The Bombay High Court ruled that damages paid under an arbitral award for a breach of contract should not automatically be considered a taxable GST "supply of service" simply because the winning party agreed to pause or withdraw enforcement proceedings after receiving payment. This decision arose from the case between Tata Sons Private Limited and the Union of India, involving a shareholders' agreement with NTT Docomo. After Tata failed to meet performance targets, Docomo initiated arbitration, resulting in an award of over USD 1.17 billion in its favor. Tata and Docomo later entered consent terms during enforcement proceedings, with Tata depositing around ₹8,450 crore, and Docomo agreeing to suspend execution proceedings temporarily.
The Directorate General of GST Intelligence (DGGI) contended that Docomo had "tolerated" Tata's breach and refrained from pursuing proceedings in exchange for payment, thus constituting a taxable supply under Entry 5(e) of Schedule II of the CGST Act. However, the Court found that the payment was for decretal damages, not for any independent commercial service. The Court emphasized that GST under Entry 5(e) applies only where there is a separate agreement with independent consideration specifically for tolerating an act. In this case, the payment was for damages awarded by the arbitral tribunal, not for any separate promise by Docomo.
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The Court also referenced CBIC circulars clarifying that liquidated damages and compensation for breach of contract are generally not taxable unless there is an independent agreement to tolerate the breach. The department's attempt to characterize the arbitral settlement as a taxable supply required strict scrutiny in light of these circulars and established legal principles regarding damages.
Order Date - 30 April 2026
Parties: Tata Sons Private Limited Vs Union of India, Central Board of Indirect Taxes & Customs (CBIC) and Directorate General of GST Intelligence (DGGI)
Facts -
- Petitioner Tata Sons Private Limited, the principal investment holding company of the Tata Group, had entered into a shareholders’ agreement with Japanese telecom company NTT Docomo in relation to Tata Teleservices Limited (TTSL). The agreement assured Docomo an exit mechanism if performance targets were not achieved.
- They failed to provide the assured exit to Docomo after TTSL did not meet the agreed performance indicators. This led Docomo to initiate arbitration before the London Court of International Arbitration, which awarded more than USD 1.17 billion along with interest and costs in favour of Docomo in June 2016.
- Later they entered into consent terms before the Delhi High Court during enforcement proceedings. Tata deposited around ₹8,450 crore, and Docomo agreed to suspend execution proceedings in the UK and USA for six months pending payment and statutory approvals.
- Subsequently they faced investigation from DGGI, which alleged that Docomo had “tolerated” Tata’s contractual breach and refrained from pursuing proceedings in exchange for payment, thereby constituting a taxable supply under Entry 5(e) of Schedule II of the CGST Act. Based on this reasoning, GST demand of approximately ₹1,524 crore was proposed through DRC-01A and a later show cause notice.
Issue -
- Whether the settlement and consent terms entered into during enforcement of the arbitral award amounted to a “supply of service”
Order -
- The Court observed that the original dispute between Tata and Docomo was purely contractual and had culminated in an arbitral award granting damages. Once the arbitral tribunal awarded damages and the Delhi High Court treated the award as an enforceable decree, the payment assumed the character of decretal damages and not consideration for any independent commercial service.
- The Court noted that merely because Docomo agreed to suspend enforcement proceedings temporarily and later withdraw them upon payment, it could not automatically mean that Docomo had provided a taxable service of “tolerating an act.” The suspension of proceedings was seen as incidental to enforcement and settlement of the arbitral award rather than a standalone commercial arrangement.
- The Court emphasized that GST under Entry 5(e) applies only where there exists a separate agreement with independent consideration specifically for tolerating an act, refraining from an act, or doing an act. In the present case, the payment was fundamentally towards satisfaction of damages awarded by the arbitral tribunal and not towards any separate promise by Docomo.
- The Court also took note of CBIC circulars clarifying that liquidated damages and compensation for breach of contract are generally not taxable unless there is an independent agreement to tolerate the breach. The Court found that the department’s attempt to characterize the arbitral settlement as a taxable supply required strict scrutiny in light of these circulars and settled legal principles regarding damages.
