• Dated 11^th May, 2026

Tolerating an Act under GST – Not applicable to Arbitral Damages: Bombay High Court ruling

Brief Facts

Tata Sons Pvt. Ltd., the assessee, entered into a Shareholders Agreement with NTT Docomo for telecom business operations. Due to failure in achieving agreed performance parameters, disputes arose and were referred to arbitration, which culminated in an arbitral award directing Tata Sons to pay substantial damages along with interest and costs.

The arbitral award was enforced before the Delhi High Court, where consent terms were entered into between the parties for settlement and execution. Pursuant to such enforcement, Tata Sons discharged the entire liability and made payments to Docomo.

Subsequently, the Directorate General of GST Intelligence (DGGI) issued an intimation under Form DRC-01A and a show cause notice demanding IGST of approximately ₹1,524 crore. The department alleged that Docomo had "tolerated" the breach and refrained from enforcement actions, thereby rendering a taxable service under Entry 5(e) of Schedule II.

Assessee' s Contention

The Assessee contended that the payment made to Docomo was purely in the nature of damages for breach of contract, as determined through arbitration, and hence does not qualify as consideration for any supply. Such compensatory payments fall outside the scope of GST.

It was argued that for applicability of Entry 5(e) of Schedule II, there must be a separate agreement to tolerate an act for consideration, which was absent in the present case. The payment arose solely from adjudication of disputes and enforcement of legal rights.

The Assessee strongly relied on the following CBIC Circulars:

• CBIC Circular No. 178/10/2022-GST dated 03.08.2022 – Clarifies that damages, liquidated damages, penalties, etc. paid for breach of contract are not consideration for supply and hence not taxable under GST.
• CBIC Circular No. 214/1/2023-Service Tax dated 28.02.2023 – Reiterates that such compensatory payments are not liable to service tax/GST and directs withdrawal of contrary litigation.

It was further submitted that once an arbitral award is enforced as a decree, the payment assumes the character of compensation and cannot be re-characterized as consideration for any service.

Respondent's Contention

The department contended that the consent terms entered into between the parties created a separate contractual arrangement, distinct from the arbitral award. It was argued that Docomo agreed to suspend and withdraw enforcement proceedings for a certain period, which constitutes "tolerating an act" or "refraining from an act".
Accordingly, such forbearance was treated as a supply of service under Section 7 read with Entry 5(e) of Schedule II, making the transaction liable to GST under reverse charge. The department also argued that the issue involves factual examination and should be adjudicated by the proper authority rather than through writ proceedings.

Court's Decision

The Hon'ble Court held that the amount paid by Tata Sons to Docomo was in the nature of damages for breach of contract, and not consideration for any supply of service. It emphasized that GST can be levied only where there is a clear supply against consideration, which was absent in the present case.

The Hon'ble Court observed that damages are compensatory in nature and arise from adjudication of disputes, and therefore cannot be equated with consideration. It further held that the concept of "tolerating an act" requires a distinct and independent agreement, which was not established in this case.

The argument of the department that consent terms created a new taxable arrangement was rejected, with the Court holding that such terms were merely part of the enforcement mechanism of the arbitral award. Accordingly, the impugned proceedings were held to be unsustainable in law.

BTA's Comment

This judgment clarifies that damages paid under an arbitral award or court decree are compensatory and not taxable under GST, as they do not constitute consideration for any supply. It further establishes that "tolerating an act" requires a separate agreement with consideration, and cannot be inferred from settlement or enforcement of contractual disputes.

Case Reference: Tata Sons Private Limited v. Union of India & Ors., Writ Petition No. 4914 of 2022, (Bombay High Court).

Author: Harsh Kr Gupta

Edited By: Sneha Nandi