Mumbai, April 30: The Bombay High Court on Thursday set aside a Rs 1,524 crore GST demand raised against Tata Sons over payments made to Japan’s NTT Docomo, holding that damages paid under an arbitral award do not amount to a “supply of service” liable to tax.
Tata Sons challenged GST notice
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A bench of Justices Girish Kulkarni and Aarti Sathe was hearing a petition filed by Tata Sons challenging a tax intimation and subsequent show cause notice issued by the Directorate General of GST Intelligence (DGGI).
The dispute traces back to a 2009 shareholders’ agreement between Tata Sons and Docomo in Tata Teleservices Ltd. After the company failed to meet performance targets, Docomo invoked exit clauses, leading to arbitration before the London Court of International Arbitration.
In June 2016, the tribunal awarded over $1.17 billion in damages to Docomo.
Payments made in 2017
Tata later deposited about Rs 8,450 crore pursuant to enforcement proceedings before the Delhi High Court, which recognised the award as a decree. Payments were remitted to Docomo in 2017.
However, tax authorities claimed that the transaction attracted GST, arguing that Docomo had “tolerated” Tata’s contractual breach and refrained from pursuing enforcement proceedings for a period, which constituted a taxable service.
Court rejects tax department’s stand
Tata opposed the demand, maintaining that the payment was purely compensatory. Senior counsel Arvind Datar argued that “damages are not consideration for any service,” and that the withdrawal of enforcement actions was merely consequential upon full payment of the award.
The company also relied on government circulars clarifying that liquidated damages for breach of contract are not subject to GST unless there is a separate agreement to tolerate an act for consideration.
The court agreed with Tata’s submissions, observing that the arbitral award represented compensation for breach and could not be treated as consideration for any service.
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It rejected the tax department’s theory that the consent terms between the parties created a separate taxable arrangement.
The bench noted that once the award was satisfied, “there was no question of Docomo tolerating any breach,” and the suspension of enforcement proceedings was incidental to the settlement.
Holding the tax demand to be without jurisdiction, the court quashed both the pre-show cause intimation and the show cause notice.
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