Damages under an Arbitral Award and Settlement of Enforcement Proceedings Do Not Constitute a Taxable Supply and not taxable under GST-Bombay High court.
The Bombay High Court in Tata Sons Private Ltd vs UOI and others Writ Petition No. 4914 of 2022, held that settlement of an arbitral award between Tata Sons and NTT Docomo did not amount to a “supply” under Section 7(1) of the CGST Act, 2017. The dispute arose after DGGI treated Docomo’s refraining from further recovery proceedings following payment of the arbitral award as a service under Entry 5(e) of Schedule II, attracting IGST under reverse charge. The Court observed that Entry 5(e) requires an independent agreement involving an obligation to refrain from an act, tolerate an act or do an act, with consideration, and cannot independently create a levy unless the transaction qualifies as a supply under Section 7. It held that the settlement and proceedings concerning enforcement of the arbitral award were integral to the award and did not constitute an independent agreement. The Court also referred to CBIC Circular No. 178/10/2022-GST dated 3 August 2022, under which liquidated damages compensating injury, loss or damage from breach are not consideration for supply. The Court concluded that no GST liability arose and did not comment on the constitutional challenge to Section 7 read with Entry 5(e).
Background of the Case
The petitioner-Tata Sons Private Limited is principal investment holding company of the Tata Group, as also the promoter of its operating companies, and the owner of the Tata brand and trademarks. It is principally engaged in the business of making and holding investments. NTT Docomo Inc. had invested in the shares of Tata Teleservices Limited along with Tata, such relationship between the parties was governed by a Shareholders agreement. On account of commercial dispute matter ultimately referred for adjudication in arbitral proceedings by Docomo The arbitral proceedings culminated in an unanimous arbitral award to be payable by Tata to Docomo.
