The Delhi High Court on Friday protected InterGlobe Aviation Limited, the parent company of IndiGo Airlines, from coercive recovery action in connection with a Goods and Services Tax demand of approximately ₹458 crore. A division bench of Justice Nitin Wasudeo Sambre and Justice Ajay Digpaul issued notice to the GST department and granted interim protection to the airline after observing that, "prima facie, the amount received appears to be compensation and cannot be termed as supply." The order comes as the airline mounts a legal challenge to both the demand and an equivalent penalty imposed by the GST Department. The case, styled Interglobe Aviation v. Additional Commissioner CGST, raises questions of broader significance for how India's GST framework treats contractual compensation, particularly in sectors such as aviation where commercial disputes with foreign counterparts are common and sums involved are substantial.
The case arises out of a commercial dispute between IndiGo and a foreign aircraft engine supplier, whose engines malfunctioned and caused the grounding of multiple aircraft during the financial years 2018–19 and 2019–20. With aircraft unable to fly, the airline lost flying hours and suffered business losses. To make up for these losses, the foreign engine supplier entered into supplementary agreements with IndiGo and issued credit notes worth nearly ₹2,000 crore to compensate the airline for operational losses and reduced flying hours. According to Litigation News, advocate V Lakshmikumaran explained that the airline had imported aircraft along with engines and had paid Integrated GST at the time of import. However, during 2018-19 and 2019-20, some engines malfunctioned, forcing the airline to ground aircraft for safety reasons. The assessment order in the present case was passed under Section 74 of the CGST Act, the provision that applies where there is an allegation of suppression or wilful misstatement and covered the period from FY 2018–19 to FY 2022–23.
Before the Court, IndiGo argued that the amounts received constituted compensation for business loss and had no nexus with any 'supply' of goods or services under the Central Goods and Services Tax Act, 2017. Counsel for the airline submitted that treating such receipts as taxable consideration would be a fundamental mischaracterisation of the contractual arrangement. The airline relied on Section 7 of the Central Goods and Services Tax Act as well as a CBIC circular issued on August 3, 2022, contending that a taxable supply can arise only where there is an agreement, express or implied, to perform, refrain from performing, or tolerate an act in exchange for consideration. As per Litigation News, the airline argued that the circular makes it clear that there must be an express or implied agreement to do something, abstain from doing something, or tolerate an act in return for payment before such payment can be treated as consideration for a taxable supply. The airline maintained that damages or compensation for contractual breach do not amount to payment for 'tolerating' a breach, arguing that 'the contract is entered into for performance, not for breach' while referring to the CBIC clarification.
The High Court issued notice to the tax department, whose counsel accepted notice in Court. When asked how the revenue's interests would remain safeguarded during the pendency of the case, IndiGo's counsel V Lakshmikumaran assured solvency, stating that he was not going to run away...I pay more than ₹20,000 crore in a year. I am solvent. According to Litigation News, the airline submitted that its solvency was not in doubt and it was not a 'fly-by-night operator'. The airline also challenged the tax authorities' interpretation of the circular, contending that the Commissioner had relied on the same clarification to draw a conclusion contrary to its plain wording. The Bench directed that no coercive action be taken against InterGlobe Aviation until further orders, with the Court observing that prima facie the amount in question appeared to be compensatory in nature and could not be brought within the definition of 'supply' under Section 7 of the CGST Act.
Tax experts view this case as significant because it pushes back against the expanding use of the 'tolerating an act' entry under GST. According to Ikesh Nagpal, lead-indirect tax at tax and consulting firm AKM Global, the case indicates that the issue requires deeper judicial examination on whether compensation arising from contractual failure or non-performance can be treated as consideration for a taxable supply. Nagpal noted that 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. The matter 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. This ruling could significantly impact how GST demands are enforced against major airlines in India. This is not the first time IndiGo's tax affairs have been tested at the Delhi High Court - in March 2025, a separate division bench struck down an additional Integrated GST levy on re-imported aircraft parts following overseas repairs, holding that such imports constitute a supply of services and cannot be subjected to a double levy under customs notifications, a matter understood to be under challenge before the Supreme Court.
