Bombay High Court quashes ₹1,524‑crore GST demand against Tata Sons

The Bombay High Court has set aside a ₹1,524‑crore GST demand proposal against Tata Sons on the payments made by Tata to Japanese firm Docomo pursuant to an arbitral award [Tata Sons Pvt Ltd v. Union of India & Ors.]

A Bench of Justices GS Kulkarni and Aarti Sathe held that a settlement under an arbitral award does not amount to “supply” of services under the GST law.

The Court was hearing Tata Sons’ challenge to a September 28, 2022 intimation, and a July 26, 2023 show‑cause notice issued by the Directorate General of GST Intelligence of Mumbai.

The notices proposed to levy integrated GST of ₹1,524.35 crore on payments made to Docomo pursuant to a 2016 London arbitral award and its enforcement before the Delhi High Court.

Docomo had obtained an award of about $1.17 billion in damages (plus interest and costs) against Tata following the breakdown of their shareholders’ agreement in Tata Teleservices.

The Delhi High Court, while enforcing the foreign award in April 2017, recorded consent terms under which Tata deposited about ₹8,450 crore.

Docomo agreed that on receipt of the funds, it would withdraw its UK and US enforcement actions and will not initiate further proceedings in relation to the SHA or the award.

Based on the consent terms, the Directorate General of GST Intelligence alleged that Docomo had supplied a service of “agreeing to the obligation to refrain from an act or to tolerate an act or a situation” under Entry 5(e) of Schedule II to Section 7 of the CGST Act by agreeing to suspend and withdraw foreign enforcement and not initiate further proceedings.

Additionally, it concluded that Tata was liable to pay IGST on reverse charge on the award amount of about ₹84,68 crore.

The matter then reached the High Court.

The High Court stressed that Entry 5(e) presupposes an independent agreement with separate consideration, where the parties in the normal course of business bind themselves to refrain from an act or to tolerate an act or a situation or to do an act.

The Court noted from the consent terms that it was not such a bargain at all, but merely a legal consequence of satisfying a money decree.

“The reciprocal obligation even in settlement of a decree necessarily emanates from a decree, which cannot be construed to be an independent agreement de hors the decree and/or alien to the decree itself,” the Court held.

The Court found it “quite an absurdity” to treat the withdrawal of foreign execution proceedings after receipt of the decretal amount as a taxable supply of services by Docomo.

The Court also invoked the circulars by the Central Board of Indirect taxes and Customs which clarified that payments termed as 'liquidated damages' are not taxable where there is no separate agreement to tolerate or refrain. 

The circulars also emphasised that tax under Entry 5(e) arises only where there is a separate agreement and flow of consideration for such toleration or forbearance. 

The Court found hardly any distinction between such liquidated damages and arbitral/court‑awarded damages and concluded that CBIC’s own position supported Tata’s case.

Neither Tata’s payment of damages nor Docomo’s withdrawal of foreign proceedings could be regarded as 'supply of services', the Court held as it quashed the notices issued for intimation and show cause.

Senior advocate Arvind Datar with advocates Rohit Jain, Chirag Shetty and Ayushi Agrawal briefed by Economic Laws Practice appeared for Tata Sons. 

Additional Solicitor General Anil C Singh with advocates Jitendra Mishra, Aditya Thackker, Sangeeta Yadav, Ashutosh Mishra, Rupesh Dubey and Adarsh Vyas appeared for the tax authorities. 

[Read Judgment]