GST Implication on Payment under ICC Arbitration Award for Breach of Non-Solicitation Clause

[Abhijeet Mane]

A is required to pay C (Located outside India) under an ICC arbitration award for breach of a non-solicitation/non-circumvention clause in their Term Sheet. The breach occurred because A directly engaged with B (Customer of C) and secured brand rights for India during the exclusivity period, triggering liquidated damages of INR 1 Lacs to be paid by A to C.

Does GST under Reverse Charge apply on this payment to C? 

[Sadanand Bulbule]

Payment of liquidated damages to a non-resident pursuant to an arbitral award for breach of contract is compensatory in nature and not consideration for any supply; hence, it is outside the scope of GST and no reverse charge applies.

[Raam Srinivasan Swaminathan Kalpathi]

Kindly also refer Circular 178 of 2022 for clarification.

[Shilpi Jain]

There is no supply and thereby no GST

[VIPUL JHAVERI]

IMHO, Mute Point remains ICC award is Liquidated Damge or Not, normally if damages are predefined in contracts it takes form of liquidated Damages mostly, While here may be this award by ICC is like unliquidated damage and if paying RCM gets us ITC back, better to opt for safer, no loss option unless this compenseation paid is sure as "Liquidated Damges" then of course it escapes RCM

AI Summary

GST on arbitration award payments depends on characterisation as liquidated damages or consideration for supply. Whether GST reverse charge applies to payment to a non resident under an arbitral award depends on characterisation: payments treated as liquidated damages are compensatory, not consideration for supply, and thus outside GST scope; if characterised otherwise, reverse charge and input tax credit consequences may arise.