Gujarat AAR Rules Compensation Recovered From Transporters For Transit Losses Not Liable To GSR

The Gujarat Authority for Advance Ruling (AAR) has recently ruled that compensation recovered by a business from transporters for injury, loss or damage suffered during the transportation of goods is not liable to Goods and Services Tax (GST).

It held that such recoveries compensate the business for the injury, loss or damage suffered and are not consideration for a taxable supply.

The ruling was delivered by a two-member bench comprising CGST Member Sushma and SGST Member Vishal Malani on an application filed by Pon Pure Chemical India Private Limited.

Observing that the recoveries were only compensation for the injury, loss or damage suffered by the applicant, the authority held,

“The various circumstances under which the compensation is claimed/received from the transporters reveals that it is only 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.”

Pon Pure Chemical India Private Limited, which deals in chemicals, engages transporters to move goods from suppliers, ports and its facilities to customers.

It recovers compensation where losses exceed the agreed tolerance limit or where the transporter's default results in shortages during transit, tanker leakages, quality or colour issues, damage or destruction of goods, theft or pilferage, failure to deliver goods at the required place and time, or negligence during handling, loading or unloading.

The company sought an advance ruling on whether these recoveries amounted to consideration for a supply of services liable to GST.

The authority examined the contractual arrangement. It noted that compensation was recovered only after actual injury, loss or damage had occurred. The recoveries represented compensation for the injury, loss or damage suffered because of the transporters' default.

It further observed that there was no agreement, express or implied, under which the applicant had agreed to refrain from an act, tolerate an act or situation, or do anything in return for the compensation.

The authority also referred to earlier advance rulings and judicial decisions on liquidated damages. It concluded that the compensation recovered by the applicant represented compensation for the injury, loss or damage suffered due to the transporters' breach. The amounts did not constitute consideration for a supply.

Accordingly, the authority ruled that compensation recovered from transporters for transit losses and related defaults is not liable to GST.

For Applicant: Vikash Agarwal, Chartered Accountant