Recipient held liable to pay GST on interest on Arbitral award under RCM

Angerlehner Structural and Civil Engineering Company Vs Municipal Corporation of Greater Bombay (Bombay High Court)

This liability of GST (taxes) was certainly not in contemplation of the parties when they entered into the contract in the year 2001. MCGM 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.

Facts-

The Applicant, being a foreign entity, does not have a bank account in India. The Applicant, therefore, requested that payment under the Arbitral Award be made by the MCGM in the name of the Applicant’s lawyer and agent who would credit the same into the Applicant’s account in escrow for transfer to the Applicant in Austria.

This Court directed the MCGM to pay the amounts due under the Arbitral Award. It was made clear that once the aforesaid payment was made, the liability of the MCGM under the Award would stand satisfied and the Applicant would have no claim whatsoever against the MCGM.

The total amount payable under the Arbitral Award was Rs.11,28,99,770.69/-. However, the MCGM had credited only an amount of Rs.10,61,04,805.67 on 31st March 2022. The differential amount of Rs.67,94,965.02 was not deposited as the same was withheld by the MCGM towards liability of GST payable by the Applicant. The said GST is payable on the interest granted under the Arbitral Award.

Conclusion-
This liability of GST (taxes) was certainly not in contemplation of the parties when they entered into the contract in the year 2001. The rates and prices bid submitted by the Applicant in the priced Bill of Quantities and which were to include all taxes and duties would certainly not have taken into consideration that the MCGM would not make payment in a timely manner, raise disputes, which would then make them liable to pay interest and which would be subjected to the levy of GST.

Clause 3 “taxes and duties” of the contract did not in any way contemplate the liability of GST that may arise due to payment of interest for delayed payment of any consideration for the supply of the services. 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 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.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

The above Execution Application is filed for executing the Arbitral Award dated 23^rd June 2014 passed in favour of the Applicant and against the Municipal Corporation of Greater Mumbai (for short the “MCGM”).

2. The MCGM was aggrieved by the Award passed by the Arbitral Tribunal, and therefore challenged the same before this Court under Section 34 of the Arbitration and Conciliation Act, 1996 (for short “the Arbitration Act”). However, the said challenge was repelled by a learned single judge of this Court vide his order dated 27^th February 2019. Even an Appeal filed under Section 37 of the Arbitration Act before the Division Bench of this Court was dismissed on 8^th September 2021. The order of the Division Bench was thereafter challenged before the Hon’ble Supreme Court by filing an SLP which was also dismissed on 22^nd November 2021. The Hon’ble Supreme Court granted time to the MCGM up to 31^st March 2022, to make payment to the Applicant.

3. In light of the above factual position, this Execution Application was moved before me on 9^th March 2022. On the said date, it was pointed out to the Court that the Applicant, being a foreign entity, does not have a bank account in India (as the contract between the Applicant and the MCGM was concluded in 2003). The Applicant, therefore, requested that payment under the Arbitral Award be made by the MCGM in the name of the Applicant’s lawyer and agent who would credit the same into the Applicant’s account in escrow for transfer to the Applicant in Austria. The Escrow Agreement dated 3^rd February 2022 was produced before the Court on the said date along with a letter dated 29^th November 2021 written by the Applicant to the MCGM requesting them to credit the monies due under the Award to their lawyer’s account to be held in escrow. A copy of the said Escrow Agreement dated 3rd February 2022 as well as the copy of the letter dated 29^th November 2021 addressed by the Applicant to the MCGM were also taken on record and marked “X” and “X-1” for identification. On the said date, namely, 9th March 2022, Mr. Sakhare, the learned Senior Counsel appearing on behalf of the MCGM, fairly stated before the Court that the MCGM was willing to credit the monies due under the Arbitral Award to the account of the lawyers of the Applicant. He however submitted that it should be made clear that once these monies are paid, the MCGM is relieved of their liability under the Award and the Applicant would thereafter have no claim whatsoever against the MCGM. In light of the aforesaid submissions, this Court, on 9^th March 2022, directed the MCGM to pay the amounts due under the Arbitral Award (dated 23^rd June 2014) by crediting Bank Account No.5020035159821 in HDFC Bank Ltd, Nariman Point, Mumbai 400 021, on or before 31^st March 2022. It was made clear that once the aforesaid payment was made, the liability of the MCGM under the Award dated 23^rd June 2014 would stand satisfied and the Applicant would have no claim whatsoever against the MCGM (in relation to the Arbitral Award dated 23^rd June 2014). It was also directed that the costs of Rs.1 Lakh deposited by the MCGM in this Court shall also be credited by the Prothonotary and Senior Master in the aforesaid Bank Account on or before 31^st March 2022. Accordingly, the above Execution Application was placed on Board for compliance and disposal on 5^th April 2022.

3. When the matter came up on 5^th April 2022, it was pointed out to the Court that the amounts deposited in the aforesaid Bank Account was not the entire amount due and payable under the Award but after withholding an amount of Rs.67,94,965.02 allegedly towards payment of the Goods and Services Tax (“GST”), and which according to the MCGM, was the liability of the Applicant. It was pointed out that as per the Arbitral Award, the principal amount due was Rs.6,83,55,000/-and the interest amount due was Rs.4,45,44,770.69/-. Hence, the total amount payable under the Arbitral Award was Rs.11,28,99,770.69/-. However, the MCGM had credited only an amount of Rs.10,61,04,805.67 on 31^st March 2022. The differential amount of Rs.67,94,965.02 was not deposited as the same was withheld by the MCGM towards liability of GST payable by the Applicant. This deduction was made by the MCGM because of the provisions of Section 15(2)(d) of The Central Goods and Services Tax Act, 2017 (for short the “CGST Act”) read with Section 20 of the Integrated Goods and Services Tax Act, 2017 (for short the “IGST Act”).

4. Thereafter, the matter was adjourned to 18^th April 2022 when I heard the learned Senior Counsel for the parties. Being aggrieved by the action of the MCGM withholding the sum of Rs.67,94,965.02 towards the alleged GST liability of the Applicant, Mr. Firoz Andhyarujina, the learned Senior Counsel appearing on behalf of the Applicant, pointed out that the liability towards GST, if any, could not be foisted upon the Applicant, and therefore, the MCGM ought to be directed to pay the amount of Rs.67,94,965.02 to the Applicant. To substantiate this argument, the submissions made by Mr. Andhyarujina were twofold. The first submission was that 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) and even the Arbitral Award was passed long before the GST law/regime was brought into force. In this regard, Mr. Andhyarujina submitted that the Award is dated 23^rd June 2014 and the GST law was brought into force sometime in the year 2017. He submitted that this being the case, the GST law had no application to the facts of the present case as it does not have any retrospective effect. The second submission canvassed by Mr. Andhyarujina was that under the CGST Act as well as under the IGST Act, there was a Reverse Charge Mechanism (“RCM”) under which it was the liability of the MCGM to make payment of the GST, if any. He, therefore, submitted that in any event, the liability towards payment of GST could not be foisted on the Applicant.

5. On the other hand, Mr. Sakhare, the learned Senior Counsel appearing on behalf of the MCGM, contended that the Applicant’s argument that the GST law is not applicable, is contrary to the provisions of the CGST Act and the IGST Act. In this regard, Mr. Sakhare submitted that the GST regime came into effect in the year 2017 and it is true that it was not in existence at the time when the Arbitral Award was passed on 23^rd June 2014 (which determined the amounts due to the Applicant along with interest). However, the said Award was under challenge, and during the period of such challenge, the GST regime was introduced. In this regard, Mr. Sakhare drew my attention to Section 15 of the CGST Act read with Section 20 of the IGST Act and contended that the said provisions stipulate 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 the sole consideration for the supply. He submitted that what is to be included in the value of supply is enumerated in sub-clauses (a) to (e) of sub-section (2) of Section 15 of the CGST Act. He submitted that Section 15(3) provides for what would not be included in the value of supply. Mr. Sakhare submitted that for the purposes of the present dispute, Section 15(2)(d) of the CGST Act [read with Section 20 of the IGST Act] is relevant, which inter-alia provides that the value of supply shall include interest or late fees or penalty for delayed payment of any consideration for any supply. He, therefore, submitted that GST is payable on the interest component under the Arbitral Award as the same is awarded in favour of the Applicant because of the delay on the part of the MCGM to make payment. Mr. Sakhare submitted that considering that interest is being paid after the GST regime was brought into force, GST would be applicable on the interest component of the Arbitral Award, and which would have to be paid to the Government.

6. On the second contention of the Applicant, namely, that under the CGST Act as well as under the IGST Act, there was a Reverse Charge Mechanism (“RCM”) under which it was the liability of the MCGM to make payment of the aforesaid GST liability, Mr. Sakhare submitted that under clause 3 of the Contract between the parties, it was agreed that all taxes were to be borne by the Applicant. He, therefore, submitted that notwithstanding the Reverse Charge Mechanism (provided under the CGST Act and the IGST Act), the GST liability could not be foisted on the MCGM and would be payable solely by the Applicant.

7. In support of their respective submissions, both learned Senior Counsel also tendered to the Court their written submissions/notes of arguments. I therefore heard the parties at length on 18^th April 2022 and placed the matter on board on 4^th May 2022 for passing orders. On 4^th May 2022, I pointed out to Mr. Andhyarujina that if he is pressing the argument regarding the applicability of the GST regime/law to the present dispute (his first contention), then I would have to hear the Union of India. In answer to this, Mr. Andhyarujina, on instructions, stated that the aforesaid argument is not being pressed and I should proceed to decide the matter only on the second point canvassed by him, viz. that in any event, the Applicant is not liable to pay any GST because the Applicant is a foreign entity and by virtue of a Notification issued by the Government of India dated 28th June 2017 [under Section 5(3) of the IGST Act], it would be the liability of the MCGM to pay the GST. In other words, the argument was that by virtue of this Notification, the MCGM, being the recipient of the service, would have to bear the liability of GST under a Reverse Charge Mechanism. Since this was the stand now taken by the Applicant, I was of the opinion that there was no need to join the Union of India and thereafter reserved judgement due to paucity of time.

8. In view of the statement made by Mr. Andhyarujina (recorded earlier), I am now only deciding the second point canvassed by him, namely, that under the CGST Act as well as under the IGST Act there was a Reverse Charge Mechanism (“RCM”) under which it was the liability of the MCGM to make payment of the GST. In support of this argument, Mr. Andhyarujina submitted that in the case of normal taxable supply, the supplier issues a tax invoice to the recipient of the goods or services and receives the amount from the recipient along with the GST and then discharges his GST liability to the Government. This is referred to be as the “forward charge”. In case of a “reverse charge” the supplier of the services or goods does not charge GST on the invoice and receives the amount from the recipient without any GST. Further, the liability to pay the GST is on the recipient of the goods or services instead of the supplier of such goods or services in respect of notified categories of supply. Mr. Andhyarujina submitted that the objective of shifting the burden of paying GST to the recipient is (i) to widen the scope of levy of tax on various unorganized sectors, (ii) to exempt specific classes of suppliers and (iii) to tax the import of services (since the supplier is based outside India). To substantiate this argument, Mr. Andhyarujina relied upon Sections 9(3), 9(4) and 9(5) of CGST Act and Sections 5(3), 5(4) and 5(5) of the IGST Act. Mr. Andhyarujina submitted that these provisions govern the Reverse Charge Mechanism for intra-State and inter-State transactions, respectively. Mr. Andhyarujina then pointed out that in exercise of the powers conferred by sub-section (3) of Section 5 of the IGST Act, the Government has notified the categories of supply in which the specified recipient of the services is liable to pay the GST under the RCM (Reverse Charge Mechanism). In this regard, the learned Senior Counsel relied upon Notification No. 10 of 2017-Integrated Tax (Rate) issued by the Government of India, Ministry of Finance (Department of Revenue), dated 28^th June 2017. The relevant portion of this Notification reads thus:-

GSR…(E)-In exercise of the powers conferred by sub-section (3) of section 5 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), the Central Government on the recommendations of the Council hereby notifies that on categories of supply of services mentioned in column (2) of the Table below, supplied by a person as specified in column (3) of the said Table, the whole of integrated tax leviable under section 5 of the said Integrated Goods and Services Tax Act, shall be paid on reverse charge basis by the recipient of the such services as specified in column (4) of the said Table:-

Table