2022 (6) TMI 424 - HC - GST

Municipal Corporation ordered to credit Rs. 67,94,965.02 as GST on arbitration interest falls under reverse charge mechanism

M/s. Angerlehner Structural and Civil Engineering Company Versus Municipal Corporation of Greater Bombay

The Bombay HC directed the Municipal Corporation to credit Rs. 67,94,965.02 to the applicant's bank account, ruling that GST liability on interest awarded ... Execution of Arbitral Award passed in favour of the Applicant and against the Municipal Corporation of Greater Mumbai (MCGM) - withholding of amount towards the alleged GST liability of the Applicant - Section 34 of the Arbitration and Conciliation Act, 1996 - HELD THAT:- It can hardly be disputed that in case of a normal taxable supply, the supplier issues a tax invoice to the recipient of the goods and services and receives the amount from the recipient along with the GST and then discharges its GST liability to the Government. This, as Mr. Andhyarujina puts it, is a “forward charge”. Then a concept of “Reverse Charge” is also introduced in the GST regime. In the 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 adding GST to his invoice. This is because under the Reverse Charge Mechanism, the liability to pay the GST is on the recipient of the goods or services instead of the supplier of such goods or services. This is however only in respect of the categories notified under Sections 9(3), 9(4) & 9(5) of the CGST Act and Sections 5(3), 5(4) and 5(5) of the IGST Act. There are similar provisions, namely, Sections 9(3), 9(4) & 9(5), even in the Maharashtra Goods and Services Tax Act, 2017 (the State Goods and Services Tax Act). From the N/N. 10 of 2017-Integrated Tax (Rate) dated 28th June 2017, it is clear that any service supplied by any person, who is located in a non-taxable territory to any person located in the taxable territory [other than a non-taxable online recipient], it is the recipient of the service who would be liable to pay the GST on a Reverse Charge basis - In the present case, it is not in dispute that the Applicant was the supplier of services who is located in a nontaxable territory. The MCGM is a person located in the taxable territory and is not a non-taxable online recipient. This being the case, by virtue of the aforesaid Notification, it would be the MCGM [the recipient of the service] who would be liable to pay the GST on a Reverse Charge basis as contemplated under Section 5(3) of the IGST Act. In the present case, 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. Since, the MCGM did not make those payments, the Applicant invoked Arbitration which finally culminated into an Arbitral Award dated 23rd June 2014. Since the Arbitrator found that there were monies due and payable by the MCGM to the Applicant and which were not paid, the Arbitral Tribunal awarded interest on the aforesaid amounts at the rates more particularly mentioned in the Arbitral Award - 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. This is also made clear from clause 4, which stipulates that the rate of price (which is to include all taxes and duties) shall be entered against each item in the priced Bill of Quantities whether quantities are stated or not. The costs of item against which the contractor has failed to enter a rate of price shall be deemed to be covered by other rates and prices entered in the Bill of Quantities. When one reads clauses 3 & 4 of the contract in conjunction with each other, the inescapable conclusion is that the “taxes and duties” referred to in clause 3 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. This, according to me, was never in contemplation of the parties when they entered into the contract. It is therefore opined 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. Thus, it is directed that the MCGM shall credit Bank Account No.5020035159821 in HDFC Bank Limited, Nariman Point, Mumbai – 400 021 with the sum of Rs.67,94,965.02 on or before 30th August 2022. Once this amount is credited in the aforesaid Bank Account, the Arbitral Award dated 23rd June 2014 shall be marked as fully satisfied and the Applicant would thereafter have no claim whatsoever against the MCGM. The Execution Application is disposed of. Issues Involved:1. Execution of the Arbitral Award dated 23rd June 2014.2. Applicability of GST on the interest component of the Arbitral Award.3. Liability to pay GST under the Reverse Charge Mechanism (RCM).4. Contractual obligation to bear taxes and duties.Detailed Analysis:1. Execution of the Arbitral Award dated 23rd June 2014:The Applicant sought to execute the Arbitral Award against the Municipal Corporation of Greater Mumbai (MCGM). The Award was challenged by the MCGM under Section 34 of the Arbitration and Conciliation Act, 1996, but the challenge was dismissed by the High Court, Division Bench, and the Supreme Court. The Supreme Court granted MCGM time until 31st March 2022 to make the payment. The Applicant, being a foreign entity, requested the payment to be made to their lawyer's account in escrow, which was agreed upon by the MCGM, provided that it would relieve them of any further liability under the Award.2. Applicability of GST on the interest component of the Arbitral Award:The MCGM withheld Rs.67,94,965.02 from the payment, claiming it was towards the GST liability of the Applicant. The total amount payable under the Award was Rs.11,28,99,770.69, but only Rs.10,61,04,805.67 was credited. The MCGM argued that GST was applicable on the interest component of the Award as per Section 15(2)(d) of the CGST Act read with Section 20 of the IGST Act, which includes interest for delayed payment in the value of supply.3. Liability to pay GST under the Reverse Charge Mechanism (RCM):The Applicant contended that the GST regime was not applicable as the contract and the Arbitral Award predated the GST law. Additionally, the Applicant argued that under the RCM, it was the liability of the MCGM to pay the GST. The court agreed with the Applicant, noting that the GST liability arose due to the interest on delayed payments, which was not contemplated in the original contract. The court referred to Notification No. 10 of 2017-Integrated Tax (Rate), which mandates that the recipient of the service (MCGM) is liable to pay GST under RCM.4. Contractual obligation to bear taxes and duties:The MCGM argued that under Clause 3 of the contract, the Applicant was liable to bear all taxes and duties. However, the court found that this clause did not contemplate GST on interest for delayed payments, which arose due to MCGM's failure to make timely payments. The court held that the contract did not shift the GST liability on the Applicant for the interest component, and thus, MCGM could not withhold the amount towards GST.Conclusion:The court directed MCGM to credit the withheld amount of Rs.67,94,965.02 to the Applicant's lawyer's bank account by 30th August 2022. Once credited, the Arbitral Award would be marked as fully satisfied, and the Applicant would have no further claims against MCGM. The Execution Application was disposed of with these directions, and compliance was scheduled for 5th September 2022.