The Bombay High Court has held that the service recipient is liable to pay the GST to the government on interest under an arbitrary award and it can not be deducted from the dues payable to the service provider.
The single bench of Justice B.P. Colabawalla has observed that service tax is an indirect tax, and it is possible that it may be passed on. Therefore, an assessee can certainly enter into a contract to shift its liability for service tax.
The applicant has filed the Execution Application for executing the Arbitral Award passed in favour of the applicant and against the Municipal Corporation of Greater Mumbai (MCGM).
The MCGM was aggrieved by the award passed by the Arbitral Tribunal and therefore challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. However, the challenge was repelled by a single judge. Even an appeal filed under Section 37 of the Arbitration Act before the Division Bench Court was dismissed. The order of the Division Bench was thereafter challenged before the Supreme Court by filing an SLP, which was also dismissed. The Supreme Court granted time to the MCGM up to March 31st, 2022, to make payment to the applicant.
It was made clear that once the payment was made, the liability of the MCGM under the award would be satisfied and the applicant would have no claim against the MCGM. It was also directed that the MCGM's court costs of Rs.1 lakh be credited by the Prothonotary and Senior Master in the Bank Account on or before March 31st, 2022.Accordingly, the Execution Application was placed on the Board for compliance and disposed of on April 5, 2022.
The amount deposited in the bank account was not the entire amount due and payable under the award. The MCGM withheld an amount allegedly towards payment of the GST, which, according to the MCGM, was the liability of the applicant.
The deduction was made by the MCGM because of the provisions of Section 15(2)(d) of the CGST Act read with Section 20 of the IGST Act.
The applicant contended that the liability for GST, if any, could not be foisted upon the applicant. Therefore, the MCGM ought to be directed to pay the amount to the applicant. The applicant made two-fold arguments.
Firstly, there is no liability to pay any GST as the GST law/regime came into force much after the contract between the Applicant and the MCGM was concluded (i.e. in the year 2003). The Arbitral Award was passed long before the GST law was brought into force.
Secondly, under the CGST Act as well as under the IGST Act, there was a Reverse Charge Mechanism under which it was the liability of the MCGM to make payment of the GST, if any. In any event, the liability towards payment of GST could not be foisted on the applicant.
The MCGM contended that GST is payable on the interest component under the Arbitral Award as it is awarded in favour of the Applicant because of the delay on the part of the MCGM to make payment. The interest is being paid after the GST regime was brought into force. GST would be applicable on the interest component of the arbitral award, which would have to be paid to the government.
Clause 3 of the contract states that if any taxes or duties are leviable, they would have to be included in the rates and prices bid and would have to be borne by the applicant.
The court observed that Clause 3 does not contemplate the payment of any taxes that have arisen on account of the payment of interest because of a default on the part of the MCGM to make payment in a timely manner. The liability to pay GST has arisen because there were disputes between the applicant and the MCGM on the amounts payable by the MCGM to the applicant.
"I am therefore of the opinion that clause 3 of the contract does not come to the assistance of the MCGM to deduct the GST of Rs.67,94,965.02 from the applicant. It is the MCGM, under Notification No.10 of 2017 – Integrated Tax (Rate) issued by the Government of India, Ministry of Finance (Department of Revenue), dated 28th June 2017, read with the provisions of Section 5(3) of the IGST Act, who would be liable to pay the GST to the government on a reverse charge basis and the same cannot be deducted from the dues payable to the applicant," the court said.
The court directed MCGM to credit the bank account with the sum of Rs. 67,94,965.02 on or before August 30, 2022. Once the amount is credited to the bank account, the arbitral award shall be marked as fully satisfied and the applicant shall have no claim whatsoever against the MCGM.
Case Title: M/s Angerlehner Structural and Civil Engineering Company Versus Municipal Corporation of Greater Bombay
Case No: Commercial Execution Application No. 54 Of 2016
Citation: 2022 LiveLaw (Bom) 228
Counsel For Applicant: Senior Counsel Firoz Andhyarujina
Counsel For Respondent: Senior Counsel A. Y. Sakhare