GST on Compensation for Transit Losses: Gujarat Advance Ruling
Compensation received from transporters for transit losses is not a taxable supply of services under GST.
- Ruling
- GUJ/GAAR/R/2026/23 dated 24.06.2026
- Dated
- 24 Jun 2026
- Authority
- Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- The company asked if transit loss compensation is a taxable service.
- The Authority ruled that such payments are not taxable under GST.
- These payments are considered liquidated damages, not a supply of services.
In short
The company asked the Gujarat Authority for Advance Ruling (GAAR) if money received from transporters for chemical losses during transit counts as a taxable service under the Central Goods and Services Tax (CGST) Act. The authority decided that this compensation is simply a recovery for damages caused by a breach of contract, not a payment for a service provided by the company.
What has changed
How it worked before
Businesses were often unsure if receiving compensation for damages could be classified as 'tolerating an act,' which would make it a taxable service under GST.
What has changed
The authority clarified that these payments are a 'mere flow of money' to cover losses. In practice, this means you do not need to pay GST on compensation received from transporters for goods lost or damaged during transit.
Who this affects
Businesses that hire transporters and receive compensation for goods lost or damaged in transit.
An example
A logistics firm loses a shipment of electronics belonging to a retailer. The retailer charges the logistics firm for the value of the lost goods as per their contract. Under this ruling, the retailer does not need to pay GST on this compensation because it is a recovery of loss, not a service provided to the logistics firm.
What you should do
If you receive similar compensation, you may treat it as non-taxable. However, remember that an Advance Ruling only binds the company that asked and its specific tax office; it is not a law that automatically applies to your business.
If you do nothing
If you incorrectly assume this ruling applies to your specific contract, you might fail to pay GST on payments that the tax department considers taxable services. This could lead to tax demands, interest, and penalties if an officer disagrees with your classification during an audit.
The terms explained
- Liquidated damages
- A pre-agreed amount of money paid by one party to another when a contract is broken, intended to cover the loss suffered.
- Supply of services
- Any activity carried out by one person for another for a fee, which is generally subject to GST.
- Consideration
- The payment or value given in exchange for a service or good.
The ruling in detail
Authority for Advance Ruling
M/s. Pon Pure Chemical India Private Limited
GUJ/GAAR/R/2026/23 dated 24.06.2026 · Gujarat
Questions before the authority
- 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?
Facts
The applicant engages various transporters for the movement of chemicals. Due to the nature of the goods, unavoidable losses occur during transit, and the applicant seeks compensation from transporters for losses exceeding an agreed tolerance limit.
Ruling
| Question | What the authority ruled |
|---|---|
| Whether compensation for loss from transporters is a supply of services | No The compensation is not a consideration for any supply |
The Authority held that the compensation received from transporters for losses in transit does not constitute a supply of services. Such payments are in the nature of liquidated damages for breach of contract and are not taxable.
Reasoning
The Authority relied on the principle that liquidated damages are a **mere flow of money** to compensate for loss or damage and do not constitute consideration for an independent service. It determined that the applicant is not tolerating an act or refraining from an act under the contract, but is merely recovering damages for breach. The ruling is based on the interpretation of Section 7 of the CGST Act, 2017, and the clarification provided in CBIC Circular No. 178/10/2022-GST.
Provisions relied on
- Section 7 of the CGST Act, 2017
- Section 2(31) of the CGST Act, 2017
- Section 73 of the Contract Act, 1872
- Para 5(e) of Schedule II of the CGST Act, 2017
- CBIC Circular No. 178/10/2022-GST dated 03.08.2022
- CBIC Circular No. 245/02/2025-GST dated 28.01.2025
For the practitioner
This ruling confirms that compensation received as liquidated damages for breach of contract, specifically for transit losses, is **not taxable under GST**. It provides strong support for taxpayers seeking to avoid GST on recovery of damages, provided the payment is purely compensatory and not for an independent service. It does not apply to payments that might be construed as consideration for a separate service or facility.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/AAR/2-ponpure.pdf
Legibility of the scan, as read: high.
Prepared 11-10-2026.
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