Contractual Service Tax reimbursement cannot cover third-party service tax; related interest falls once the principal claim is set aside.

A contractual clause allowing reimbursement of Service Tax "in respect of the contract" was held not to extend to Service Tax paid on separate third-party service arrangements. Because the contractor was not assessed to Service Tax on the works executed under the contract itself, the arbitral reading that expanded the clause to cover third-party invoices was found fundamentally flawed and vitiated by patent illegality. The claim for such reimbursement was therefore set aside, and the connected award of interest on that amount also could not survive once the principal reimbursement claim failed.

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Issues: (i) Whether the contractor was entitled under the contract to reimbursement of Service Tax paid in connection with services availed from third-party service providers; (ii) Whether interest could be sustained on the amount awarded towards such Service Tax reimbursement.

Issue (i): Whether the contractor was entitled under the contract to reimbursement of Service Tax paid in connection with services availed from third-party service providers.

Analysis: The contractual clause provided reimbursement of Service Tax paid on demand in respect of the contract. The project contract was an item-rate contract for execution of works, and the court held that this expression referred to Service Tax levied on the contract itself, not to Service Tax embedded in invoices of independent third-party suppliers or subcontractors. The contractor had not been assessed to Service Tax on the works executed under the contract, and reimbursement could not be extended to tax paid in relation to separate arrangements with third parties. The arbitral interpretation enlarging the clause to cover such third-party Service Tax was held to be fundamentally flawed and vitiated by patent illegality.

Conclusion: The claim for reimbursement of Service Tax on third-party services was not maintainable, and the award to that extent was set aside in favour of the petitioner.

Issue (ii): Whether interest could be sustained on the amount awarded towards such Service Tax reimbursement.

Analysis: Interest awarded on the reimbursement amount was consequential to the underlying Service Tax award. Once the reimbursement award was set aside, the interest awarded on that amount could not survive. No contractual bar against interest was shown, but that did not preserve interest on a claim that had itself failed.

Conclusion: Interest on the set-aside Service Tax amount was also not sustainable.

Final Conclusion: The challenge succeeded only to the extent of the Service Tax reimbursement awarded for third-party services, and the connected interest on that amount fell with it, while the remainder of the award was not disturbed.

Ratio Decidendi: A contractual clause providing reimbursement of Service Tax in respect of the contract cannot be extended to Service Tax paid by the contractor on separate third-party service arrangements where the contractor was not assessed on the contract work itself.

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