GST Not Applicable on Arbitral Damages Without Supply Element: Bombay HC

Tata Sons Private Ltd. Vs Union of India (Bombay High Court)

Arbitral award damages not consideration for supply — settlement in enforcement proceedings not independent agreement under Section 7 read with Entry 5(e) — IGST demand of Rs. 1524 crores quashed

Principles of Law as evolved from Judgment

SCOPE OF SUPPLY — SECTION 7 READ WITH SCHEDULE II ENTRY 5(e)

Independent agreement is a prerequisite for Entry 5(e). Entry 5(e) of Schedule II — “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” — can operate only where there exists an independent agreement, entered into in the course or furtherance of business, where one party agrees to refrain or tolerate for a separate consideration. Absent an independent agreement and separate consideration, Section 7 itself is not attracted.

Entry 5(e) cannot be read dehors Section 7(1). Schedule II Entry 5(e) must be read in the context of the parent provision, Section 7(1), which requires supply to be made for consideration in the course or furtherance of business. Entry 5(e) cannot be applied independently of Section 7 to create a tax liability.

Damages under an arbitral award do not constitute consideration for supply. Payment of damages awarded by an arbitral tribunal under an international commercial arbitration — being compensation for breach of contract — does not constitute consideration for any supply of service. The legal character of such payment is a flow of money from the defaulting party to the injured party, not consideration for tolerating an act.