GST IS PAYABLE BY SERVICE RECIPIENT ON INTEREST GRANTED UNDER ARBITRAL AWARD UNDER REVERSE CHARGE MECHANISM

[Mr. M. GOVINDARAJAN]

In M/S. ANGERLEHNER STRUCTURAL AND CIVIL ENGINEERING COMPANY VERSUS MUNICIPAL CORPORATION OF GREATER BOMBAY [2022 (6) TMI 424 - BOMBAY HIGH COURT], the respondent company and the appellant entered into a contract.  The dispute has arisen between the respondent company and the applicant as to the amount payable by the respondent company to the applicant.  Since the respondent company did not pay the dues the applicant invoked the provisions of arbitration clause in the contract.  The Arbitrator while passing the arbitral award also award interest for the outstanding amount.

The respondent company challenged the arbitral award under section 34 of the Arbitration and Conciliation Act, 1996 (‘Act’ for short) before the High Court.  The Single Judge rejected the petition filed by the respondent.  An appeal was filed against the order before the Division Bench which also dismissed the appeal.  The Supreme Court also dismissed the Special Leave Petition filed against the order of Division Bench.  The Supreme Court granted time to the respondent to pay the amount of arbitral award with interest on or before 31.03.2022.

Since the award attains finality and the respondent did not come forward to pay the same, the appellant filed execution petition before the High Court.  The applicant in its execution petition submitted that the applicant, being a foreign company, does not have a bank account in India.  The applicant, therefore, prayed that the amount may be deposited in the name of their Advocate who in turn transfer the same to the applicant.  The lawyer’s account for this purpose will be considered as ‘escrow account’.  The respondent company was also ready to pay the amount to the applicant’s Advocate account subject to the condition that the company shall be relieved from all liabilities and no claim has been made against the company.  The High Court directed the company to pay the award amount to the credit of the Advocate’s account, as agreed to, on or before 31.03.2022.

To confirm the compliance of the order of Court hearing was held on 05.04.2022.  The applicant submitted that the company has not paid the entire amount as ordered by the Court.  The company withheld a sum of Rs.67.95 lakhs towards the payment of GST.  The total amount payable by the company is Rs.11,28,99,770.69 including the interest amount Rs.4,45,44,770.69. 

The applicant submitted the following before the High Court-

• The GST liability could not be foisted upon the applicant.
• The applicant is not liable to pay GST since the award was made before the implementation of GST.  The award was made on 23.06.2014 whereas the GST was implemented on 01.07.2017.
• The GST law has not retrospective effect.  Therefore the applicant is not liable to pay GST.
• Even GST is liable in this case the company may pay the amount under Reverse Charge Mechanism.

The respondent company submitted the following before the High Court-

• The contentions of the applicant are contrary to the provisions of CGST Act and IGST Act.
• The award was challenged during the GST regime.
• Section 15 of CGST Act read with section 20 of stipulates that the value of supply of goods or services or both, shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both, where the supplier and the recipient of the supply are not related and the price is sole consideration of the supply.
• Section 15(2)(d) provides that the value of supply shall include interest or late fees or penalty for delayed payment of any consideration of any supply.  Therefore GST is payable on interest component of arbitral award. 
• Clause 3 of the Contract between the parties, it was agreed that all taxes were to be borne by the applicant.
• Therefore, notwithstanding the Reverse Charge Mechanism the GST liability could not be foisted on the company and would be payable solely by the applicant.
• Vide Notification No. 10/2017-Integrated Tax, dated 28.06.2017 provides that any service supplied by any person who is located in a non taxable territory to any person other than the taxable online recipient and the supplier of service is located in a non taxable service, then any person located in the taxable territory other than non taxable online recipient is liable to pay GST under Reverse Charge Mechanism.
• The applicant is a person located in the non taxable territory and the recipient of the service i.e., the respondent company located in the taxable territory.  Therefore the respondent company, the recipient would have to pay the GST.
• The respondent company can avail the input tax credit paid under reverse charge mechanism subject to the condition that the goods and services used or will be used for business or furtherance of business.
• If the amount is allowed to be retained by the respondent company and is thereafter paid over to the Government towards the liability of GST it would amount to unjust enrichment on the part of the respondent company because the respondent would be entitled to input tax credit even though the respondent paid the GST from the monies of the applicant.
• Therefore there is no justification to withhold the amount by the respondent company on the contention of payment of GST.

For the above submissions of the applicant, the respondent company again submitted the following before the High Court-

• Though the position of the law is as discussed by the applicant, the burden of tax liability by entering into a contract to the contrary.
• Clause 3 of the contract between the applicant and the respondent company stipulated that the rates and prices bid in the priced bill of quantities shall, except insofar as it is otherwise provided under the contract, include all constructional plant, labor, supervision, materials, erection, maintenance, insurance, profit, taxes and duties together with all general risks, liabilities and obligations set out or implied in the contract. 
• The applicant had agreed to bear all the taxes, the respondent company was entitled and justified to deduct from the applicant the GST payable by the respondent company.
• The respondent company is well within its rights to withhold the amount of Rs.67.95 lakhs towards the payment of GST in  view of Clause 3 of the contract between the parties.
• The respondent company has not availed the input tax credit on the withheld amount.

The respondent company submitted based on the above arguments the respondent company is correct in withholding the amount towards the payment of GST.

The High Court heard the submissions made by both the parties.  The High Court analyzed the provisions of CGST Act and IGST Act.  The High Court observed that it is not in dispute that the services rendered by the applicant to the respondent company would be governed by the IGST Act as the same are in relation to the inter-State supply of services.  The High Court also analyzed the Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017.  The High Court observed that it is clear that any service supplied by any person, who is located in a non taxable territory to any person located in the taxable territory (other than a non taxable online recipient) it is the recipient of services would be liable to pay GST on reverse charge basis.  In this case the respondent company is the recipient of services located in a non taxable territory.  Therefore the respondent company is liable to pay GST under reverse charge mechanism.

The High Court further considered the contention of the respondent company that the tax liability is shifted to the applicant.  The High Court analyzed the provisions of the contract entered into between the applicant and the respondent company.  The High Court held that the respondent company can always contract to shift its liability to pay GST on the applicant.  The High Court observed that Clause 3 does not contemplate the payment of any taxes that have arisen on account of payment of interest because of a default on the part of the company to make payment in a timely manner. 

The High Court held that clause 3 of the contract does not come to the assistance of the respondent company to deduct GST of Rs.67.95.   According to the Notification No. 10/2017-Integrated Tax (Rate), dated 28.06.2017 the respondent company is liable to pay GST under reverse charge mechanism.  The High Court directed the respondent company to release the withheld amount to the applicant.