Bombay High Court Rules Damages Under Arbitral Award Not Taxable Under GST In Tata Sons–NTT Docomo Case

The Bombay High Court has held that the Rs. 8,450 crore paid by Tata Sons to NTT Docomo under an arbitral award cannot be subjected to GST.

The payment arose from a dispute over Docomo's exit rights under a shareholders' agreement in Tata Teleservices, and the Court rejected the tax department's claim that it amounted to a taxable service.

A Division Bench of Justices G.S. Kulkarni and Aarti Sathe was considering whether settlement of the arbitral award and the accompanying consent terms could be treated as a “supply” under GST law.

The Court framed the issue as:

“Whether the settlement between the parties in the proceedings filed by Docomo under Sections 47 and 48 of the Arbitration and Conciliation Act, 1996 (ACA), under which the arbitral award for damages stood settled between the parties, would amount to “supply” within the definition of Section 7(1) of the CGST Act?”

Answering the issue in the negative, the court held that the payment was in the nature of damages and not consideration for any service.

The dispute arose from a shareholders' agreement under which NTT Docomo had acquired a 26% stake in Tata Teleservices and was entitled to exit at a predetermined price if specified performance conditions were not met. When Tata failed to fulfill this obligation, disputes arose and were referred to arbitration before the London Court of International Arbitration.

An arbitral award dated June 22, 2016 directed Tata Sons to pay substantial damages to Docomo. The award was subsequently enforced by the Delhi High Court, which treated it as a decree, following which Tata deposited ₹8,450 crore that was later remitted to Docomo.

The Directorate General of GST Intelligence issued a show cause notice demanding over Rs.1,524 crore as IGST, contending that Docomo had agreed to “tolerate” Tata's breach and refrain from pursuing enforcement proceedings, thereby providing a taxable service under Entry 5(e) of Schedule II of the Central Goods and Services Tax Act.

Rejecting this argument, the court emphasised that the amount paid under the award was compensatory in nature and could not be equated with consideration.

“What has been awarded to Docomo were damages and not the price of the shares,” the Court noted, referring to the Delhi High Court's findings.

The Court also examined the consent terms and noted that suspension and withdrawal of enforcement proceedings were only incidental to satisfaction of the award.

“Another important aspect is that Docomo has in para 7 of the consent terms undertaken that for a period of six months pending compliance with the consent terms, all other enforcement actions instituted in Courts abroad shall stand suspended and after compliance shall stand withdrawn.”

It held that such arrangements do not amount to an independent agreement to tolerate an act or refrain from enforcing rights for consideration.

“The AT has come to a definite conclusion that what has been awarded to Docomo is damages,” the Court observed, referring to the earlier proceedings.

Accordingly, the Bombay High Court concluded that the payment retained its character as damages and could not be brought within the scope of “supply” under GST law, rendering the IGST demand unsustainable.

"In the above circumstances, we proceed to answer the question framed by us to hold that the settlement as brought about between Docomo and Tata before the Delhi High Court settling the arbitral award would not amount to supply within the meaning of Section 7(1) of CGST Act, 2017. The consent terms entered between the parties on the basis of which the Delhi High Court passeD the final orders on the proceedings filed by Docomo under Sections 47 and 48 of the ACA, cannot be construed to create any independent agreement between the parties, de hors the arbitral award and/or bring about any legal consequence other than recognizing Docomo's entitlement for the award amounts. Thus, these facts and circumstances did not attract the provisions of CGST and IGST Act so as to create tax liability on Tata", It held.

For Petitioner: Senior Advocate Arvind Datar (through video conference) with Advocates Rohit Jain, Chirag Shetty and Ayushi Agrawal, instructed by Economic Laws Practice

For Respondents: Additional Solicitor General Anil C. Singh with Advocates Jitendra Mishra, Aditya Thackker, Sangeeta Yadav, Ashutosh Mishra, Rupesh Dubey and Adarsh Vyas