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

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 ... Reverse Charge Mechanism - inclusion of interest in the value of supply under Section 15(2)(d) of the CGST Act read with Section 20 of the IGST Act - contractual shifting of indirect tax liability - Notification No.10 of 2017 - RCM for services supplied by persons located in non taxable territory - Input Tax Credit and unjust enrichment - satisfaction of Arbitral Award on payment into specified accountReverse Charge Mechanism - Notification No.10 of 2017 - RCM for services supplied by persons located in non taxable territory - inclusion of interest in the value of supply under Section 15(2)(d) of the CGST Act read with Section 20 of the IGST Act - contractual shifting of indirect tax liability - Whether MCGM was entitled to withhold from the award payment the amount deducted towards alleged GST liability of the applicant - HELD THAT: - The Court held that Notification No.10 of 2017 (issued under Section 5(3) of the IGST Act) makes the recipient in the taxable territory liable to pay integrated tax on services supplied by a person located in a non taxable territory on a reverse charge basis; the applicant (supplier) is located in a non taxable territory and MCGM (recipient) is in the taxable territory, and the notification therefore casts liability on MCGM. The Court accepted that Section 15(2)(d) of the CGST Act read with Section 20 of the IGST Act brings interest/late fees into the value of supply and that interest awarded after introduction of the GST regime is taxable. Although the law permits parties to contractually shift indirect tax liabilities (Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran), the Court examined Clause 3 of the contract and concluded that the clause - which required rates to include taxes and duties - did not contemplate taxes arising on account of interest awarded later due to delayed payment and protracted disputes culminating in an arbitral award. Clause 3 and 4 read together indicate the parties did not foresee a contingency where interest awarded post award would attract GST and hence did not operate to transfer the statutory RCM obligation to the applicant. Consequently, MCGM could not legitimately deduct the GST amount from the award payable to the applicant; the statutory liability under the Notification and the IGST Act remained on MCGM. [Paras 18, 21, 22, 23]MCGM was not entitled to withhold the sum deducted towards GST; it was directed to credit the specified bank account with the withheld amount by the date directed, after which the Arbitral Award would be marked fully satisfied.Final Conclusion: The Court directed MCGM to credit the withheld amount in the specified bank account by the date ordered, holding that the reverse charge notification and IGST provisions cast the GST liability on MCGM and that the contractual clause relied upon did not transfer the RCM liability to the applicant; upon that crediting the arbitral award shall stand satisfied and the execution petition is disposed. 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.