The Bombay High Court has set aside a Rs 1,524.35-crore GST demand raised against Tata Sons, ruling that payments made under an arbitral award cannot be treated as a “supply” of services under GST law.
A Bench comprising Justices GS Kulkarni and Aarti Sathe was dealing with a challenge mounted by Tata Sons to an intimation dated September 28, 2022, and a subsequent show-cause notice issued on July 26, 2023, by the Directorate General of GST Intelligence, Mumbai.
The tax authorities had sought to levy integrated GST on amounts paid by Tata to Japanese telecom firm Docomo linked to a 2016 arbitral award rendered in London and later enforced in India. The demand was pegged at Rs 1,524.35 crore.
Docomo had secured an award of approximately $1.17 billion in damages, along with interest and costs, following disputes arising out of a shareholders’ agreement in Tata Teleservices. When the award came up for enforcement, the Delhi High Court in April 2017 recorded consent terms under which Tata deposited about Rs 8,450 crore.
As part of those terms, Docomo agreed that upon receiving the money, it would withdraw enforcement proceedings initiated in the United Kingdom and the United States and refrain from commencing further legal action connected to the dispute or the award.
Relying on these undertakings, the tax department argued that Docomo had effectively provided a service by “agreeing to the obligation to refrain from an act or to tolerate an act or a situation,” falling within Entry 5(e) of Schedule II to Section 7 of the CGST Act. On that basis, it was alleged that Tata was liable to pay GST under the reverse charge mechanism.
The High Court, however, rejected this characterisation. It clarified that Entry 5(e) applies only where there is a distinct and independent agreement supported by separate consideration, under which a party agrees, in the course of business, to tolerate or refrain from certain acts.
Examining the consent terms, the Bench concluded that no such independent arrangement existed. Instead, the obligations flowed directly from the arbitral award and its enforcement.
“The reciprocal obligation even in settlement of a decree necessarily emanates from a decree, which cannot be construed to be an independent agreement de hors the decree and/or alien to the decree itself,” the Court observed.
The judges also took a strong view of the tax department’s interpretation, remarking that it would be “quite an absurdity” to treat the withdrawal of enforcement proceedings—after receipt of the awarded sum—as a taxable service.
In addition, the Court referred to circulars issued by the Central Board of Indirect Taxes and Customs (CBIC), which clarify that payments such as liquidated damages are not taxable in the absence of a separate agreement involving consideration for toleration or forbearance.
The Bench noted that there was “hardly any distinction” between such liquidated damages and damages awarded through arbitration or court decrees. On this reasoning, it found that CBIC’s own guidance supported Tata’s case.
Ultimately, the Court held that neither the payment of damages by Tata nor Docomo’s agreement to withdraw proceedings could be classified as a “supply of services” under GST. Consequently, the impugned notices were quashed.
