The Allahabad High Court has held that dispute relating to taxation is arbitrable when it falls within the contractual domain, such as determining which party is contractually liable to pay tax, reimbursement of tax paid, or interpretation of contractual tax clauses, but is not arbitrable when it requires statutory determination by taxing authorities, such as determination of tax rates, classification of goods, or challenge to statutory tax arrangements. In the present case, the dispute was arbitrable as it was confined to the manner of GST calculation as per competing guidelines and did not encroach upon the exclusive domain of the taxing authority.
The Court clarified that borrowing technical specifications from MoRTH in a contract does not automatically import MoRTH’s taxation guidelines or SOP into the contract, especially when the contract contains a separate and specific tax clause. Further, technical, financial, and commercial requirements are treated separately in contract administration, and borrowing one does not implicitly subsume the other unless specifically provided for. A directory SOP framed for EPC contracts cannot be made binding on item rate contracts without cogent evidence or contractual stipulation permitting such extension.
Government Orders issued by the State Government in the course of its business, partaking the nature of executive instructions, are binding on the government department to which they are addressed, and an arbitral tribunal cannot discard their applicability without recording cogent reasons. An arbitral tribunal, being a creature of contract, cannot re-write the contract or fill in lacunae, and findings based on conjectures and assumptions without backing of cogent evidence render the award susceptible to interference under Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996.
The Division Bench comprising the Chief Justice Arun Bhansali and Justice Jaspreet Singh first addressed the contention that tax disputes are not arbitrable. The Court laid down a comprehensive framework distinguishing arbitrable from non-arbitrable tax disputes. Under “Head-A” fall disputes that can be resolved within the contract, such as determining inter se tax liability between contracting parties, reimbursement of tax paid, tax sharing or indemnity clauses, and interpretation of contractual phrases like “inclusive of all taxes” in the context of a newly introduced tax. Under “Head-B” fall disputes requiring statutory determination through tax laws, such as those encroaching upon the exclusive domain of the taxing authority, challenging statutory tax arrangements, determining classification or entries under a taxing statute, determining rate of taxation, or disputes between a contracting party and the State as sovereign.
The Court held that the present dispute fell under Head-A, as it was confined to whether GST should be calculated as per the MoRTH SOP or the State Government Orders, it did not involve adjudication of whether a transaction was taxable, nor did it challenge any statutory tax arrangement or require determination of tax rate or classification. The Court also noted that the objection of non-arbitrability was raised for the first time in the Section 37 appeal, never having been raised before the Arbitral Tribunal under Section 16 or before the Commercial Court under Section 34.
On the core issue of applicability of the MoRTH SOP versus the State Government Orders, the Court conducted a detailed examination of the contract clauses. Clause 3 of the Special Conditions stated that all work would be carried out as per MoRTH specifications, and the Technical Specification clause referenced MoRTH specifications, PWD detailed specifications, IRC codes, and Government Orders. However, Clause 45, the specific tax clause, merely stated that rates quoted by the contractor would be deemed inclusive of all sales and other taxes, and the employer would deduct taxes at source as per applicable law. The Court observed that borrowing technical specifications from MoRTH for engineering standards, nature, quality, and quantity of materials, could not implicitly subsume taxation guidelines. Technical, financial, and commercial requirements are generally treated separately in contract administration, and borrowing one does not implicitly import the other unless specifically provided for.
The Court further observed that the MoRTH SOP dated Nov 19, 2018 was a directory and guiding document, not a mandatory one. The use of the word “may” in Clause 6 and the reference to “mutual agreement” in Clause 6.2(iv) indicated its directory nature. Crucially, the SOP’s Clause 6 and its illustration were specifically framed for EPC contracts, and there was no material evidence to suggest that the same methodology could be ipso facto applied to item rate contracts, which the parties had agreed was the nature of their contract. The Sole Arbitrator applied the EPC contract illustration to an item rate contract without any cogent reasoning or reference to contractual clauses permitting such extension, which amounted to reading into the contract something that was not present and basing findings on conjectures and assumptions.
The Court noted that the two Government Orders dated Nov 09, 2017 and Dec 10, 2019 issued by the State Government were executive instructions binding on the appellant-department, as the department was a State instrumentality and the contract was funded by the State. The Sole Arbitrator did not discuss under what circumstances these binding Government Orders would not be applicable, nor did he record any cogent reason to discard their applicability.
On the issue of penalty and interest, the Court observed that under the GST Act, the liability to pay tax is on the assessee (the contractor), who was required to deposit the tax in time. If the contractor failed to do so, it was the contractor who should bear the interest and penalty. The Sole Arbitrator, without recording a clear finding that a specific tax amount was due and payable within a specified time, that non-payment was solely attributable to the department’s negligence, and that the contractor had actually suffered interest and penalty payable to the GST Department, merely invoked Section 50 of the GST Act to make the department liable for interest and penalty. This amounted to the Arbitrator acting as an Assessing Officer.
The Court also flagged a significant omission: neither the Sole Arbitrator nor the parties noticed the transitional provisions under Chapter XX of the GST Act, 2017, particularly Sections 142(2), 142(10), and 142(11), which deal with contracts entered prior to the appointed date (01.07.2017) where there is upward or downward revision post that date. The expert evidence filed by the respondent also did not consider the impact of these sections, rendering the Sole Arbitrator’s finding on applicability of MoRTH guidelines vulnerable as it lost its core integrity of reasoning.
The Court further observed that the work was completed in FY 2018-19 and the maximum period for concluding GST assessment is three years, meaning assessments would have become final by the time of the award in 2024. The best evidence of the contractor’s actual GST liability would have been the final assessment order, but no such document was placed on record, nor was there any indication that any notice under Section 73 or 74 of the GST Act had been issued to the contractor.
Briefly, the Uttar Pradesh Public Works Department invited tenders for widening and strengthening of Bilraya-Panwari Road (SH-21) and Nepalpur-Bijwar Road in District Sitapur from two-lane to four-lane (44.70 kms). The bid submitted by M/s Vriddhi Infratech India Pvt Ltd. was accepted, and the parties entered into a contract on April 27, 2016 for a total contract price of Rs. 155.89 crores. The work commenced on April 27, 2016 and was to be completed by April 26, 2018, but after a time extension, the contractor completed the work and a completion certificate was issued on April 10, 2019.
The contract was entered under the old tax regime comprising Value Added Tax (VAT), under which the contractor had quoted item rates inclusive of 4% VAT. From July 01, 2017, the GST regime replaced VAT, and construction work attracted 12% GST payable by the contractor directly to the GST Department. The dispute arose when the contractor demanded GST on running account bills for work done after June 30, 2017, calculated as per the Standard Operating Procedure (SOP) issued by the Ministry of Road Transport and Highways (MoRTH) dated Nov 19, 2018. The department disputed this, relying on Government Orders issued by the State of U.P. dated Nov 09, 2017 and Dec 10, 2019, which prescribed a different methodology for GST calculation on running contracts.
The dispute was first referred to the Dispute Review Expert (DRE), who held that the department was liable to pay GST to the contractor on price adjustment, but that the quantum was to be calculated as per the State Government Orders. Dissatisfied with the mode of calculation, the contractor invoked arbitration. The Sole Arbitrator held that the MoRTH SOP dated Nov 19, 2018 was applicable (and not the State Government Orders), and awarded the contractor a total sum of Rs. 11.35 crores comprising GST on work done, GST on price adjustment of Rs. 94.77 lakhs, refund of wrongfully deducted amount of Rs. 75.90 lakhs, along with 15% penalty and 18% interest per annum, and Rs. 66,500/- towards the department’s share of DRE fee. The department’s challenge under Section 34 was dismissed by the Commercial Court-I, Lucknow, affirming the award.
