Settlement of Arbitral Awards and GST: Bombay High Court Clarifies No ‘Supply’ on Withdrawal of Enforcement

The Bombay High Court in Tata Sons Private Ltd. v. Union of India & Ors. has delivered an important ruling on the GST implications of settling foreign arbitral awards. The Court has categorically held that settlement of a foreign arbitral award and withdrawal or suspension of enforcement proceedings pursuant to such settlement do not constitute a “supply” under Section 7 of the CGST Act read with Entry 5(e) of Schedule II.

This judgment significantly narrows the Revenue’s attempt to tax compensatory damages and clarifies how Entry 5(e) relating to “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” must be understood within the overall framework of “supply” under GST.

Background of the Dispute

Investment, Shareholders Agreement, and Arbitral Award

Tata Sons Private Ltd. (“the Petitioner”) is the primary investment holding entity of the Tata Group. NTT Docomo Inc., a Japanese company, invested in Tata Teleservices Limited (“TTSL”) under a Shareholders Agreement dated March 25, 2009.

When TTSL could not meet the stipulated contractual performance benchmarks, disputes emerged. These disputes were referred to arbitration before the London Court of International Arbitration (“LCIA”). The arbitral tribunal granted an award in favour of NTT Docomo, granting:

  • Damages
  • Interest
  • Legal costs
  • Arbitration costs

The foreign arbitral award was subsequently declared enforceable as a decree by the Delhi High Court on April 28, 2017.

GST Investigation and Demand Proposal

The Union of India, acting through the Ministry of Finance, Central Board of Indirect Taxes & Customs (CBIC) and the Directorate General of GST Intelligence (“the Respondents”), initiated a GST investigation into the transaction.

Following the investigation, the authorities issued:

  • Form DRC-01A dated September 28, 2022, and
  • Show Cause Notice dated July 26, 2023 under Section 74(1) of the CGST Act,

proposing levy of IGST of ₹1,524.35 crore.

The Respondents alleged that:

  • NTT Docomo tolerated the breach of the Shareholders Agreement by Tata entities, and
  • Agreed to refrain from pursuing enforcement proceedings in the UK and USA,

and that this amounted to a “supply of service” under Entry 5(e) of Schedule II to the CGST Act.

Thus, the Revenue sought to treat the damages paid under the arbitral award as consideration for a taxable service involving “toleration of an act” or “refraining from an act”.

Petitioner’s Stand Before the Bombay High Court

Tata Sons challenged the DRC-01A and Show Cause Notice through a writ petition under Article 226 before the Bombay High Court, arguing that:

  1. Nature of payment
    The entire payment made to NTT Docomo was nothing but damages awarded under an arbitral award and enforced as a decree of a court. These damages represented compensation for breach of contract, not consideration under an independent contract for any service.

  2. No independent agreement under Entry 5(e)
    There was no separate agreement whereby Docomo agreed, for consideration, to:

    • Refrain from an act, or
    • Tolerate an act or situation, or
    • Do an act,

    in terms of Entry 5(e) of Schedule II. All steps, including any withdrawal or suspension of enforcement, were merely incidental to satisfaction of the arbitral award.

  3. Reliance on CBIC Circulars
    The Petitioner placed strong reliance on:

    • CBIC Circular No. 178/10/2022-GST dated August 3, 2022, and
    • CBIC Circular No. 214/1/2023-Service Tax dated February 28, 2023,

    which clarify that damages for breach of contract are not taxable as “supply” in the absence of an independent agreement where consideration is specifically paid to tolerate, refrain or do an act.

  4. Damages under Indian Contract Act
    The damages flow from breach and subsequent adjudication under Section 73 of the Indian Contract Act, 1872.