Damages paid in settlement of arbitral award do not constitute ‘supply’ for GST liability

The Bombay High Court has answered in negative the question as to whether the settlement between the parties in the proceedings under Sections 47 and 48 of the Arbitration and Conciliation Act, 1996, under which the arbitral award for damages stood settled between the parties, would amount to ‘supply’ under Section 7(1) of the CGST Act, 2017. 

The Department had alleged that settlement of the arbitral award constituted supply in accordance with the provisions of sub-section (1) of Section 7 as referred to in Entry 5(e) of Schedule II to the CGST Act, 2017 with GST liability under reverse charge as involved import of service. It was alleged that the amount was paid for the activity of agreeing to an obligation of refraining from an act; the act being of continuing with the proceedings initiated against the assessee, in relation to the arbitral execution proceedings which were pending in UK and US Courts. 

Allowing the petition, the Court in Tata Sons Private Ltd. v. Union of India observed the following:

• 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.
• Proceedings for recovery of award amount draw their colour from the arbitral award, hence any satisfaction of the award amounts in law would result in collateral proceedings before other Courts also coming to an end. 
• Position as accepted by Department with regard to liquidated damages [in two CBIC Circulars] would necessarily apply in respect of unliquidated damages.