Contractual GST Differential Tax Claim Must Go to Arbitration: Karnataka HC

Executive Engineer Vs M Venkata Rao Infra Projects Pvt Ltd (Karnataka High Court)

Summary: The Karnataka High Court considered an intra-Court appeal against the judgment and order dated 25.07.2025 passed by the Writ Court in W.P.No.2788/2025. The writ petition had challenged the letter/order dated 03.01.2025 issued by the Executive Engineer (Projects Central-4), Bruhat Bengaluru Mahanagara Palike, Bengaluru.

The petitioner, a registered contractor, had been awarded a contract for construction of a grade separator at Shivananda Circle, Bengaluru under a work order dated 30.06.2017. The contract estimate was prepared under the then-prevailing VAT and Service Tax regime, while GST came into force from 01.07.2017 during execution of the contract. After completion of the work and payment of bills, BBMP withheld the differential tax component.

The petitioner disputed the deduction, contending that the differential tax was not payable by him. However, the agreement between the parties contained an arbitration clause, and the petitioner had already invoked arbitration for adjudication of his contractual claims, including the differential tax component.

The High Court held that the dispute fell within the realm of private law and that a public law remedy under Article 226 was not available for raising the contractual money claim. Since arbitration had already been invoked, the claim regarding the differential tax could be raised in those proceedings.

The Court expressly clarified that it had not expressed any opinion on the merits of the claim or entitlement to the differential tax amount. It was for the arbitrator to decide the issue on merits. The writ appeal was accordingly allowed and the impugned judgment and order dated 25.07.2025 was set aside.

Background of the Contract and Differential Tax Dispute

The present intra Court appeal has been filed impugning the judgment and order dated 25.07.2025 passed by the Writ Court in W.P.No.2788/2025 filed by the respondent for quashing the letter/order dated 03.01.2025 issued by the Executive Engineer (Projects Central-4), Bruhat Bengaluru Mahanagara Palike, Bengaluru.

The parties are referred to as per their ranking before the writ Court, for the sake of convenience.

The petitioner who is a registered contractor was awarded a contract for construction of a grade separator at Shivananda Circle, Bengaluru for which work order dated 30.06.2017 was issued in favour of the petitioner. The cost estimate for the said contract was prepared under the then prevailing Value Added Tax (VAT) and Service Tax regime. However, during the execution of the contract, the Goods and Services Tax (GST) regime came into force with effect from 01.07.2017. After the execution of the work and on payment of the bills raised by the petitioner, the BBMP had withheld the payment of the bills raised for the differential tax component.

Petitioner’s Challenge to the Differential Tax Deduction

Aggrieved by this action, the petitioner had filed a writ petition as the petitioner was of the opinion that the differential tax rate was not to be paid by him for the work completed inasmuch as the project was executed prior to 01.07.2017. The taxes payable under the new GST regime were not taken into consideration while finalizing the tender/work order.

TaxGuru has separately reported the Karnataka High Court’s guidelines for determining discrepancies arising on tax calculation on pre-GST contracts.

Existing Arbitration Clause and Invoked Arbitration

It is not in dispute that the agreement executed between the parties contains an arbitration clause. The petitioner has already invoked the arbitration clause for adjudication of his claims arising out of the contract which would include the differential tax component deducted by the BBMP.

Karnataka High Court on Writ Jurisdiction and Contractual Money Claims

Having heard the learned counsel appearing for the parties and upon consideration of the material on record, we are of the considered view that the dispute falls within the realm of private law and a public law remedy under Article 226 of the Constitution of India would not be available to the petitioner to raise a contractual dispute for money claim. Since the petitioner has already invoked the arbitration clause, any claim regarding the differential tax deducted may be raised in those proceedings.

For context on the GST treatment of contractors and works contracts, see GST Guide for Contractors.

Tribunal/Court Clarifies That Merits of GST Claim Were Not Decided

We make it clear that we have not expressed opinion on the merits of the petitioner’s claim or on the entitlement to the differential tax amount as deducted by the BBMP. It is for the arbitrator to examine and decide the issue on merits in the arbitration proceedings.

Final Decision of the Karnataka High Court

However, we are of the considered view that the invocation of public liability is not available for money claim under a contract. Consequently, the writ appeal is allowed. The impugned judgment and order dated 25.07.2025 is hereby set aside in the aforesaid terms.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

The present intra Court appeal has been filed impugning the judgment and order dated 25.07.2025 passed by the Writ Court in W.P.No.2788/2025 filed by the respondent for quashing the letter/order dated 03.01.2025 issued by the Executive Engineer (Projects Central-4), Bruhat Bengaluru Mahanagara Palike, Bengaluru.

2. The parties are referred to as per their ranking before the writ Court, for the sake of convenience.

3. The petitioner who is a registered contractor was awarded a contract for construction of a grade separator at Shivananda Circle, Bengaluru for which work order dated 30.06.2017 was issued in favour of the petitioner. The cost estimate for the said contract was prepared under the then prevailing Value Added Tax (VAT) and Service Tax regime. However, during the execution of the contract, the Goods and Services Tax (GST) regime came into force with effect from 01.07.2017. After the execution of the work and on payment of the bills raised by the petitioner, the BBMP had withheld the payment of the bills raised for the differential tax component.

4. Aggrieved by this action, the petitioner had filed a writ petition as the petitioner was of the opinion that the differential tax rate was not to be paid by him for the work completed inasmuch as the project was executed prior to 01.07.2017. The taxes payable under the new GST regime were not taken into consideration while finalizing the tender/work order.

5. It is not in dispute that the agreement executed between the parties contains an arbitration clause. The petitioner has already invoked the arbitration clause for adjudication of his claims arising out of the contract which would include the differential tax component deducted by the BBMP.

6. Having heard the learned counsel appearing for the parties and upon consideration of the material on record, we are of the considered view that the dispute falls within the realm of private law and a public law remedy under Article 226 of the Constitution of India would not be available to the petitioner to raise a contractual dispute for money claim. Since the petitioner has already invoked the arbitration clause, any claim regarding the differential tax deducted may be raised in those proceedings.

7. We make it clear that we have not expressed opinion on the merits of the petitioner’s claim or on the entitlement to the differential tax amount as deducted by the BBMP. It is for the arbitrator to examine and decide the issue on merits in the arbitration proceedings.

8. However, we are of the considered view that the invocation of public liability is not available for money claim under a contract. Consequently, the writ appeal is allowed. The impugned judgment and order dated 25.07.2025 is hereby set aside in the aforesaid terms.