No GST on Arbitral Damages: Tata Sons Judgment Sets Important Precedent on ‘Toleration’ under GST
Introduction:
The indirect tax regime, Goods and Service Tax, in India was implemented with an aim to establish a modern, transparent and tax-payer friendly destination-based tax, which aimed at eliminating cascading effect. In a deliberate manner, numerous indirect taxes were subsumed by GST. Several legal concepts were borrowed from the existing laws, for instance, the extremely broad meaning of “services” under GST, which tends to treat almost everything that is not “goods” as a taxable service, as provided under section 2(102) of The Goods and Services Act, 2017. Even though the intention of the legislation may have been to make the new law thorough and minimize the loopholes, such a step has not been able to avoid litigation and disputes.
The widest possible amplitude nature of the definition, as regards to ‘service’, has managed to tax everything non-goods as services unless they are excluded by law or exempted by the virtue of exemption provision. In light of the same, this article intends to clear the air around the broad taxation scheme of the contemporary GST law in context of a recent decision rendered by Hon’ble Bombay High Court in case of Tata Sons Pvt Ltd vs Union of India, 2026[1].
Exploring the erstwhile law:
It is pertinent to comprehend the historical evolution of taxation of services in India and the relevant complex feature of the erstwhile service tax regime which are incorporated into Goods and Services Tax law.
At the time when erstwhile service tax law was in force, the legislation decided to move away from positive list (where the tax was levied on the services enumerated in the list) to negative list, whereby the legislation taxed all services except those which explicitly became taxable[2]. Furthermore, a notable introduction made by the legislation was insertion of a concept “declared services”, which in essence granted a ‘widest possible amplitude’ to the already existing definition of services. For instance, it said “any activity carried out by a person for another for consideration and includes a declared service”[3]. Imbibing the principle as provided above, the contemporary GST law, in Entry 5(e) Schedule II of the Goods and Services Act, 2017 [4][hereafter referred to as ‘Entry5(e)’], sought to bring, within its fold, a tax implication on obligation acts/forbearance to act arising from agreement. For instance, it states, “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”[5].
In light of the aforementioned provision, the article seeks to address the status of such omnibus provisions which has resulted in a dispute, whereby the Revenue has sought to impose tax on payment ranging from compensatory payments, liquidated damages and compensation for breach of contract. Essentially treating them as “tolerating” an act or situation.
Picturising Entry 5(e) Schedule II of Goods and Services Tax, Act 2017
The concept of declared services has been inherited from the erstwhile service tax regime. Hence, similar to the erstwhile concept. GST law has declared activities relating to “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” to be supply of service. Consequently, due to the wide range of scope of such provision, litigation in that regard has been ensued[6].
Several decisions have been rendered by Hon’ble High courts, which have addressed some genuine concerns. For instance, the Hon’ble Gujarat High Court clarified that payment made towards Municipal corporation for digging trenches to install electrical lines was held to be not taxable under Entry 5(e)[7]. Furthermore, even Kerala High Court has held that when Gas corporations are in receipt of penalty notices in light of violation of certain guidelines, such penalty discharged are not taxable under GST[8]. Similarly, the Hon’ble Bombay High Court has declared that “Court receivers” services are transactions which shall not be treated as supply of services or goods[9].
In pursuance of such disputes, Government issued an official clarification whereby, to the extent of “transaction of levy of additional/penal interest does not fall within the ambit” of Entry5(e) and as such would be outside the bounds of GST[10]. Despite such effort of narrowing, the uncertainty regarding widely applicable Entry5(e) still subsisted. Therefore, the judicial intervention was imperative (Tata sons ruling). This judgement marks significance, as it elucidates a clear legal stand as regards to the contentious omnibus nature of Entry5(e).
Tata Sons Ruling[11]:
In the Writ Petition filed by Tata Sons (Hereinafter referred to as ‘petitioner’), the Hon’ble Bombay High Court was called upon to conduct an examination, as regards to the validity of the Show Cause Notice (Hereinafter referred to as ‘impugned notice’), issued by the GST authorities (The department). It was alleged that payment made to Docomo in pursuance of the arbitral award, which was enforced by the Hon’ble Delhi High Court, is a consideration and hence it should be interpreted as supply of service as per Entry 5(e). The department contended that Docomo had provided a service through its act of “tolerating” Tata Sons’ actions and, as a result, abstaining from pursuing legal proceedings in the United Kingdom and the United States. In light of the above contentions, the Hon’ble court ascertained the issue as below:
“Whether the settlement between the parties in the proceedings filed by Docomo under Sections 47 and 48, Arbitration and Conciliation Act, 1996, under which the arbitral award for damages stood settled between the parties, would amount to ‘supply’ within the definition of Section 7(1), CGST Act?”
Consequently, the Hon’ble Court, rejected the contention rendered by the Department and stated that payment made pursuant to arbitral award cannot be interpreted as “consideration” which is defined under Section 2(31) of the Goods and Services Act, 2017[12]. It further opined that, characterization of damages awarded by the arbitral tribunal as consideration is a fundamental fallacy on part of the revenue.
It further stated that for invocation of Entry 5(e), there must be an independent agreement which provides conditions as regards to do or abstain from doing an act for consideration. In the present case no such agreement existed. However, the Department contended that a consent terms, which was submitted by petitioner and Docomo with the Hon’ble Delhi Court, to be an independent agreement which was followed by the act of toleration by Docomo. Whereby, it was held that as follows, “The consent terms entered between the parties on the basis of which the Delhi High Court passed the final orders on the proceedings filed by Docomo under Sections 47 and 48, Arbitration and Conciliation Act, 1996, cannot be construed to create any independent agreement between the parties, de hors the arbitral award and/or bring about any legal consequence other than recognising Docomo’s entitlement for the award amounts”.
Therefore, The Hon’ble Bombay High Court obliterated such contention by observing that consent terms do not create any fresh agreement. The Docomo’s action of withdrawing suits from UK and USA was merely incidental to the enforcement of the arbitral award. Hence it does not amount to supply of services, as contemplated under Entry 5(e) of the CGST Act, 2017.
Furthermore, in a similar ruling, which decreed on issues relating to wider implication of an omnibus provision, the Hon’ble High Court observed that, according to GST law, receiving money under a court order or an arbitral award for damages does not constitute providing services[13]. Hence, in the present Bombay High Court ruling, The Court reasoned that commitments resulting from an arbitral award or judicial decision cannot be regarded as separate agreements outside of the decree or award. As a result, fulfilling such commitments is not covered by Schedule II’s Clause 5(e). The Court further made it clear that Clause 5(e) must meet the requirements for “supply” under Section 7 of the CGST Act and cannot be interpreted in isolation.
Lastly, the Bombay High Court concluded that payment of damages by Tata sons to Docomo in light of the arbitral award and consequent forbearance by Docomo is outside the purview of GST law. The Court citing the circular issued by Government (Circular No. 178/10/2022-GST) and (Circular No. 214/1/2023-Service Tax) reflected upon the correct legal position, i.e., damages/compensation arising out of breach of contract does not see the light of implications under GST.
Conclusion:
In spite of such historic decisions, Clause 5(e) of Schedule II is still fully applicable, because its constitutionality has not been contested. It was purposefully written as a broad catch-all clause to include all residual activities in the GST net, but even after the government clarifies, it still requires a fact-specific investigation in each case, which prolongs litigation. Therefore, the ongoing discussion about the extent and applicability of GST on supplies containing an “obligation to refrain from an act, or to tolerate an act or a situation” as envisioned under Clause 5(e) of Schedule II to Section 7 of the CGST Act is still ongoing.
Notes:
[1] (2026) 42 Centax 106 (Bom.) [30-04-2026]
[2] Taxation of services based on negative list of services – concept paper for public debate, https://www.manupatra.com/manufeed/contents/PDF/634502359844814523.pdf.
[3] Section 66E of the Finance Act, 1994, Act No. 32 of 2017.
[4] Entry 5(e) of the Goods and Service Act, 2017, Act No. 12 of 2017
[5] Supra Id 4.
[6] Tarun Jain, Taxing Supply of “Obligation to Refrain from an Act, or to Tolerate an Act or a Situation”: Bombay High Court Elucidates GST Law Provisions, SCC Times, (15th May, 2026), https://www.scconline.com/blog/post/2026/05/15/tata-sons-gst-clause-5e-bombay-high-court-analysis/amp/.
[7] Torrent Power Ltd. v. Union of India, 2025 SCC OnLine Guj 5745.
[8] Aswathy Gas Agencies v. Indian Oil Corpn. Ltd., 2024 SCC OnLine Ker 7291
[9] Bai Mamubai Trust v. Suchitra, (2020) 73 GSTR 46 : 2019 SCC OnLine Bom 1854.
[10] CBIC Circular No. 178/10/2022-GST dated 3-8-2022.
[11] Supra Id 1.
[12] Section 2(31) of the CGST Act, 2017, Act 12 of 2017.
[13] Union of India v. Raman Iron Foundry, (1974) 2 SCC 231.
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