Summary
The Hon’ble Bombay High Court (‘the Court’) in the case of Tata Sons Pvt. Ltd. v. Union of India, has held that payment of damages and withdrawal of enforcement proceedings following an arbitral award, does not constitute ‘supply’ under GST law. Consequently, levy of IGST on such settlements is unsustainable. The Court also affirmed that a writ petition is maintainable where the tax authority lacks jurisdiction, even if alternate remedies exist
Key Facts:
- The Petitioner and NTT Docomo (Japan) entered into a Shareholders Agreement (2009) under which Docomo acquired 26% equity in the Petitioner. Since the Petitioner failed to meet performance indicators, Docomo invoked arbitration before LCIA, London
- LCIA Award directed the Petitioner to pay USD 1.17 billion as damages to Docomo
- Docomo initiated enforcement proceedings in UK, USA and India (Delhi High Court) under Sections 47 and 48 of the Arbitration and Conciliation Act, 1996
- The Petitioner and Docomo filed Consent Terms before the Delhi HC pursuant to which (i) the Petitioner paid INR 8,450 crores to Docomo (ii) Docomo agreed to suspend UK/US enforcement proceedings for six months pending payment (iii) both parties agreed that upon receipt of funds, the award would stand fully and finally satisfied with no further proceedings
- Based on the same, the award amount was remitted to Docomo
- DGGI issued Intimation demanding IGST of Rs. 1,524 crores, alleging that Docomo rendered a taxable “supply of service” by tolerating the Petitioner’s breach and withdrawing enforcement proceedings
- The Petitioner cited Circular No. 178/10/2022 dt. August 2022 clarifying damages for breach of contract are not taxable and further reiterated in Circular No. 214/1/2023 dt. February 2023
- DGGI issued SCN reiterating the same demand against which the Petitioner filed writ petition before Hon’ble Bombay High Court challenging both intimation and Show Cause Notice (SCN)
Key Issues before Hon’ble Court
- Whether settlement of an arbitral award including withdrawal of enforcement proceedings under consent terms constitutes a “supply” under Section 7(1) of the CGST Act, 2017?
- Whether Docomo’s withdrawal of proceedings amounted to an independent agreement to “tolerate/refrain from an act” for consideration, attracting Entry 5(e) of Schedule II?
- Whether damages awarded by an Arbitral Tribunal can be treated as “consideration” for a supply of service?
- Whether the CBIC Circulars of 3.8.2022 and 28.02.2023 were binding on the department and covered the present facts?
- Whether the writ petition is maintainable despite the availability of an alternate statutory remedy?
Discussion and Ruling:
- No “Supply” Under GST: Settlement of the arbitral award, including Clause 7 of the consent terms requiring withdrawal of UK/US proceedings, did not constitute a “supply” under Section 7(1) of the CGST Act
- Entry 5(e) of Schedule II Cannot Apply in Isolation: Entry 5(e) (covering obligations to tolerate/refrain from an act) must be read alongside Section 7, which requires an independent agreement with separate consideration in the course of business, it cannot be applied in isolation
- Clause 7 Was Not an Independent Contract: The withdrawal of foreign proceedings was an integral, incidental consequence of satisfying the arbitral award; not a separately bargained obligation. Once the award amount was paid, ceasing parallel enforcement proceedings was a legal inevitability, not a standalone commercial arrangement
- No Independent Consideration: The damages paid by Petitioner were a Tribunal-mandated compensation for breach of contract (per Section 73, Indian Contract Act), not a pre-existing debt or voluntary consideration. Citing Union of India v. Raman Iron Foundry and Iron & Hardware v. Firm Shamlal & Bros., the Court held that damages crystallise only upon judicial/ arbitral determination and cannot be treated as consideration for ‘supply’
- CBIC Circulars were Binding: The Circulars dated 03.08.2022 and 28.02.2023 expressly clarified that payments of liquidated/unliquidated damages made purely to compensate for breach without any independent agreement to tolerate or refrain are not taxable under GST. Issuing a SCN contrary to the department’s own circulars was legally untenable
- Jurisdictional Bar on GST Levy: Since GST authorities lacked jurisdiction to tax this transaction altogether, the writ petition was maintainable notwithstanding the availability of an alternate remedy jurisdictional errors justify direct recourse to the High Court
- SCN and DRC-01A Quashed: The Court quashed both the SCN and the intimation issued in Form DRC-01A, allowing the writ petition in favour of the Petitioner