On 30 April 2026, a Division Bench of the Bombay High Court (‘High Court’) in Tata Sons Private Ltd v Union of India through the Ministry of Finance (‘Tata Sons case’) set aside a ‘patently perverse’ Goods and Services Tax (‘GST’) demand. But, before we get to the perversity, basic facts of the case.
Facts
NTT Docomo Inc (‘Docomo’), a Japanese company, invested in the shares of Tata Teleservices Limited (‘TTSL’) along with Tata Sons Private Limited (‘Tata’). As per the Shareholder Agreement, if TTSL failed to satisfy the ‘Second Key Performance Indicators’ then Tata was obligated to find a buyer for Docomo’s shares at the ‘sale price’. Tata was unable to comply with its obligation leading to disputes with Docomo. The disputes were referred to arbitration proceedings and culminated in an arbitral award wherein Tata was liable to pay damages to Docomo. Initially, Tata resisted discharging its liability and Docomo filed enforcement proceedings before various courts in the US, UK, and India. In India, before the Delhi High Court the award was held to be enforceable as a deemed decree of the Delhi High Court.
During enforcement proceedings before the Delhi High Court, Tata expressed its willingness to pay amounts under the arbitral award. Tata and Docomo placed on record consent terms before the Delhi High Court and accordingly prayed for disposal of the enforcement petition filed by Docomo. The Delhi High Court accepted the consent terms as per the settled law wherein parties to execution proceedings can enter a settlement.
One para of the consent terms proved to be foundation of the Revenue’s case. Para 7 of the consent terms stated that Docomo shall keep in suspension all enforcement proceedings instituted by it against Tata and ultimately withdraw them subject to compliance by Tata of its obligations. Docomo also agreed to not initiate any further proceedings in relation to shareholder agreement or the arbitral award during the suspension period.
The Revenue’s arguments can be divided into two sub-parts:
Firstly, that Docomo by agreeing to suspend and later withdraw enforcement proceedings against Tata has agreed to an obligation of refraining from an act. What act was it refraining from? The act of continuing with proceedings initiated against Tata in relating to execution proceedings.
Secondly, Docomo has tolerated breach of Shareholder Agreement by Tata as the latter failed to find buyers for its shareholding in TTSL.
Relevant Legal Provision
The Revenue first attempted to levy service tax and eventually after introduction of GST, made a demand under the Central Goods and Services Act, 2017(CGST Act, 2017). Section 7 of the CGST Act, 2017 read with Schedule II, Entry 5(e) states that supply of services shall include:
agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;
The above clause has been directly borrowed from Section 66E(e), Finance Act, 1994 wherein service tax was levied in similar situations.
The Revenue demanded that Tata should pay Integrated Goods and Service Tax (‘IGST’) on a reverse charge basis. Tata had received services from Docomo, based outside India. And the services were that Docomo refrained from continuing its enforcement proceedings against Tata and tolerated the breach of contract. Tata, of course, denied that it had received any service much less a taxable service. And challenged the Revenue’s demand via a writ petition before the High Court arguing lack of legal and jurisdictional basis and a perverse appreciation of facts.
Before we get into the case. The premise of levying GST on toleration of an act or refraining from an act is that if a consideration is received by a person for not indulging in an act, then it should amount to supply of services. The obligation to tolerate or refrain must be in a separate contract where such toleration or restraint is the aim and purpose of the contract. In the absence of such an independent obligation it is tough, if not impossible to prove a supply and thus a supply of services.
CBIC Circular
In Tata Sons case, one of the hurdles in making the GST demand successfully was the Central Board of Indirect Taxes own circular dated 3rd August 2022. The CBIC, through this circular, clarified what amounted to ‘tolerating an act’ and whether GST can be levied on liquidated damages. Two relevant portions of the circular were germane to this dispute.
The circular states that obligation to tolerate an act or refrain from an act is nothing but a contractual arrangement and:
A contract to do something or to abstain from doing something cannot be said to have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act. (para 6)
And, in respect of liquidated damages, the circular clarified that they are paid only to compensate for injury, loss or damage suffered by the aggrieved party. And:
… there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable. (para 7.1.4)
Thus, an independent contract for restraining from or tolerating an act is a necessity. And at least in so far as liquidated damages are concerned the CBIC’s position was clear and straightforward: it is a mere flow of money for compensating injury and cannot be equated to consideration. The High Court in Tata Sons case reasoned that a similar logic applies to unliquidated damages as well. The other question that the High Court had to engage with was: whether consent terms between Tata and Docomo wherein latter refrained from pursuing legal proceedings amounted to an independent contract? The High Court held that in the absence of any consideration ‘we are at a loss to understand’ how a settlement of an arbitral award amounts to import of services by Tata.
Bombay High Court Dismisses the Revenue’s Claim
To begin with, the High Court referred to Schedule II, Entry 5(e) and noted that for the provision to be applicable existence of an independent agreement is necessary. An agreement wherein parties bind themselves to refrain from an act, or to tolerate an act, or to do an act involving consideration.
The High Court clarified that recovering amounts for breach of contract form part of a legal scheme integral to the arbitral process. And any settlement between parties during execution is ‘integral to’ or ‘intricately connected’ to the decree or the arbitral award itself. And cannot be construed to be an independent agreement de hors the decree. Proceedings for recovery of damages as per the arbitral award amount draw their color from the arbitral award itself. And thus, Docomo agreeing to not pursue collateral proceedings for full satisfaction of the amount due under arbitral award cannot be considered as supply of services. Since it was within the parameters of and an extension of the arbitral award itself. Why?
The Bombay High Court relied on various overlapping parameters. Let me delineate them into four:
Firstly, the High Court held that Section 7 defines ‘scope of supply’ and ‘consideration’ is an essential element of supply. Notably, the High Court added that Schedule II, Entry 5(e) cannot be interpreted in a manner that it extends beyond the principal provision, i.e., Section 7. The High Court correctly concluded that there is no independent agreement involving any consideration between Tata and Docomo. No consideration was promised by Tata. Para 7 of the consent terms cannot be construed to say that it brings into existence an independent agreement between Tata and Docomo.
Secondly, the High Court said that Docomo did not agree to something different or an independent obligation which was beyond the arbitral award. And its obligation to suspend and withdraw enforcement proceedings cannot be categorized as an independent obligation amounting to supply of service under Section 7 read with Schedule II, Entry 5(e). Docomo agreeing not to proceed with enforcement proceedings was a logical consequence of the arbitral award itself and not an independent obligation.
Thirdly, the High Court clarified that the position adopted by the Revenue regarding liquidated damages would necessarily apply to unliquidated damages. The only difference between the two kind of damages was that in case of former it is agreed on between the parties while in the latter it is awarded by the court. Irrespective, legal character of the payment of damages is nothing but flow of money from a party which causes breach of contract to the party which suffers loss or damage. And CBIC’s own circular of 2022 takes the same position that payment of liquidated damages is flow of money.
Fourthly, the High Court clarified that when damages were awarded by an arbitral tribunal to Docomo it was not because of any different obligation on part of Tata. Docomo became entitled to such compensation, only on being determined and awarded by the arbitral tribunal. And until the arbitral tribunal’s determination no liability there was no liability on Tata to pay damages. There was no amount ipso facto due from Tata to Docomo. And the liability to pay damages only came into existence by the arbitral award. Thus, there was no scope for the Revenue to read any independent contract between parties where reciprocal obligations de hors the arbitral proceedings were created.
In effect, the Revenue termed Docomo’s attempt to secure damages awarded to it under an arbitral award as a supply of services. Why? Because as per its settlement with Tata it agreed to halt and suspend enforcement proceedings if the damages were paid.
Absurdity of Revenue’s Demand
The Bombay High Court, at various points in the judgment, questioned rationale of the Revenue’s approach. The Revenue’s approach was termed as ‘absurd’, ‘wholly without jurisdiction’, ‘patently perverse’, having ‘no basis whatsoever in law, looked from any angle.’ (paras 67-70)
The reason the Revenue’s demand seemed – and let me add another adjective – outlandish was because it misinterpreted three core aspects: (a) the consent terms were viewed as an independent agreement and not an extension of arbitral proceedings; (b) Docomo agreeing to suspend and withdraw enforcement proceedings was termed as refraining from an act even if there was no additional consideration agreed upon for such a restraint; (c) Docomo receiving damages was interpreted as if it was tolerating Tata’s breach of Shareholder Agreement. Docomo tolerating Tata’s breach of contract would make sense if Docomo did not initiate arbitration proceedings or did not receive damages. By initiating arbitration, receiving an arbitral award in its favor, and filing for enforcement proceedings Docomo was evidencing that it is not ready to tolerate breach of a contract. And should receive compensation for injury and loss caused by the breach of contract.
Also, as the High Court pointed out, if such settlement terms are accepted as a supply of services under GST, then settlement of every money decree where parties are before the Court and agree to a course of action purely under the decree would be regarded as a supply of service. If no independent obligation is agreed upon under the settlement, no additional consideration is agreed upon, then treating it as supply of service would to creating a situation not wholly recognized by the relevant provisions of the CGST Act, 2017.
One core reason for the Revenue’s ‘absurd’ demand was summed up by the High Court in following terms:
It appears to us that as merely the award amounts are large amounts, the impugned action without application of mind to the law and the facts, has been resorted. Such action has no basis whatsoever in law, looked from any angle. (para 69)
In more ways than one, the High Court’s above observations sum up the Revenue’s motivation and underlying reason for its tax demand. The arbitration resulted in damages more than 8,000 crores and the Revenue demanded more than Rs 1,500 crores in GST. Hunger for tax, especially a huge amount, can catalyze a need to test the limits of tax law provisions and their interpretation. The Revenue though came up against a division bench of the High Court that did not, and for good reason, agree to adopt an absurd interpretation of law.
