Madras HC Directs GST Reimbursement Under GCC for Tax Regime Change

Sakthi Constructions Vs Additional Chief Secretary/Commissioner (Madras High Court)

The Madras High Court disposed of three writ petitions filed by contractors challenging orders rejecting their claims for reimbursement of GST paid after the implementation of the GST regime, price escalation/price adjustment under the General Conditions of Contract (GCC), and refund of retention amounts. The petitions related to integrated storm water drainage works awarded pursuant to tenders floated in 2015. The contractors had earlier approached the Court seeking directions for determination and reimbursement of the GST component in terms of G.O.Ms.No.296, Finance (Salaries) Department dated 09.10.2017 and determination of price adjustment under the GCC.

The contracts contained Clause 43 governing taxes and Clause 45 governing price adjustment. Clause 43.2 provided for adjustment of the contract price where taxes, duties, or other levies changed between 28 days before submission of bids and the date of the last completion certificate, provided such changes were not already reflected in the contract price. The contracts also contained provisions requiring disputes to be resolved through the contractual adjudication and arbitration mechanism.

The Court noted that the petitioners had completed the works and claimed reimbursement of the additional tax burden arising from the introduction of the GST regime with effect from 01.07.2017, along with price adjustment and refund of retention amounts. The Government of Tamil Nadu had issued G.O.Ms.No.296 dated 09.10.2017, which stated that suppliers would collect GST from purchasers and that the entire GST on the supply would ultimately be borne by the purchaser. The Court also referred to Section 64-A of the Sale of Goods Act, 1930 and observed that Clause 43.2 of the GCC incorporated a similar principle for adjustment of contract price on account of changes in taxes.

The petitioners submitted that, before GST, they were governed by the Tamil Nadu Value Added Tax Act, 2006 and had opted to pay tax under Section 6(1) read with Rule 8(5)(d) of the Tamil Nadu Value Added Tax Rules, 2007. They contended that the change in the tax regime from VAT/service tax to GST entitled them to reimbursement of the increased tax component and to price adjustment under the contract. The Court examined the relevant statutory provisions and notifications governing the pre-GST and GST tax regimes, including Notification No.25/2012-Service Tax, Notification No.06/2015-Service Tax, and Notification No.09/2016-Service Tax. It observed that Notification No.09/2016-Service Tax had no impact on the petitioners because their tenders were floated and accepted during 2015.

The Court held that the change in taxes between the date specified in Clause 43.2 and the last completion certificate attracted the contractual mechanism for adjustment of the contract price. It observed that the tax component arising from the transition to the GST regime had to be reimbursed to the petitioners and that Clause 6 of G.O.Ms.No.296 also expressly reflected this position.

Regarding the retention amounts, the impugned orders had stated that they could not be released because audit objections were pending. The Court held that audit objections alone were not a sufficient ground to withhold refund of retention amounts. It observed that retention amounts should be refunded unless there were reasons for appropriating them on account of the works executed under the contracts, and that any audit objections should be communicated to the petitioners.

As regards price escalation and price adjustment under Clause 45 of the GCC, the respondents had rejected the claims on the ground that such claims had not been made during execution of the work through the monthly Interim Payment Certificates and had instead been raised after completion of the works. The Court held that these claims involved several disputed questions of fact and declined to express any opinion on their merits. It directed that such disputes be pursued through the alternative dispute resolution mechanism provided in the GCC.

Accordingly, the Court disposed of the writ petitions by directing the respondents to: (i) refund the tax component under Clause 43.2 of the GCC arising from the change in the tax regime from VAT/Central Sales Tax to the GST enactments; and (ii) refund the retention amounts with interest at the commercial rate. In respect of price escalation and price adjustment claims under Clause 45 of the GCC, the petitioners were granted liberty to pursue the remedy in accordance with law. No costs were awarded.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

By this Common Order, all these Writ Petitions are being disposed of after hearing the learned Senior Counsel for the Petitioner and the learned Senior Counsel, learned Standing Counsel for the Respondents.

2. In these Writ Petitions, the respective Petitioners have challenged the Impugned Orders as detailed below:-

3. This is the second round of litigation before this Court. Earlier, the respective Petitioners have approached this Court for a Mandamus, to direct the 1^st Respondent to refund the amount paid by them pursuant to the implementation of Central Goods and Services Tax Act, 2017 and the Tamil Nadu Goods and Services Tax Act, 2017 and the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the respective GST Enactments) and to determine the GST component payable to them in terms of G.O.Ms.No.296, Finance (Salaries) Department dated 09.10.2017 and determine Price Adjustment as provided under the General Conditions of Contract.

4. The facts on record reveal that the respective Petitioners responded to different packages in a tender floated by the First Respondent for Integrated Storm Water Drainage work in the city of Chennai pursuant to the tenders floated in the year 2015.

5. The respective Petitioners had responded to the bid which was accepted and contracts were awarded to the respective Petitioners for the following packages as detailed below:-

6. These works were also completed by the respective Petitioners on the dates mentioned above.

7. The respective Petitioners have claimed that they are not only entitled for reimbursement of the tax paid pursuant to increase in the rate of tax with effect from 01.07.2017, being the date of implementation of the respective GST Enactments, but also for Price Escalation / Price Adjustment under the terms of General Conditions of Contract (GCC).

8. Relevant clause relating to Tax and Price Adjustment in the General Conditions of Contract (GCC) which forms part of the General Conditions of Contract (GCC) are reproduced below:-

9. By the Impugned Order, the 1^st Respondent has rejected the request of the respective Petitioners for reimbursement of tax borne by the Petitioner on account of higher tax paid by the respective Petitioners under the GST Regime and on account of Price Adjustments.

10. In this connection, the respective Petitioners have given representations on the following dates:-

11. There is no dispute that the contract between the Petitioners and the Respondents contemplate resolution of dispute through Arbitration. Relevant clause from the General Conditions of Contract (GCC) is extracted below:-

“23. Appointment of the Adjudicator of Dispute Review Expert:

23.1 The Adjudicator/Dispute Review Expert [DRC] named in FCC shall be appointed jointly by the Employer and the Contractor, at the time of the Employer’s issuance of the Letter of Acceptance. If, in the Letter of Acceptance, the Employer does not agree on the appointment of the Adjudicator/DRE, the Employer will request the Appointing Authority designated in the FCC, to appoint the Adjudicator/DRE within 14 days of receipt of such request.

23.1.1 The Adjudicator/DRE should be in position before “notice to proceed with work” is issued to the Contractor and an agreement should be signed with the Adjudicator/DRE jointly by the Employer and the Contractor in the form attached – Appendix 3.

23.2 Should the Adjudicator/DRE resign or die, or should the Employer and the Contractor agree that the Adjudicator/DRE is not functioning in accordance with the provisions of the Contract; a new Adjudicator/DRC shall be jointly appointed by the Employer and the Contractor. In case of disagreement between the Employer and the Contractor, within 30 days, the Adjudicator/DRE shall be designated by the Appointing Authority designated in the PCC at the request of either party, within 14 days of receipt of such request.

Procedure for Dispute

24.1 If the Contractor believes that a decision taken by the Project Manager was either outside the authority given to the Project Manager by this Contract or that the decision was wrongly taken, the decision shall be referred to the Adjudictor/DRE within 14 days of the notification of the Project Manager’s decision.

24.2 The Adjudicator/DRE shall give a decision in writing within 28 days of receipt of a notification of a dispute.

24.3 The Adjudicator/DRE shall be paid daily at the rate specified in the PCC, together with reimbursable expenses of the types specified in the PCC, and the cost shall be divided equally between the Employer and the Contractor. Whatever decision is reached by the Adjudicator/DRE, either party may refer that decision to an Arbitrator within 28 days of the Adjudicator’s/DRE’s written decision. If neither party refers the dispute to arbitration within the above 28 days, the Adjudicator’s/DRC’s decision shall be final and binding.

24.4 The arbitration shall be conducted in accordance with the arbitration procedures published by the Institution named and in the place specified in the PCC.

The Arbitrator(s) shall give a decision in writing within 120 days of start of the proceedings unless otherwise agreed to by the Parties. The Arbitrators shall entertain only those issues which have been earlier referred to the Adjudicator/Dispute Review Expert and either party is dissatisfied with the decision given by the Adjudicator/Dispute Review Expert.”

12. The facts on record reveal that in view of the change in the tax regime with effect from 01.04.2017 from Finance Act, 1994 and TNVAT Act, 2006 to TNGST Act, 2017 and CGST Act, 2017, the Government of Tamil Nadu had issued G.O.Ms.No.296, Finance (Salaries) Department dated 09.10.2017, by applying the principle akin to Section 64-A of the Sale of Goods Act, 1930. Section 64-A is reproduced below:-

“64-A. In contracts of sale, amount of increased or decreased taxes to be added or deducted.-

(1) Unless a different intention appears from the terms of the contract, in the event of any tax of the nature described in sub-section (2) being imposed, increased, decreased or remitted in respect of any goods after the making of any contract for the sale or purchase of such goods without stipulation as to the payment of tax where tax was not chargeable at the time of the making of the contract, or for the sale or purchase of such goods tax-paid where tax was chargeable at that time,-

(a) if such imposition or increase so takes effect that the tax or increased tax, as the case may be, or any part of such tax is paid or is payable, the seller may add so much to the contract price as will be equivalent to the amount paid or payable in respect of such tax or increase of tax, and he shall be entitled to be paid and to sue for and recover such addition; and

(b) if such decrease or remission so takes effect that the decreased tax only, or no tax, as the case may be, is paid or is payable, the buyer may deduct so much from the contract price as will be equivalent to the decrease of tax or remitted tax, and he shall not be liable to pay, or be sued for, or in respect of, such deduction.

(2) The provisions of sub-section (1) apply to the following taxes, namely,-

(a) any duty of customs or excise on goods;

(b) any tax on the sale or purchase of goods”

13. In fact, the Clause relevant to taxes as extracted above from the above General Conditions of Contract viz, Clause 43.1 and Clause 43.2 of the General Conditions of Contract, also make it clear that the rates quoted by a Contractor shall be deemed to be inclusive of the Value Added Taxes, Sales Taxes and other Taxes. However, as per Clause 43.2, the Project Manager shall adjust the Contract Price if taxes, duties, and other levies changed between 28 days before the submission of bids for the Contract and the date of the last Completion Certificate. The adjustment shall be based on the change in the amount of tax payable by the Contractor, provided such changes are not already reflected in the Contract Price.

14. As per Clause 6 to G.O.Ms.No.296, Finance (Salaries) Department dated 09.10.2017, a supplier while raising bills and tax invoice post-GST, will have to collect GST from the purchaser at revised rates of notified percentage of value of supply and remit the same to the respective Government. The entire GST of the supply will have to be finally borne by the purchaser. The context of relevant Clause reads as under:-

“6. The supplier, while raising bills and tax invoice post-GST, will now have to collect GST from the purchaser at revised rates of notified percentage of value of supply and remit the same to the respective Government. The entire GST of the supply will have to be finally borne by the purchaser.”

15. The case of the respective Petitioners is that they have executed work contracts under the respective contracts and were liable to tax either under Section 5 or 6 of the Tamil Nadu Value Added Tax Act, 2006 and in this case, the respective Petitioners have opted to pay tax under Section 6(1)

(i) read with Rule 8(5)(d) of the Tamil Nadu Value Added Tax Rules, 2007 under the compounded rates, as per which, tax was to be paid under the Tamil Nadu Value Added Tax Act, 2006 at 2% of the total contract value for the civil construction of Integrated Storm Water Drainage Work of Coovam Basin executed by the respective Petitioners. Text of Section 6(1) of the Tamil Nadu Value Added Tax Act, 2006 and Rule 8(5)(d) of the Tamil Nadu Value Added Tax Rules, 2007 are reproduced below:-

16. In other words, it is the case of the respective Petitioners that on the entire contract value, they were entitled to deduct tax at 15% of the total cost towards the labour and other charges and thus were liable to pay VAT at 2% on the balance of 85% of the Contract Value.

17. There is no doubt that on account of increase in the tax component due to implementation the respective GST Enactments with effect from 01.07.2017, the respective Petitioners are entitled for reimbursement in terms of the principle akin to Section 64-A of Sale of Goods Act, 1930.

18. In this case, when the contracts were awarded to the respective Petitioners on 12.2025, 15.12.2015 and 28.09.2015, respectively, the respective Petitioners were governed by the Tamil Nadu Value Added Tax Act, 2006, on the works contract in terms of Section 5 and Section 6 and under Section 66B of the Finance Act, 1994 read with the Notification issued under Section 93(1) of the Finance Act, 1994.

19. Although it is the case of the respective Petitioners that the work contract executed by the respective Petitioners for the 1 ^st Respondent was exempted in terms of No.12(d) to Notification No.25/2012-Service Tax dated 20.06.2012, prima facie indications are that the work executed by the respective Petitioners do not fall within the purview of Sub-clause (d) to Clause 12 to Notification No.25/2012-Service Tax dated 20.06.2012.

20. Incidentally, Clause 12 to Notification No.25/2012-Service Tax dated 20.06.2012 was amended vide amended Notification No.06/2015-Service Tax dated 01.03.2015 whereby Sub-Clause (a), (c) and (f) to Clause 12 were deleted with effect from 01.04.2015. A further notification was thereafter issued amending the above Notification vide Notification No.09/2016-Service Tax dated 01.03.2016. Text of relevant portion of these Notifications are reproduced below:-

Note : * Sub Clauses (a), (c) & (f) of Clause 12 to Notification No.25/2012-Service Tax dated 20.06.2012 in Column No.1 were deleted vide a Notification No.06/2015-Service Tax dated 01.03.2015 in Column No.2

21. Clause 12A(a), which was inserted vide amendment Notification No.09/2016-Service Tax dated 03.2016 will apply to the contracts which were entered before 1^st March 2015 and on which appropriate stamp duty was paid. Therefore, this Notification has not impact on the petitioner.

22. In these cases, the tender itself came to be floated in the year 2015 and the bids of the respective Petitioners were accepted during the month of October 2015. Therefore, the respective Petitioners were governed by the tax regime as it stood till then for the work done from the date of awarding till 06.2017. However, for the period after 01.07.2017, tax was to be paid under the GST regime. It is precisely for such an eventuality Clause 43.2 has been provided in the General Conditions of Contract (GCC) incorporating the principle in Section 64-A of the Sales of Goods Act, 1930 as mentioned above and Clause 43.2 of the General Conditions of Contract as per which the Project Manager shall adjust the Contract Price if taxes, duties, and other levies are changed between the date 28 days before the submission of bids for the Contract and the date of the last Completion Certificate.

23. Thus, the change in the rate of taxes, duties, and other levies between the date 28 days before the submission of bids and the date of the last Completion Certificate is to be charged by the project manager. Only restriction is that such damages are not reflected in the contract price.

24. Therefore, the amount of tax due to the change in the tax regime has to be reimbursed to the respective Petitioners. In fact, Clause 6 of G.O.Ms.No.296, Finance (Salaries) Department dated 09.10.2017 also resonates with this expressly.

25. The reasons given in the Order dated 25.01.2024 impugned in W.P.No.15940 of 2024 that the retention amounts were not refunded due to Audit Objections raised, if any, has to be communicated to the respective Petitioners. Relevant portion of the Impugned Order read as under:-

““As per tender clause 45.1 (h) “it is stated that unless otherwise stated in the P.C.C., the price adjustment shall be done in each monthly Interim Payment Certificate (IPC). The coefficients and indices are given in the Tables of Adjustment Data in Contract data.”

This practice was not followed by the petitioner for packages 1, 2 & 5 and the petitioner has not made any claim towards price adjustment during the work execution period while the contract was in force. The works were completed for package 1 on 06.04.2018, for package 2 on 28.03.2018, for package 5 on 26.03.2018 respectively. The petitioner had given representations towards price adjustment to the Project Manager/Superintending Engineer (SWDD) from 27.07.2019 for packages 1, 2 & 5 as an afterthought and well after the completion of work and receipt of final bills from the Project Manager/Superintending Engineer (SWDD).

Any claim towards price adjustment is operational and binding only during the work execution period and before the completion of work and receipt of final bill by the contractor (i.e., on each monthly Interim Payment Certificate (IPC) or each part/running bill).

Hence, it is concluded that the petitioner’s claim of price adjustment for the works carried out in packages 1, 2 & 5 is rejected after perusing the facts and available records submitted in this regard.

iii) Claim of Retention Amount:

For the packages 1, 2 & 5, retention amount could not be released due to pending audit objections (AG Audit) related to these work packages and audit reply in this regard is put up to the concerned Audit Department by the Superintending Engineer (Storm Water Drain Department).

On perusing all the facts and after scrutiny of the available records submitted in this regard, the claim of the petitioner for the differential amount paid in respect of GST and claim towards Price Adjustment is rejected.”

Similar reasons have been given in the other Orders impugned in W.P.Nos.15786 and 15936 of 2024.

26. In my view, the retention amounts are to be refunded back unless there are reasons for appropriating the retention amounts on account of the works executed by the respective Petitioners under the contract. Merely because the audit objections were raised by the Audit General would not be a ground for not processing the amount claimed by the respective Petitioners for refund of the aforesaid retention amounts.

27. As far as the Price Escalations / Price Adjustments, they involve several disputed questions of fact and therefore this Court is unable to give any opinion on the same. The dispute can be resolved in the alternative method of dispute resolution prescribed under the General Conditions of Contract.

28. Under these circumstances, these Writ Petitions are disposed of with the following directions:-

(a) The Respondents shall,

i. refund the Tax component as per Clause 43.2 of the General Conditions of Contract (GCC) on account of change in tax regime from Value Added Tax/Central Sales Tax to the respective GST Enactments, and

ii. refund the retention amounts with interest at commercial rate.

(b) As far as the Price Escalations / Price Adjustments as per Clause 45 of the General Conditions of Contract (GCC) is concerned, the respective Petitioners are at liberty to pursue the remedy in the manner known to law.

(c) No costs.