Payment of damages for breach of contract does not constitute 'supply' under GST law.

The Petitioner, Tata Sons, entered into a Shareholders Agreement (SHA) with NTT Docomo in 2009

Following disputes regarding share buyback obligations, an LCIA Arbitral Tribunal awarded Docomo damages of approximately USD 1.17 billion plus interest and costs

Docomo initiated enforcement proceedings in the UK and USA, and a petition in the Delhi High Court under Sections 47 and 48 of the Arbitration and Conciliation Act (ACA)

The parties entered into Consent Terms before the Delhi High Court, wherein Tata agreed to pay the award amount (approx. Rs. 8,450 crores) and Docomo agreed to suspend and eventually withdraw the foreign enforcement proceedings

The Respondents (DGGI) issued an intimation (DRC-01A) and a subsequent Show Cause Notice (SCN) demanding Rs. 1,524 crores as IGST

The Revenue alleged that by withdrawing foreign execution proceedings and "tolerating" the breach of the SHA, Docomo provided a taxable "supply of service" under the "reverse charge" mechanism

1. Whether the settlement of an arbitral award for damages, including the agreement to withdraw enforcement proceedings, constitutes a "supply" of service under Section 7 of the CGST Act read with Entry 5(e) of Schedule II

2. Whether the impugned Show Cause Notice was issued in violation of binding CBIC Circulars and settled legal principles regarding the nature of damages

Section 7 of the CGST Act, which defines the scope of "supply" as requiring "consideration" and being in the "course or furtherance of business"

Schedule II, Entry 5(e), which classifies "agreeing to the obligation to refrain from an act, or to tolerate an act" as a supply of service

CBIC Circular No. 178/10/2022-GST, which clarifies that liquidated damages paid for breach of contract are a "mere flow of money" and not consideration for a supply

The principle from Union of India v. Raman Iron Foundry, affirming that damages are compensation granted by the "fiat of the court" rather than a pre-existing pecuniary liability

The Court reasoned that for Entry 5(e) of Schedule II to apply, there must be an independent agreement to tolerate an act for a specific consideration

The payment made by Tata was purely to satisfy an arbitral award for damages arising from a breach of contract

The Court found that the withdrawal of foreign enforcement proceedings (UK/US) was an "incidental" and "logical consequence" of the satisfaction of the debt, not an independent service

The Revenue's attempt to bifurcate the settlement into a "new contract" for toleration was held to be a "fundamental flaw"

Since the award amount was characterized as damages (compensation for injury) and not consideration for any activity, no "supply" occurred

The Court emphasized that the Revenue’s logic would absurdly subject every court-mandated settlement of a money decree to GST

The agreement to not pursue execution proceedings is integral to the satisfaction of the decree and lacks independent consideration

The DGGI lacked jurisdiction to levy IGST on the decretal amount

The Court quashed and set aside the intimation under Form DRC-01A and the Show Cause Notice dated 26 July 2023