The Delhi High Court has held that the ground of patent illegality under Section 34(2A) of the Arbitration and Conciliation Act, 1996 is unavailable for setting aside an award arising from an international commercial arbitration, and restored an arbitral award directing reimbursement of ₹1.38 crore towards service tax to Taiwanese contractor Continental Engineering Corporation Ltd. (CEC).
A Division Bench of Justice Prathiba M. Singh and Justice Dinesh Bhatt allowed the appeal and set aside the Single Judge’s judgment dated March 22, 2022 and review order dated May 2, 2022.
The dispute arose from a ₹442.95 crore contract awarded to CEC for development of the Outer Ring Road corridor between Mukarba Chowk and Wazirabad Chowk, including flyovers, bridges, footpaths, cycle tracks and allied works.
The sole arbitrator had awarded CEC ₹1,38,58,095 towards service tax directly deposited by it under the reverse-charge mechanism, while rejecting the balance of its ₹5.02 crore claim. The arbitrator had also awarded ₹3.14 crore towards environmental compensation cess, which was not challenged by the Union of India.
The Single Judge subsequently set aside the service tax reimbursement, holding that the tax related to services availed by CEC from third-party service providers and fell outside the scope of the contractual reimbursement clause.
The Division Bench disagreed, holding that Clause 37(i) of the GCC and Clause 14 of the Instructions to Bidders specifically contemplated reimbursement of service tax upon proof of actual payment. It held that engaging subcontractors or service providers for executing the project did not, by itself, disentitle CEC from claiming reimbursement.
The Court further held that the expression “in respect of this contract” covered services rendered or availed in connection with the project and was not confined to services directly provided by CEC.
Since CEC was a foreign company, the arbitration constituted an international commercial arbitration. The Bench reiterated that patent illegality under Section 34(2A) is not available as a ground to set aside an award in an international commercial arbitration. Relying on Urban Infrastructure Real Estate Fund v. Neelkanth Realty (P) Ltd. (2026) 4 SCC 166, the Court held that the Single Judge could not interfere with the award on that ground.
The Court also held that the service tax reimbursement was not contrary to the public policy of India, leaving no valid ground for setting aside the award.
Accordingly, the Division Bench set aside the Single Judge’s judgment and review order, restored the arbitral award, and held CEC entitled to reimbursement of ₹1,38,58,095 towards service tax.
