2022 (3) TMI 986 - HC - Service Tax

Scope of contractual agreement - Reimbursement of Service Tax and Environmental Compensation Cess - period between October, 2013 to June, 2017 - Section 34 of the Arbitration and Conciliation Act, 1996 - HELD THAT - The Service Tax was included in the tax invoices raised by the service providers to CEC. CEC had made payment of the said invoices and sought reimbursement of the Service Tax charged by the service provider. In terms of a Notification dated 01.03.2016, the services pertaining to construction of flyovers was also exempted from Service Tax - CEC was exempted from payment of any tax in respect of any service rendered by it for execution of the Agreement in question. As mentioned above, the Agreement was essentially an Item Rate Contract and CEC was not assessed to Service Tax in respect of any of the items executed by it for performance of its obligations under the Agreement. Undisputedly, CEC s claim is for reimbursement of Service Tax included in the services availed by it and not the services rendered by it. The Arbitral Tribunal had proceeded on the basis that since CEC was assessed to Service Tax, albeit, on a Reverse Charge Mechanism, in respect of certain services, it was entitled to reimbursement in terms of Clause 37(i) of GCC read with Clause 14 of the Instructions to Bidders - CEC is not claiming reimbursement of Service Tax in respect of the Agreement executed by it or the works performed by it; CEC claims the Service Tax levied in respect of the services availed by it from third party service providers. This is, obviously, the Service Tax chargeable in respect of contracts between the third-party service providers and CEC. Clearly, this is outside the scope of Clause 37(i) of GCC. Although, it is well settled that matter regarding interpretation of a contract falls within the jurisdiction of Arbitral Tribunal and the Courts would not normally interfere with such interpretation. However, in the present case, this Court is of the view that Arbitral Tribunal s interpretation of Clause 37(i) of the GCC to the extent it includes reimbursement of Service Tax levied in connection with contracts / arrangements between CEC and third parties, is fundamentally flawed and vitiates the impugned award by patent illegality - there is merit in the petitioner s contention that the award of reimbursement of Service Tax is contrary to the express terms of Clause 37(i) of the GCC. The impugned award to the extent of a sum of ₹ 1,38,58,095/- awarded in favour of CEC in respect of Claim no. 1, is set aside. Consequently, no interest is also payable on the said amount - The petition is partly allowed.

Summary

Issues Involved:
1. Reimbursement of Service Tax (Claim No. 1)
2. Reimbursement of Environmental Compensation Cess (ECC) (Claim No. 2)
3. Interest on Claims (Claim No. 3)
4. Costs of arbitration (Claim No. 4)

Detailed Analysis:

1. Reimbursement of Service Tax (Claim No. 1)
The petitioner challenged the arbitral award concerning the reimbursement of Service Tax paid by the respondent (CEC). The Arbitral Tribunal partly allowed this claim, awarding ?1,38,58,095/- for Service Tax paid directly by CEC to the Service Tax Department under the Reverse Charge Mechanism. However, the Tribunal denied the claim for ?3,63,89,858/- paid by CEC to its sub-contractors, as no demand was raised by the Service Tax Authorities on CEC. The Tribunal's interpretation was that Clause 37(i) of the GCC and Clause 14 of the Instructions to Bidders entitled CEC to reimbursement if three conditions were met: payment of Service Tax to the department, a demand raised by the department, and satisfaction of the Engineer-in-Charge. The court, however, found this interpretation flawed, stating that Clause 37(i) referred to Service Tax "in respect of this Contract" and not for services availed from third-party providers. Therefore, the court set aside the award of ?1,38,58,095/- for Claim No. 1.

2. Reimbursement of Environmental Compensation Cess (ECC) (Claim No. 2)
The petitioner accepted the arbitral award concerning the reimbursement of ECC. The Arbitral Tribunal awarded ?3,14,06,709/- to CEC, based on Clause 38 of the GCC and a Certificate from CEC's Statutory Auditor confirming the payment of ECC during the period from November 2015 to August 2018. This claim was not contested further by the petitioner.

3. Interest on Claims (Claim No. 3)
The Arbitral Tribunal awarded interest at the rate of 10% per annum on the amounts awarded for Claims No. 1 and 2. The petitioner contested the award of interest, arguing that it was contrary to the terms of the Agreement. However, the court noted that the petitioner could not point to any specific clause in the Agreement that proscribed the award of interest. Consequently, the interest awarded on the amount of ?1,38,58,095/- (Claim No. 1) was also set aside, as the principal amount itself was not upheld.

4. Costs of Arbitration (Claim No. 4)
The Arbitral Tribunal awarded ?15,00,000/- as costs of arbitration in favor of CEC. This aspect of the award was not specifically contested in the petition.

Conclusion:
The court partly allowed the petition, setting aside the arbitral award concerning the reimbursement of ?1,38,58,095/- for Service Tax (Claim No. 1) and the corresponding interest. The award for the reimbursement of ECC (Claim No. 2) and the costs of arbitration (Claim No. 4) were upheld. Each party was directed to bear its own costs.