Bombay High Court: Settlement of Arbitral Award and Enforcement Withdrawal Not Taxable as Supply Under GST
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TL;DR
- Bombay High Court ruled settlement of a foreign arbitral award and related enforcement withdrawal is not taxable as supply under GST.
- Tata Sons' payment to NTT Docomo was characterized as compensation for breach, not consideration for supply.
- GST authorities' notices seeking IGST on the settlement were quashed by the court.
- Court relied on CBIC circulars clarifying non-taxability of compensation for breach in absence of an independent agreement.
Overview
The Bombay High Court ruled in Tata Sons Private Ltd. v. Union of India & Ors. that the settlement of a foreign arbitral award and the withdrawal or suspension of related enforcement proceedings do not constitute a 'supply' under India's CGST Act, and are not subject to GST liability. The dispute arose after GST authorities sought to levy IGST on damages paid under an arbitral award following a settlement.
What Happened
Tata Sons and NTT Docomo were parties to an arbitration at the London Court of International Arbitration, resulting in an award of damages to Docomo.
After the award was declared enforceable by the Delhi High Court, the parties reached consent terms, including settlement of the awarded amount and withdrawal of enforcement actions in the UK and USA.
Indian GST authorities issued notices seeking to impose IGST, arguing that Docomo tolerated Tata Sons' breach and agreed to refrain from pursuing enforcement, amounting to a taxable supply of service.
Tata Sons contested the notices, asserting the payments were compensation for breach, not for any independent act or forbearance. The Bombay High Court agreed and quashed the GST notices.
Context
The GST authorities based their notices on Section 7 of the CGST Act and Entry 5(e) of Schedule II, which address taxability of consideration for refraining from or tolerating acts.
The court relied on CBIC circulars and previous case law clarifying that damages for breach, without an independent agreement to refrain from an act, are not taxable as a supply.
Why It Matters
- The ruling clarifies that compensation paid as a result of arbitral awards is not subject to GST unless there is a separate contract for forbearance or toleration.
- It provides legal certainty for parties settling arbitral awards in India and guidance for treatment of similar enforcement withdrawals under GST.