Tata Sons Private Limited vs. Union Of India & Ors. [Writ Petition No. 4914 Of 2022 – Order Dated 30.04.2026]

BRIEF FACTS OF THE CASE

• The Petitioner is the principal investment holding company of the Tata Group. NTT Docomo Inc., (Docomo), a Japanese Company, invested in Tata Teleservices Limited pursuant to a Shareholders Agreement dated 25 March 2009. Upon failure to meet the agreed performance indicators, disputes arose between the parties and were referred to arbitration before the London Court of International Arbitration (LCIA).
• The arbitral proceedings culminated in an award dated 22 June 2016, directing the Petitioner to pay damages of USD 1.17 billion, along with interest, arbitration costs, and legal costs. Enforcement proceedings were initiated in multiple jurisdictions, and pursuant to Consent Terms before the Delhi High Court, the Award was declared enforceable, and Rs. 8,450 crore was deposited and remitted to Docomo.
• Thereafter, the DGGI initiated enquiries from September 2017 alleging Service Tax/GST applicability on the award amount, which the Petitioner consistently disputed, including by seeking a clarification from the Central Board of Indirect Taxes and Customs (CBIC). The DGGI ultimately issued an Intimation in Form DRC-01A alleging that Docomo’s forbearance constituted a taxable supply under Entry 5(e) of Schedule II to the CGST Act, attracting IGST under the reverse charge mechanism as an import of service.
• Being aggrieved, the Petitioner filed a writ petition before the Bombay High Court challenging the levy of GST as an import of services on damages paid to Docomo, during which a Show Cause Notice dated 26 July 2023 u/s 74(1) was also issued, demanding IGST of Rs. 1,524 crore with interest and penalty.
• The Petitioner amended the writ petition also to challenge the SCN, contending that damages paid pursuant to an arbitral award do not constitute ‘supply’, relying inter alia on CBIC Circular No. 178/10/2022-GST dated 3 August 2022, which had clarified that damages for breach of contract do not fall within Entry 5(e) of Schedule II and do not constitute consideration for supply.

KEY OBSERVATIONS OF THE HON’BLE HIGH COURT

• The Court held that the words "agreeing to the obligation" in Entry 5(e) necessarily indicate that there must exist an independent agreement whereby the parties, in the normal course of business, bind themselves to refrain from an act, to tolerate an act or a situation, or to do an act, involving consideration so as to constitute a supply of services of such nature. The Court further held that Entry 5(e) cannot be read de hors the principal provision, i.e., Section 7 of the CGST Act, and that reading it in isolation would amount to an erroneous construction of the provision.
• The Court found that, on a plain reading of the provisions of Section 7 of the CGST Act, a settlement of a foreign arbitral award in the manner accepted by the Delhi High Court did not involve any independent consideration and was purely an enforcement matter inter se between the parties, accordingly it could not constitute a supply or import of services. In the facts of the present case, neither was there any independent agreement involving any consideration, nor was Clause 7 of the Consent Terms implied to be any independent agreement for which a separate consideration had been promised by the Petitioner to Docomo, to even remotely attract the provision of Section 7 read with Entry 5(e) of Schedule II.
• The Court observed that the clear intention of Docomo in initiating enforcement proceedings before the Delhi High Court and before the Courts of the UK and the USA was to realise the award amount. Attributing any other purpose to such proceedings, in the absence of any independent agreement de hors what had transpired between the parties in the enforcement proceedings, had no basis in law. The Court accordingly held that, in the absence of any independent contract creating rights and obligations that could stand independent of the arbitral award/decree, labelling the proceedings before the Delhi High Court and the parties' agreement to settle the claim under the award as a "supply" within the meaning of Section 7 of the CGST Act read with Entry 5(e) of Schedule II constituted a fundamental flaw, and that such approach on the part of the Designated Officer was wholly without jurisdiction and patently perverse.
• The Court held that CBIC Circular No. 178/10/2022-GST dated 3 August 2022 (paras 7.1.4 and 7.1.5) and Circular No. 214/1/2023-Service Tax dated 28 February 2023 appropriately reflect the legal position that where an amount is received by a party on account of a breach of contract, such receipt does not constitute consideration for a supply and is accordingly not taxable. The Court observed that the Revenue was at all times aware of the legal position as clearly notified in the said circulars, yet proceeded to raise the impugned demand without any application of mind to the law and the facts.
• The Court held that the satisfaction of the arbitral award as recorded by the Delhi High Court, in terms of any such judicial or arbitral determination, would not attract liability for payment of IGST under the provisions of Section 7 of the CGST Act, as neither the payment made by the Petitioner to Docomo nor Docomo's agreement not to pursue the execution/enforcement proceedings could be regarded as any "supply of services". Consequently, the Writ Petition was allowed with both the intimation and SCN being quashed and set aside.

AURTUS COMMENTS

• The judgment reaffirms a crucial test under GST that tax can be levied only where there is a “supply” for consideration in the course or furtherance of business, as mandated under Sections 7 and 9 of the CGST Act. Damages or amounts awarded, whether through arbitration or otherwise, are compensatory in nature and lack the essential character of a reciprocal supply–consideration arrangement.
• Under Sections 73 and 74 of the Contract Act, 1872, liquidated damages represent monetary compensation for loss suffered due to breach and not consideration for “tolerating an act” or agreeing to refrain from legal action. Contractual performance is the essence of any agreement, and no party enters into a contract to tolerate its breach. Such damages therefore do not constitute a taxable supply under Entry 5(e) of Schedule II of the CGST Act.
• Any attempt to levy GST on arbitral damages, particularly where the underlying contract and breach predate GST, are legally untenable and contrary to the Department’s own binding Circulars, viz., Circular No. 178/10/2022 GST and Circular No. 214/1/2023-Service Tax. Such action also offends the settled principle that the Revenue cannot approbate and reprobate and doing so would amount to taking positions contrary to settled principles of law.

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