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 through arbitration falls under reverse charge mechanism. The court held that the corporation, as recipient of services from a non-taxable territory supplier, must pay GST directly to the government rather than deducting it from the arbitral award amount. The contractual clause requiring inclusion of taxes did not contemplate GST on interest for delayed payments, which was not within parties' original contemplation when entering the contract.

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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.

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