While seeking response from the department on InterGlobe’s petition challenging the tax demand and penalty, a division bench of Justices Nitin Wasudeo Sambre and Ajay Digpaul observed that the company prima facie demonstrated that the amount received “was towards compensation and could not be termed as supply in any way” under the GST law.
The court will hear the case further in August.
Stating that there is no risk to revenue from giving protection to the company, its counsel V Lakhsmikumaran said: “I am not going to run away…I pay more than ₹20,000 crore in a year. I am solvent.”
Ikesh Nagpal, lead-indirect tax at tax and consulting firm AKM Global, termed the case as “significant because it pushes back against the expanding use of the ‘tolerating an act’ entry under GST”.
Tolerating an act under GST is where an entity explicitly agrees for a fee or consideration to tolerate or permit another party’s action, and it is classified as a supply of service.
The interim relief granted by the HC indicates that the issue requires a deeper judicial examination, on whether compensation arising from contractual failure or non-performance can be treated as consideration for a taxable supply, he said.
“The matter also brings into focus the broader debate on whether every contractual payment or financial adjustment can fall within the GST net merely because there is a flow of money between parties. The final judgment could become an important reference in determining how far the concept of ‘supply’ can be stretched under GST, particularly in the context of contractual compensation, damages and business loss recoveries,” according to Nagpal.