The Supreme Court has refused to interfere in the Paytm Nightstay GST Arbitration Dispute involving One97 Communications Limited and Nightstay Travels Private Limited. The dispute concerns a claim for ₹99 lakh under an Assignment Deed. The Court upheld the decision to send the matter to arbitration.
Background of the Dispute
One97 Communications, the parent company of Paytm, executed an Assignment Deed with Nightstay Travels on December 14, 2018. Under the agreement, One97 acquired certain intellectual property from Nightstay Travels.
The transaction involved a consideration of ₹5.5 crore. One97 also paid ₹99 lakh as Goods and Services Tax (GST).
Paytm alleged that Nightstay Travels failed to deposit the GST amount with the tax authorities. As a result, Paytm claimed that it lost the corresponding input tax credit.
Based on this claim, Paytm sought recovery of the ₹99 lakh. It also sought interest from Nightstay Travels and its former director, Nasr Ullah Khan.
Khan also founded the Nightstay App.
Nightstay Challenges Arbitration
Nightstay Travels opposed the claim on several grounds. It argued that the dispute involved taxation and fell under the Central Goods and Services Tax Act, 2017.
The company also argued that the dispute could not go to arbitration.
The arbitrator accepted this argument. The arbitrator held that the dispute was non-arbitrable.
Paytm then challenged that decision before the District Judge, Commercial Court, at Patiala House Courts in New Delhi.
District Court Holds Dispute Arbitrable
The District Judge overturned the arbitrator’s decision. The Court held that the dispute was essentially contractual.
According to the Court, the dispute did not challenge the State’s power to levy or assess GST. It also did not concern any order issued by a tax authority.
Instead, Paytm sought payment from a private party under the Assignment Deed. The Court therefore treated the claim as a contractual dispute between private parties.
The Court also examined Clause 7 of the Assignment Deed. It found that the clause raised questions about compensation and indemnification.
These questions involved contractual interpretation. Therefore, the Court held that the arbitral tribunal could decide them.
The District Judge consequently set aside the arbitrator’s order. The Court also directed the parties to proceed with arbitration.
Legal Principles on Arbitrability
Indian arbitration law distinguishes between rights in rem and rights in personam.
Rights in rem apply against the world at large. Courts and specialised public forums generally decide such disputes.
Rights in personam, however, arise between specific parties. Contractual disputes of this nature generally remain suitable for arbitration.
The Supreme Court explained this distinction in Booz Allen and Hamilton Inc. v. SBI Home Finance Limited.
Later, in Vidya Drolia v. Durga Trading Corporation, the Supreme Court developed a four-part test.
The test examines whether the dispute:
- Concerns rights in rem;
- Affects third-party rights with erga omnes effect;
- Involves an inalienable sovereign function; or
- Faces an express or implied statutory bar to arbitration.
GST Dispute Does Not Always Bar Arbitration
Tax disputes often raise questions about arbitrability. Courts generally exclude disputes involving the State’s power to levy, assess, or recover taxes from private arbitration.
However, the present case involved a different issue.
The dispute did not challenge any action by a tax authority. Instead, Paytm sought compensation from Nightstay Travels under a private contract.
The claim also concerned the parties’ contractual allocation of the financial consequences of a GST-related event.
The District Judge therefore treated the claim as an indemnity dispute. The Court found that it involved rights in personam between the assignor and assignee.
Supreme Court Declines to Interfere
Nasr Ullah Khan challenged the District Judge’s decision before the Supreme Court through a Special Leave Petition.
A Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe heard the matter.
The Bench declined to interfere with the impugned judgment. The Supreme Court consequently dismissed the Special Leave Petition.
The Court also dismissed the accompanying interlocutory applications, if any.
The District Judge’s direction to proceed with arbitration therefore remains undisturbed.
Significance of the Decision
The Paytm Nightstay GST Arbitration Dispute highlights an important distinction in arbitration law.
A dispute involving the State’s sovereign taxing powers may remain outside arbitration. However, a private contractual dispute may still go to arbitration even when GST forms part of the factual background.
The ruling also reinforces the principle that courts should narrowly interpret the category of non-arbitrable disputes.
The decision may have particular relevance for technology and platform companies. Such companies often structure intellectual property and digital asset transactions through assignment deeds.
These agreements may also contain indemnity clauses covering tax-related liabilities.
A failure to deposit GST can therefore create disputes over input tax credit and contractual reimbursement.
The Supreme Court’s approach suggests that courts may continue to distinguish tax litigation from private contractual claims.
For transactional lawyers, the case also highlights the importance of clearly drafted indemnity clauses. Clear contractual language can help parties resolve tax-related financial disputes through the arbitration mechanism they agreed upon.
