The most contentious and widely worded entry in the declared list read “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”, which resulted into large scale disputes on the scope and coverage of clause 5(e) with the resultant consequence of service tax liability.
Setting the context
The Goods and Services Tax (GST) regime was introduced in India in the year 2017 towards reforming the existing indirect tax landscape. As a deliberate design, variety of existing indirect taxes were subsumed and replaced by GST. Many legal concepts under the existing indirect tax legislations, however, have been continued under the GST legislations. For illustration, the omnibus scheme under the erstwhile service tax laws of christening anything other than goods as “services” and thereby bring within the tax fold all non-descript activities, has been continued under the GST legislations. Similar to the fate under the service tax laws, this design of the GST laws has resulted into a contentious position and is heavily litigated. This article attempts to demystify the broad taxation scheme of GST legislations in context of a recent decision of the Bombay High Court which declares that amounts payable under court settlements are not services so as to be treated as taxable supplies under GST legislations. While one may treat it as an obvious conclusion that court settlement is not a taxable supply, there is a further need for greater judicial clarity in order to obviate unintended GST consequences in view of the overarching legislative scheme.
Dissecting service tax law regime
In order to appreciate the scheme under the GST legislations, it is expedient to trace the pre-GST legislative scheme which found the force of law under Chapter 5 of the Finance Act, 1994 which provided for levy of service tax. The original scheme of service tax law envisaged — what is colloquially referred as “positive list” scheme — levy of tax on enumerated services i.e. only those activities which were specifically listed were taxed; this scheme was revisited in 2012 which introduced a concept of “negative list” i.e. all services other than those enlisted in the negative list or otherwise specifically exempted were brought within the scope of service tax.1
Another distinctive feature of the 2012 negative list scheme was the introduction of a widely worded deeming fiction to bring various activities and transactions — otherwise doubted to be services — within the scope of service tax. This was achieved through the concept of “declared service”, which was engrafted into a new definition of “service”, the latter being defined to mean “any activity carried out by a person for another for consideration, and includes a declared service… ”.2 The statutory provision enlisted certain items declaring that “following shall constitute declared services”;3 the list covering various activities or transactions which are ordinarily not construed to be a service; such as “renting of immovable property”; “temporary transfer or permitting the use or enjoyment of any intellectual property right”; “development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software”; “transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods”; “activities in relation to delivery of goods on hire purchase or any system of payment by instalments”; etc.
The most contentious and widely worded entry in the declared list read “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”, which obviously resulted into large scale disputes on the scope and coverage of this clause with the resultant consequence of service tax liability. For example, advance amount retained by hotel upon cancellation of booking by customers;4 ex gratia job charges to cover up the loss or deficiencies in normal job charges paid to contract-manufacturers;5 compensation/penalty recovered by a government company from the buyers of coal on the short-lifted/unlifted quantity of coal and non-compliance of terms and conditions of coal supply agreements including forfeiture of earnest money;6 payment made upon cancellation of agreements;7 amount collected towards liquidated damages and theft of electricity by electricity distribution company;8 etc. have been claimed by the service tax authorities to be taxable under this widely worded species of declared service.
Appreciating statutory landscape in GST regime and picturising the disputes landscape
Effective from July 2017 a new indirect tax system (i.e. GST) replaced the service tax regime along with a number of other indirect taxes. However, the GST legislations did not start with a clean slate and were substantially inspired by the predecessor indirect tax legislations. The concept of declared services were inherited by the GST laws from the service tax regime whereby various activities and transactions are declared to be supply of services, similar to their pre-GST service tax setting.9 The activity of “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” [hereinafter referred to as “Clause 5(e)”] has similarly been declared to be a service in GST laws.10 Unsurprisingly the litigation which ensued in the service tax regime on account of this provision has arisen similarly in the context of GST laws.
In one of the earliest cases in the GST regime, compensation for delay and deficiency was considered to be a covered within the scope of Clause 5(e) and GST was held to be payable thereon.11 Subsequently, various charges collected by an electricity distribution company, including fee charged for cheque dishonor was held to be liable to GST within the scope of Clause 5(e).12 Furthermore, compensation paid for alternate accommodation/delayed possession to be paid to tenant of old building by developer/owner was held to be liable to GST under this clause.13 Similarly compensation and forfeited amounts under various commercial contracts were held to be liable to GST under Clause 5(e).14 In order to address the anomalous consequence of treating financial charges as taxable supplies under GST, an official clarification was issued by the government to the effect that “transaction of levy of additional/penal interest does not fall within the ambit” of Clause 5(e) and thus would be outside the scope of GST.15
Notwithstanding the official clarification, the disputes subsisted. This aspect was acknowledged by the policy-makers who took notice of the fact that “in certain cases/instances, questions have been raised regarding taxability of an activity or transaction as the supply of service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act” and in particular admitted that complex issues persist regarding the “applicability of GST on payments in the nature of liquidated damage, compensation, penalty, cancellation charges, late payment surcharge, etc. arising out of breach of contract or otherwise and scope of the Entry at Para 5(e) of Schedule II” of the CGST Act; this aspect resulting into a detailed official clarifications purporting to interpret Clause 5(e) in a narrow paradigm.16
Besides the various fact-based situations addressed in this clarification, it was additionally clarified that “agreement to do or refrain from an act should not be presumed to exist” and “there has to be an express or implied agreement; oral or written, to do or abstain from doing something against payment of consideration for doing or abstaining from such act, for a taxable supply to exist”.17 Subsequently another official clarification was issued clarifying that “forfeiture of salary or payment of bond amount in the event of the employee leaving the employment before the minimum agreed period” would not be subject to tax under Clause 5(e).18
In many High Court decisions also the issue arising from application of Clause 5(e) have been addressed, albeit on a case-specific basis. For illustration, the Bombay High Court declared that “Court Receivers” implement orders of the courts and function under the supervision and direction of the Court and accordingly it is “clear that services of the Court Receiver are activities or transactions which shall be treated neither as a supply of goods nor a supply of services” notwithstanding the omnibus scope of Clause 5(e).19 As another illustration, the Madras High Court concluded that amount received by employer from outgoing employees in lieu of serving shorter notice period is not taxable.20 In yet another illustration, the Karnataka High Court held that solatium component of compensation received by landowners on acquisition of land by the government cannot be subjected to GST under this clause.21 Another notable illustration is the decision of the Kerala High Court which holds that penalties received by gas distributions from gas corporations owing to infraction of marketing guidelines and failure to carry out responsibilities, etc. cannot be held liable to GST.22 Also noteworthy is the decision of the Gujarat High Court which holds that payment made to Municipal Corporation by electricity distribution for permitting digging tranches on the public road (which are maintained by the Municipal Corporation) is not a taxable supply under GST.23
Despite the aforesaid official clarifications and judicial rulings, the disputes have subsisted on the true nature and scope of Clause 5(e). This aspect has recently been adverted and Clause 5(e) has obtained a detailed exposition by the Bombay High Court in its decision in Tata Sons(P) Ltd. v. Union of India24, hence it is expedient to appreciate the decision in detail.
Bombay High Court decision in Tata Sons case
In this case Tata Sons filed a writ petition before the Bombay High Court challenging the validity of show-cause notice issued by GST authorities. The notice alleged that payment made by Tata Sons to Docomo in view of an arbitration award (which was later upheld by the Delhi High Court) was a consideration for “service” and hence liable to GST. The notice alleged that “Docomo has rendered the supply vide their act of toleration and agreeing to obligations to refrain from act of legal proceedings to TSPL and the same squarely falls within the ambit of definition of “supply” as envisaged under sub-section (1) of Section 7, CGST Act, 2017 and the damages referred to hereinabove is the “consideration” paid by TSPL to Docomo in the course and furtherance of their business. Thus, it appears that the said “supply” by Docomo would fall within in the ambit of Entry (e) of Sr. No. 5 of the Schedule II to Section 7 as “supply of services viz. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” and thus required discharge of GST thereon.
In the aforesaid background the precise issue framed by the High Court for its consideration was “[w]hether the settlement between the parties in the proceedings filed by Docomo under Sections 47 and 48, Arbitration and Conciliation Act, 1996, under which the arbitral award for damages stood settled between the parties, would amount to ‘supply’ within the definition of Section 7(1), CGST Act?” Answering the question in the negative, the High Court explained in detail the legal position and its impact on the factual scenario. The relevant findings in the decision are enlisted below:
1. Expressing its exasperation, the High Court iterated the key fallacy in the submission of the GST Department — the absence of “consideration” for the alleged supply. According to the High Court, the payment made by Tata to Docomo was against an award of damages and hence could not be described as consideration upon which GST could be levied.25
2. The High Court also asserted that invocation of Clause 5(e) was necessarily contingent upon existence of “an independent agreement”, which was missing in the factual matrix of Tata and Docomo, thereby annulling the very foundation for GST liability.26
3. Going beyond the factual appreciation and rendering a finding in rem, the High Court declared that under the existing scheme of GST legislations “the recovery of the amounts under a decree of the Court and for that matter an arbitral award, which is for damages by any stretch of imagination ought not to amount to ‘supply of services’.”27 According to the High Court, this legal position arises principally because discharge of “reciprocal obligation even in settlement of a decree necessarily emanates from a decree, which cannot be construed to be an independent agreement dehors the decree and/or alien to the decree itself”. Thus, according to the High Court, because there is no separate agreement as such besides the court decree/arbitration award, there is no supply for the purposes of GST legislations.
4. Another salient feature of the Clause 5(e) — as expounded by the High Court — is that the clause cannot be applied standalone without regard to the principal definition of ‘supply’ under the GST legislations.28 Viewed thus, there is a necessity for a supply to exist, which supply is in the nature of the activities enlisted in Clause 5(e), before GST liability can be said to arise.
5. The High Court decision also dehyphenates the distinction between court decree (and amounts payable thereunder) vis-à-vis inter-party settlements to declare that the former cannot be brought within the charge of GST.29
6. The decision also vindicates the conclusion in the Government’s official clarification that liquidated damages are not consideration for a supply and thus are beyond the liability of GST.30
Having exposited the aforesaid propositions, the High Court concluded its decision in the following terms:
“84. 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), 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, Arbitration and Conciliation Act, 1996, 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 recognising 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. The award of damages in the proceedings before the Arbitral Tribunal is a judicial exercise (See, Union of India v. Raman Iron Foundry31). The sequitur being that satisfaction of the arbitral award as recorded by the Delhi High Court in terms of any such judicial or arbitral determination, would not attract liability for payment of IGST under the provisions of Section 7, CGST Act, as neither the payment made by Tata to Docomo, nor Docomo agreeing not to pursue the execution/enforcement proceedings, can be regarded to be any ‘supply of services’.”
The decision of the High Court thus, subject to appellate review by the Supreme Court, forecloses a long pending tax controversy in India besides expounding on the scope and limitations of Clause 5(e) qua settlement under court decrees and arbitration awards. To this end, the decision is of pivotal significance being the first, besides being an authoritative decision dwelling on the contours of Clause 5(e).
It is also pertinent to note that Tata Sons had also challenged the validity of Clause 5(e) which is the root cause of these disputes. However, having granted relief to Tata Sons on facts, the High Court considered it appropriate not to dwell on the challenge. Thus, the application of Clause 5(e) in other situations continues to remain an open question.
Conclusion and way forward
Given the contentious history and the omnibus nature of the statutory provision, it is clear that while this decision of the Bombay High Court elucidates the legal position with clarity, this decision is neither the first nor shall be the last of the disputes on the applicability of GST on activities which are described as “obligation to refrain from an act, or to tolerate an act or a situation”. The reasons for this conclusion are simple and can be enumerated below:
1. At the outset, because the challenge to the validity of Clause 5(e) remains unaddressed, it will continue to apply with all vigour and will have to be implemented by the taxation authorities as the law of the land.
2. While intrinsically Clause 5(e) is openly worded, it is specifically intended by legislature to be a catch-all tax law under both, the negative list regime of the service tax law as also under the GST legislations. The constitutional mandate being to position GST as a tax on any supply of goods or services32, the legislative intent has always been to ensure that except the specifically excluded supplies all activities and transactions are brought to tax under the GST legislations. In fact, this aspect of the GST law has been validated by the Bombay High Court much early in the GST regime when it observed that “Section 7 includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business” and juxtaposing it with the “settled law that such provisions in a taxing statute would have to be read together and harmoniously in order to understand the nature of the levy, the object and purpose of its imposition. No activity of the nature mentioned in the inclusive provision can thus be left out of the net of the tax.”33 Thus, this Clause (e) is intentionally framed in wide terms, which results in testing every activity or transaction (which is otherwise not taxed) to be examined from the perspective of its liability under the GST legislations.
3. Even though the Government’s official clarification seeks to limit the omnibus scope of the provision by ascribing certain pivotal variables basis judicially evolved tests, nonetheless the clarification categorically injuncts that “the taxability in each case shall depend on facts of that case”34, thereby necessitating inquiry in every situation with the slightest of difference in the factual paradigm.
As regards the remit of the High Court decision, there are no two views that it categorically rules out levy of GST on court settlements and arbitration awards. At the same time, it is important to note that the decision has been rendered in a specific and limited factual paradigm wherein the demand for GST has arisen in the backdrop of an arbitration award and court executed settlement. Thus, the facts were beyond the pale of doubt and crystallised adjudication of the tax liability could be precipitated. Not all activities and transactions, however, exhibit such clearly stipulated contours. For illustration, it cannot be similarly argued beyond doubt that there is no consideration for a supply of the latter in a combination of asset purchase along with non-complete obligations. In fact, the decision of the Bombay High Court adds a new pivot to the appreciation of Clause 5(e) i.e. the application of Clause 5(e) is contingent upon “an independent agreement”. While the High Court has applied this test to opine that in the absence of such an independent agreement Clause 5(e) does not apply, conversely does this imply that in every arrangement which envisages an independent agreement automatically Clause 5(e) shall be triggered and GST liability shall arise? It is difficult to conclude on this proposition but the fact that the High Court has upheld the conclusion in the Government’s official clarification (albeit partly) does seem to suggest that the “independent agreement test” may have found a way as an additional test for the levy of GST under Clause 5(e).
To conclude, the above discussion reveals that notwithstanding the decision of the Bombay High Court in Tata Sons case (even if read conjointly with the earlier precedents on the subject), the legal position is precariously settled qua the unyielding scope of Clause 5(e) and a legislative prescription limiting its contours may alone be the panacea against its unrestrained application. Pithily put, the law continues to remain in a state of flux resulting into unintended GST consequences owing to the omnibus scope of Clause 5(e).
*Advocate, Supreme Court of India; LLM, London School of Economics; BBA, LLB (Hons.) (Double Gold Medalist), National Law University, Jodhpur. Author can be reached at: mailtotarunjain@gmail.com.
1. For details, see, Tarun Jain, “Negative List for Service Tax: Some Musings” (2012) 189 Excise and Customs Reporter, available at <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2004047>; Tarun Jain, “Harmonized ‘Goods and Service Tax’ in India: A Backgrounder” (2012) 191 Excise and Customs Reporter, available at <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1267066>.
2. Finance Act, 1994, S. 65-B(44).
3. Finance Act, 1994, . S. 66- E.
4. Lemon Tree Hotel v. Commr., GST, CE & Customs, 2019 SCC OnLine CESTAT 9368 : 2019 SCC OnLine CESTAT 9368.
5. K.N. Food Industries (P) Ltd. v. Commr. of CGST & CE , (2021) 94 GSTR 261 : 2019 SCC OnLine CESTAT 7331.
6. South Eastern Coalfields Ltd. v. CCE, 2020 SCC OnLine CESTAT 4872 : 2020 SCC OnLine CESTAT 4872.
7. Honda Cars India Ltd. v. Commr., 2020 SCC OnLine CESTAT 405 : 2020 SCC OnLine CESTAT 405.
8. M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. v. Commr. (CGST), 2021 SCC OnLine CESTAT 6536 : 2021 SCC OnLine CESTAT 6536.
9. Central Goods and Services Tax Act, 2017 Entry 5, Sch. 2.
10. Central Goods and Services Tax Act, 2017, Entry 5(e), Sch. 2.
11. Maharashtra State Power Generation Co. Ltd., In re, (2020) 75 GSTR 180 : 2018 SCC OnLine Mah AAR-GST 95. This ruling of GST Authority for Advance Ruling was upheld by the GST Appellate Authority for Advance Ruling in its order in Maharashtra State Power Generation Co. Ltd. v. Commr. of State Tax , 2018 SCC OnLine Mah AAAR-GST 21.
12. TP Ajmer Distribution Limited, In re, (2019) 60 GSTR 328 : 2018 SCC OnLine Raj AAR-GST 10.
13. Zaver Shankarlal Bhanushali, In re, 2018 SCC OnLine Mah AAR-GST 51.
14. For illustration, see Parvatiya Plywood (P) Ltd., In re, 2019 SCC OnLine Utt AAR-GST 13; North American Coal Corpn. India (P) Ltd., In re 2018 SCC OnLine Mah AAR-GST 140; etc.
15. Ministry of Finance, CBIC Circular No. 102/21/2019-GST (Issued on 28-6-2019) on the subject “clarification regarding applicability of GST on additional/penal interest”.
16. CBIC Circular No. 178/10/2022-GST dated 3-8-2022on the subject “scope of supply – GST applicability on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law”.
17. CBIC Circular No. 178/10/2022-GST dated 3-8-2022 on the subject “scope of supply — GST applicability on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law”.
18. Circular No. 214/1/2023-Service Tax dated 28-2-2023 on the subject “leviability of service tax on the declared service ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’ under clause (e) of S. 66-E, Finance Act, 1994”.
19. Bai Mamubai Trust v. Suchitra, (2020) 73 GSTR 46 : 2019 SCC OnLine Bom 1854. The High Court inter alia observed as under:
75. On the submission that a notional contract has come into existence, I find that there can be no resulting contract between the Court Receiver and a litigation arising from an order of the court. The role of the Court Receiver is only to give effect to an order of the court. If, in giving effect to an order of the court, the Court Receiver receives payments that would otherwise attract CGST, then, and to that extent, the CGST may be conveniently collected from the Court Receiver under the provisions of Section 92. But the effect of appointing the Receiver cannot mean that payments which do not attract CGST are now brought within the fold of the Act by notionally importing a contract between the Court Receiver and the defendant. As I have already held above, the payment of royalty as compensation for unauthorised occupation of the suit premises is to remedy the violation of a legal right, and not as payment of consideration for a supply. The Court Receiver is merely the officer of the court to whom the payment is made.
20. GE T&D India Ltd. v. CCE, 2019 SCC OnLine Mad 33202.
21. Asha R. v. Commr. of Commercial Taxes, 2024 SCC OnLine Kar 32407.
22. Aswathy Gas Agencies v. Indian Oil Corpn. Ltd., 2024 SCC OnLine Ker 7291.
23. Torrent Power Ltd. v. Union of India, 2025 SCC OnLine Guj 5745. An appeal against this decision is pending consideration of the Supreme Court in SLP (Civil) No. 16858/2026, notice issued against decision of the Gujarat High Court vide order dated 7-5-2026.
24. 2026 SCC OnLine Bom 2927.
25. In this respect, the decision observes as under:
“60. It is clear that the Revenue has considered Clause 7 of the consent terms/settlement as brought about before the Delhi High Court between Tata and Docomo as supply of services, to the foreign recipient and hence attracting the provisions of the IGST Act as noted by us hereinabove. Considering the provisions of Section 20, IGST Act, which provide for ‘Application of provisions of CGST Act’ to the provisions of the IGST Act, inter alia the scope of supply and other aspects as set out in clauses (i) to (xxv) are concerned and from a plain reading of the provisions of Section 7, CGST Act, we are at a loss to understand as to how a settlement of an arbitral award in the manner as accepted by the Delhi High Court, which is a matter purely inter se between the parties and that too in the court proceedings, which pertain to the enforcement of a foreign arbitral award qua the incorporation of Condition 7 in the consent terms amount to supply and/or import of services, that too without involving any independent consideration, when per se there is no question of any consideration, once there was a monetary award under which damages were awarded against Tata, payable to Docomo.”
26. In this respect, the decision observes as under:
“61. Under Entry 5(e) of Schedule II to the CGST Act ‘supply of services’ includes ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’. Thus, the words ‘agreeing to the obligation… … …’ are a pointer that necessarily there needs to exist an independent agreement, where the parties in the normal course of business bind themselves to refrain from an act, or to tolerate an act or a situation, or to do an act involving consideration, which would amount to supply of services of such nature. As to whether such ingredients would at all fit into, what the parties have agreed under the award, as being found relevant by the department to be the charging element, i.e. Docomo agreeing that having received the award amounts, it would not pursue the recovery proceedings initiated before the US, UK and Indian Court.”
27. In this respect, the decision observes as under:
“62. On a plain purport of the relevant provisions, it would not require any deep diving/elaboration to observe that the recovery of the amounts under a decree of the court and for that matter an arbitral award, which is for damages by any stretch of imagination ought not to amount to ‘supply of services’. The reason being multiple in the facts of the present case. We may observe that as a general principle, under the scheme of recovering amounts for breach of contract by seeking damages, either in a civil suit or in arbitral proceedings, is a part of the requirement of law or the rule of law, even when it comes to compliance of an arbitral award of a foreign Arbitral Tribunal. Any award of damages being recognised, in the context of its enforcement applying the Indian law, namely, the ACA and recognition of the principles for award of damages under the Contract Act form part of a legal scheme integral to the arbitral process. Conversely, if it were not so, even assuming that such award of damages was not in the arbitral proceedings but under a decree of a civil court in a civil suit, on the defendant not discharging its obligation under the decree, necessarily the decree would be subjected to execution under the provisions of Order 21, Civil Procedure Code, 1908. Any settlement brought about thereunder necessarily becomes ‘integral to’ and or ‘intricately connected’, to the decree itself. The reciprocal obligation even in settlement of a decree necessarily emanates from a decree, which cannot be construed to be an independent agreement de hors the decree and/or alien to the decree itself.
63. Similarly, the proceedings which are incidental, integral to the execution of the decree and falling under the decree (here an arbitral award) also cannot be considered to be alien to the decree, as such proceedings certainly partake the character of the original/principal proceedings, namely, execution of a decree. For illustration, in the process of execution of a decree, the properties (immovable/movable) of the defendant being attached, which are situated at different places, certainly would be the proceedings under the umbrella of the decree, and not outside the decree. Hence, if the money decree itself is being satisfied by the defendants by making a full and final payment to the satisfaction of the decree holder, as a natural consequence, of such satisfaction of such decree, the plaintiff agreeing to withdraw the collateral proceedings, which are in the aid of the execution and for realisation of the decretal dues, it certainly cannot be said that the plaintiff is discharging an obligation alien to the decree in withdrawing of such proceedings. Moreover, such collateral proceedings which are incidental to the execution of the decree cannot be regarded as independent proceedings, having legs different from the principal proceedings, i.e. the proceedings for execution of a decree.
64. Similar would be the position insofar as the arbitral award is concerned when in the present case a foreign award was subjected to enforcement before the Indian Court, that is, the Delhi High Court and realisation of the award amount was also resorted in the proceedings initiated before the US and UK Courts. Such proceedings for recovery of the award amount certainly draw their colour from the arbitral award. The proceedings were in relation to or under the arbitral award only, hence any satisfaction of the award amounts in the manner as agreed in Clause 7 of the consent terms, in law would result in such collateral proceedings necessarily coming to an end, as a natural corollary, on the principle that once the decree itself stands satisfied and accepted, the collateral proceedings to recover the very decretal amounts would not survive, as they need to necessarily yield to the decree being satisfied and would accordingly stand extinguished.
65. In the facts of the present case, the parties merely recording in the terms, the conditions towards satisfaction of the decree of the nature as agreed in Clause 7 (supra) of the consent terms that the collateral proceedings would not be pursued for the full and final satisfaction of the award being worked out, this being considered to be supply of services, itself is untenable considering the purport of the provisions of Section 7 read with Entry 5(e) of Schedule II.
…
68. As rightly contended on behalf of Tata, the clear intention of Docomo in initiating enforcement proceedings before the Delhi High Court and before different courts, namely, US, UK, was to realise the award amount. Attributing any other purpose remains to be an ingenuity without any basis the law could recognise, as nothing is brought on record much less any independent agreement de hors from what was inter se brought out between the parties, i.e. Tata and Docomo in the enforcement proceedings. Hence, in the absence of any such independent contract creating rights and obligations which can stand independent of the award/decree, to label the proceedings before the Delhi High Court and the parties agreeing to settle the claim under the award being characterised as “supply” within the meaning of Section 7, CGST Act read with Entry 5(e) of Schedule II, in our opinion, is a fundamental flaw. Such approach on the part of Respondent 3-Joint Director, Directorate General of GST Intelligence, is wholly without jurisdiction and patently perverse.”
28. In this respect, the decision observes as under:
“66. The reason being Section 7 which defines ‘scope of supply’ categorically provides that ‘supply’ would inter alia include all forms of supply of goods or services or both of the nature such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for ‘a consideration’ by a person in the course or furtherance of business. Coupled with this, in the present case what is being applied is the provision of Schedule II Entry 5(e) to the effect of which is ‘a party agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’. These provisions are being applied to the consent terms as entered between Docomo and Tata. In our view, considering as to what is provided by Entry 5(e), the same cannot be read beyond the purview and/or the context of principal provision, namely, Section 7, as noted by us hereinabove. Reading Entry 5(e) dehors the provision would amount to an erroneous reading of this provision, which are sought to be applied by the Revenue. In the facts of the case, neither there is any independent agreement involving any consideration nor Clause 7 of the consent terms can be implied to be any independent agreement, for which any separate consideration has been promised by Tata to be paid to Docomo so as to even remotely attract the provision of Section 7 read with Entry 5(e). Thus, in our view, Clause 7 of the consent terms cannot be construed to mean, that it is bringing about an independent contract between Docomo and Tata and on a consideration, so as to attract the applicability of Section 7, CGST Act. When Section 7 itself is not attracted, there is no question of the provisions of Entry 5(e) of Schedule II of the CGST Act and the corresponding provisions of IGST Act being made applicable. We are thus also afraid as to how the corresponding provisions of IGST as invoked and noted by us hereinabove, can at all be applied on the basis that Docomo is receiving supply of services by virtue of Clause 7 of the consent terms and/or on the arrangement between the parties, which is purely in the context of realisation of the arbitral dues in the proceedings before the Delhi High Court. It also cannot be overlooked that in the facts of the present case, the situation is not that, Docomo and Tata has agreed for something different, that is, to some independent obligation/arrangement for a consideration falling beyond the purview of the arbitral award, so as to categorise such obligation to be an independent obligation, amounting to supply of service within the purview of Section 7 read with Entry 5(e) of Schedule II.”
29. In this respect, the decision observes as under:
“69. In our opinion, if such logic as adopted by the Revenue in the present case if is accepted, in that the settlement of every money decree where parties are before the Court and agree to a course of action purely under the decree without creating any independent obligation, would be required to be regarded as ‘supply of service’ as sought to be alleged on behalf of the Revenue. This would amount to creating a situation wholly not recognised by law, in the context of the relevant provisions of the CGST Act, when it comes to execution of a decree and/or settlement of a decree, as the parties may mutually decide and which would receive the imprimatur of the Court as in the present case, when such arrangements between the parties in the course of execution/enforcement proceedings stand recognised by the court. This is precisely what has happened in the present case, as the subject-matter of the intimation as also the impugned show-cause notice emanates from the proceedings relating to the enforcement of the foreign award in question, which stands confirmed by the Delhi High Court. 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. This, more particularly, when the revenue at all material times was aware about the legal position in terms of what is clearly notified in Circular No. 178/10/2022 dated 3 August 2022…
71. The position the Revenue has accepted in regard to the liquidated damages would necessarily apply in respect of unliquidated damages. This would be clear when one considers the award of damages under Section 73, as the damages awarded by the court and the damages (penalty) agreed between the parties, the legal character of the payment is nothing but flow of money from the party who causes a breach of the contract to the party who suffers loss or damage due to such breach so as to be the damages as awarded by the court in its decree. Thus, the parameters in recovery of such damages either in the decree of the court or in the arbitral award, would not be different.”
30. In this respect, the decision observes as under:
“76. Having discussed the circulars, we are of the opinion that the circulars in fact appropriately consider the legal position that in the normal circumstances, once liquidated damages are an amount being received by a party on account of breach of contract, receipt of such amount would not constitute consideration for a supply and accordingly, such amounts would not be taxable. There would be hardly any distinction between a party receiving such amount being categorised as liquidated damages and a party receiving such amount as damages awarded by the civil court or by an Arbitral Tribunal, for the reason that the legal character and nature of such payment is nothing but receipt of compensation for a breach of contract. In these circumstances, also in the present case, once the award amount was received by Docomo as paid by Tata, was an amount payable towards damages under the arbitral award in question, considering the surrounding facts, there is no question of such amounts to be regarded as constituting consideration for a supply and accordingly being taxable, in the absence of any independent agreement of the nature as the law would envisage, creating distinct rights and liabilities, independent of the arbitral proceedings or totally alien to the arbitral award.”
32. Constitution of India, Art. 366(12-A).
33. Builders Assn. of Navi Mumbai v. Union of India, (2018) 53 GSTR 374 : 2018 SCC OnLine Bom 994. Appeal against this decision was dismissed by the Supreme Court vide order dated 9-11-2022 in SLP(C) No. 23068/2018.
34. CBIC Circular No. 178/10/2022-GST dated 3-8-2022 on the subject “scope of supply – GST applicability on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law”, Para 12.
