The Bombay High Court has held that settlement terms entered into in enforcement proceedings for satisfaction of an arbitral award do not, merely because the award-creditor agrees to suspend or withdraw collateral enforcement proceedings upon payment, constitute a “supply” under section 7 of the CGST Act.
The Court clarified that Entry 5(e) of Schedule II applies only where there is an independent agreement, in the course or furtherance of business, supported by consideration, under which a party agrees to refrain from an act, tolerate an act or situation, or do an act.
Where amounts are paid as damages/compensation for breach of contract under an arbitral award, and the withdrawal or non-pursuit of enforcement proceedings is only incidental to satisfaction of that award, such payments are not consideration for any taxable supply and cannot attract IGST as import of services, added the Court, while quashed the intimation under Form DRC-01A as well as the show cause notice.
The Division Bench comprising Justice G. S. Kulkarni and Justice Aarti Sathe framed the core issue as whether the settlement between Tata and Docomo in enforcement proceedings under sections 47 and 48 of the Arbitration and Conciliation Act would amount to “supply” within section 7(1) of the CGST Act, and held that the consent terms did not create any independent agreement de hors the arbitral award.
The Bench observed that once the decree/award is satisfied, collateral enforcement proceedings necessarily come to an end, and their withdrawal is a natural legal consequence of satisfaction of the award. It held that such withdrawal cannot be treated as an independent contractual bargain for consideration.
The Bench read section 7 of the CGST Act together with Entry 5(e) of Schedule II and held that Entry 5(e) cannot be applied in isolation. According to the Bench, Entry 5(e) contemplates an independent agreement in the course of business where a party agrees, for consideration, to: refrain from an act; tolerate an act or situation; or do an act.
Thus, the Bench held that damages awarded under an arbitral award are compensation for breach, and not consideration for any supply of service. It also relied on the CBIC circulars dated 3 August 2022 and 28 February 2023, noting that such circulars clarify that where payments are merely compensatory and there is no independent agreement to tolerate or refrain, such payments do not constitute consideration for supply.
Briefly, impugned proceedings sought to levy IGST of about INR 1,524.35 crores on amounts paid by Tata Sons to NTT Docomo pursuant to an LCIA arbitral award and the subsequent consent terms recorded before the Delhi High Court. NTT Docomo had invested in Tata Teleservices Limited under a shareholders’ agreement dated 25 March 2009. Under the shareholders’ agreement, if specified performance indicators were not met, Tata was obliged to find a buyer for Docomo’s shares at the contractually stipulated sale price. On failure of those conditions, disputes arose between Tata and Docomo and were referred to arbitration before the London Court of International Arbitration.
By award dated 22 June 2016, the arbitral tribunal held Tata liable to pay: damages of USD 1,172,137,717; interest of USD 65,276,963; arbitration costs of GBP 119,012.59; and legal costs of JPY 1,067,670,175. Docomo initiated enforcement proceedings in the UK, the US, and India. In the Delhi High Court enforcement proceedings, Tata and Docomo filed consent terms, and by order dated 28 April 2017 the Delhi High Court declared the award enforceable in India as a deemed decree.
Thereafter, the GST intelligence authorities began inquiry first from a service tax angle and later proceeded on the basis that GST was payable on the amounts remitted to Docomo. The department’s case was that Docomo, by agreeing to suspend and withdraw enforcement proceedings and by allegedly tolerating Tata’s contractual breach, supplied a service falling within Entry 5(e) of Schedule II to the CGST Act.
Appearances:
Senior Advocate Arvind Datar, along with Advocates Rohit Jain, Chirag Shetty and Ayushi Agrawal i/b Economic Laws Practice for the Petitioner/ Taxpayer
ASG Anil C. Singh, along with Advocates Jitendra Mishra, Aditya Thackker, Sangeeta Yadav, Ashutosh Mishra, Rupesh Dubey, Adarsh Vyas, for the Respondents/ Revenue
