided a contractual mechanism for compensating the applicant in the event of breach and did not evidence any agreement whereby the applicant agreed to tolerate an act, refrain from an act or undertake any act for consideration.

Relying extensively on CBIC Circular No. 178/10/2022-GST dated 3 August 2022, the Authority held that payments made solely to compensate an aggrieved party for injury, loss or damage arising from breach of contract are merely a flow of money and do not amount to consideration for a supply. The object of the transportation contracts was the proper transportation and delivery of goods, and not the receipt of compensation for defaults.

The compensation recovered for shortages, contamination, leakage, theft, destruction of goods, additional processing costs and alternate transportation expenses merely restored the applicant to the position it would have occupied had the transporter duly performed its obligations. Since there was no independent contractual obligation on the applicant to tolerate the transporter’s breach, paragraph 5(e) of Schedule II had no application.

Consequently, the Authority ruled that such compensation does not constitute a supply under Section 7 of the CGST Act and is not liable to GST.

Case Name: In Re: M/s. Pon Pure Chemical India Private Limited. dated 24.06.2026

To read the complete judgement 2026 Taxo.online 1789