The Gujarat Appellate Authority of Advance Ruling (AAAR) has held that no GST is payable on settlement fee.
The bench of B.V Siva Naga Kumari and Rajeev Topno while setting aside the Advance Ruling has observed that unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity of tolerating an act, such payments will not constitute ‘consideration’ and hence such activities will not constitute “supply” within the meaning of the GST Act.
The applicant, M/s. GSPC is holding 20% participating interest (PI), along with other concessionaires, entered into a Joint Operating Agreement (JOA). The appellant along with the concessionaires also entered into a Production Sharing Contract (PSC) with Timor Sea Designated Authority for undertaking exploration activities in Block JPDA in the Joint Petroleum Development Area JPDA. One amongst the concessionaires, M/s. Oilex Ltd, was appointed as the operator under the JOA. 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.
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 the Timor Sea Treaty governing petroleum operations in JPDA & the production sharing contract entered into for JPDA 06-103.
The six concessionaires, in view of the aforementioned arbitration proceedings, requested ANP’ for termination of the PSC by mutual agreement. ANP, issued a notice of intention to terminate PSC to the operator. ANP thereafter terminated the PSC with a demand of payment of estimated cost of exploration not carried out & damages for breach of its local content obligations in terms of article 4.5(a)(iii) of PSC.
ANP further filed a request for arbitration; settlement was reached by the parties regarding the amount to be payable by the concessionaries to ANP; the Arbitral Tribunal was thereafter notified of the settlement so arrived; the Arbitral Tribunal, in view of the settlement agreement between the parties, declared the proceedings closed in accordance with the rules.
The Arbitral Tribunal, directed payment of an amount of USD 80,00,000/- of which the GSPC (JPDA)’s share was 20%.
The appellant sought the advance ruling on the issue whether payment of settlement fees against demand made by ANP vide letter dated 15.7.2015 attract levy of GST under GST regulations.
The AAR held that GSPC is liable to pay IGST, vide Reverse Charge Mechanism on import of subject supply of service from ANP.
The AAAR set aside the Advance Ruling and modified the ruling and hold that GSPC (JPDA) Ltd., is not liable to pay GST on settlement fees against demand made by ANP, subsequently settled vide Deed of Settlement and Release dated 15.7.2020 in terms of circular no. 178/10/2022-GST dated 3.8.22 since it is liquidated damages.
Ruling Details
Applicant Name: M/s. GSPC (JPDA) Ltd.
Date: 22/01/2025
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