The Allahabad High Court has held that the disputes arising out of contractual obligations between parties, even if they involve issues of tax reimbursement or compliance, do not fall within the category of non-arbitrable disputes relating to sovereign functions, provided neither party is questioning the validity or legality of the levy of the tax itself.
Further, while exercising jurisdiction under Section 11 of the Arbitration and Conciliation Act, 1996, the Court is not required to go into the merits of the dispute; and the scope is strictly limited to examining the existence of an arbitration agreement and whether the dispute is prima facie arbitrable, added the High Court.
A Single Judge Bench of Justice Vikas Budhwar observed that sovereign functions of the State, including taxation, being inalienable and non-delegable, are non-arbitrable. However, it is evident that disputes arising out of contractual obligations between parties, even if they involve issues of tax reimbursement or compliance, do not fall within the category of non-arbitrable disputes.
Reference was made to the decision of the Delhi High Court in Spectrum Power Generation Limited vs. Gail (India) Limited [ARB.P. No. 746 of 2022], where it was held that where the issue does not relate to the taxing power of the State but rather whether GST/VAT liability could be passed on or reimbursed under an agreement, the dispute is arbitrable.
The Bench noted that in the present case, neither party is questioning the validity or legality of the levy of GST. The dispute is essentially with regard to the payment of the contractual dues, which has been withheld by the respondents on the ground of alleged non-compliance of GST obligations by the applicant. The Bench observed that such a dispute is contractual in nature and is, therefore, arbitrable. It is always open to the respondents to raise their defence or counterclaim before the arbitral tribunal with regard to GST compliance or any consequential liability.
Further, the Bench observed that at this stage, while exercising jurisdiction under Section 11(4) of the Arbitration and Conciliation Act, it is not required to go into the merits of the dispute. Thus, referring to the case of Duro Felguera S.A. vs. Gangavaram Port Limited, the Bench noted that the scope is limited to examining the existence of an arbitration agreement and whether the dispute is prima facie arbitrable, nothing more, nothing less.
Briefly, the applicant is running a partnership firm in the name of Paramhans Enterprises, engaged in the business of contractual activities including clearing and grubbing road land, earthwork in embankment, construction of subgrade, and maintenance of roads. The respondents, Varanasi Aurangabad NH-2 Tollway Private Limited, issued work orders for the construction and maintenance of roadways, which the applicant executed to the satisfaction of the respondents.
The respondents however, withheld an amount of Rs. 58.82 Lakhs against invoices raised by the applicant. After repeated requests, the matter was partly settled, and the respondents issued a settlement letter, acknowledging that out of the withheld amount, a sum of Rs. 12.08 Lakhs was released on Feb 14, 2022, and the remaining amount of Rs. 46.73 Lakhs was to be cleared.
Despite acknowledgments, the remaining amount was not released, and on Nov 22, 2022, the respondents issued a communication stating that further payment was withheld on account of alleged non-compliance of GST requirements and called upon the applicant to execute an indemnity bond in favour of the respondent. As disputes arose, the applicant issued a notice invoking arbitration. As the respondents failed to act upon the said notice, the applicant was prompted to file the present application under Section 11(4) of the Arbitration and Conciliation Act, 1996 for the appointment of an arbitrator.
Appearances:
Advocates Kirti Kumar Nirkhi, Rahul Agarwal, Sarvesh Mani Pandey, Shobhit Saxena, and Vikas Kumar Pandey, for the Applicant
Advocate Kaushalendra Nath Singh, for the Opposite party
