2025 (8) TMI 855 - HC - GST

Petitioner's contract classified as Category B, not D, for GST refund; respondents must follow Category A procedure under rule.

The HC held that the petitioner's contract falls under category B, not category D, regarding GST reimbursement on running bills. The respondent authority ... Contractual liability for reimbursment of GST - Requirement to pay GST component on addition to the bills paid by the respondent authority in respect of the running bills raised by the petitioner - reverse charge mechanism - HELD THAT:- The contract works of the petitioner is likely to be covered under category B and not category D as claimed by the petitioner. Category B is applicable for works sanctioned after 01.07.2017 under different phases of PMGSY wherein GST has not been accounted for in the original proposal or sanction and wherein tenders have been completed. For works sanctioned after 01.07.2017 and which have been awarded and commenced on the field, the action suggested is as detailed under category A. Under the action proposed or suggested under category-A, it is provided at serial No.(iv) that GST will be applicable on the portions of the contract that are being paid from 01.07.2017. The procedure required to be followed by the PWD department is clearly delineated in the communication dated 06.06.2018. However, from the facts pleaded before the Court, it is evident that the procedure prescribed under Category A, which is also applicable to Category B cases, has not been followed by the respondent department. The claim of the petitioner is allowed by directing the respondent authorities to follow the procedure prescribed under category A (which is also applicable for category B cases where works are sanctioned after 01.07.2017 and which have been awarded and already commenced) and which procedure is applicable in the case of the writ petitioner as his case falls under category B (i)(a). The respondents will now proceed to take all steps necessary and as prescribed under the communication dated 06.06.2018 and execute these steps specifically and implement the same in a time bound manner. The amount deducted from the petitioner @ 2% for GST shall also be refunded. Let this exercise be carried out within a period of three months from the date of receipt of a certified copy of this order - Petition allowed. 1. ISSUES PRESENTED and CONSIDERED 1. Whether the GST component on running bills for works executed under the Pradhan Mantri Gram Sadak Yojana (PMGSY) is payable to the contractor or is to be borne and paid directly by the government department under the reverse charge mechanism of the GST law. 2. Whether the respondent authorities were legally obliged to include and pay the GST amount separately in the running bills to the contractor, given the contract terms specifying rates exclusive of GST. 3. Whether the deduction of 2% GST from the contractor's running bills by the respondent authorities was lawful and in accordance with the contract and statutory provisions. 4. The applicability and interpretation of the communication dated 06.06.2018 issued by the National Rural Infrastructure Development Agency (NRIDA) regarding GST implementation in works contracts under PMGSY, and whether the prescribed procedures were followed by the respondent authorities. 5. The effect of the contract terms and statutory provisions (Central Goods and Services Tax Act, 2017 and Assam Goods and Services Tax Act, 2017) on the payment and recovery of GST in the present contract. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Liability to Pay GST under Reverse Charge Mechanism - Relevant Legal Framework and Precedents: The Central Goods and Services Tax Act, 2017 (CGST Act) and Assam Goods and Services Tax Act, 2017 (AGST Act) provide for the levy and collection of GST. Under the reverse charge mechanism, the liability to pay GST shifts from the supplier to the recipient of goods or services. In works contracts, the last recipient of services is generally liable to discharge GST under reverse charge. - Court's Interpretation and Reasoning: The Court noted that the petitioner claimed GST payment from the respondent authorities on the ground that the latter, as the last recipient of services, must pay GST under reverse charge. However, the Court clarified that under the reverse charge mechanism, the recipient (PWD department) is liable to pay GST directly to the government and not through releasing the GST amount to the service provider (contractor). Therefore, if reverse charge applies, the GST amount is not payable to the contractor but must be discharged by the respondent authorities themselves. - Application of Law to Facts: The petitioner's claim for release of GST amount in addition to the billed amount contradicts the principle of reverse charge mechanism. The Court emphasized that if reverse charge applies, the department must pay GST directly and not via the contractor. - Conclusion: The claim for GST payment to the contractor under reverse charge is not tenable. The GST liability under reverse charge rests with the department, and the amount is not payable to the contractor. Issue 2: Obligation to Include GST Separately in Running Bills and Contractual Terms - Relevant Legal Framework and Precedents: The contract explicitly stated that the rates quoted by the contractor were exclusive of GST. The tender conditions required bidders to quote rates exclusive of GST, with GST payable separately. The CGST and AGST Acts require that GST be shown separately in invoices and bills. - Court's Interpretation and Reasoning: The Court observed that while the contract rates were exclusive of GST, the respondent authorities failed to add the GST component in the running bills and payments made to the petitioner. The petitioner contended that this omission prevented him from depositing GST with the government, exposing him to legal consequences. The Court noted the communication dated 06.06.2018 from the National Rural Infrastructure Development Agency, which provided detailed guidelines on GST implementation in PMGSY works contracts, including the requirement to add GST separately in bills and payments. - Key Evidence and Findings: The petitioner's running bills were prepared without adding GST @12%. Instead, the respondents deducted 2% GST from the bills, which was challenged as illegal. The contract and tender documents mandated exclusive of GST quoting, implying GST should be added separately. - Treatment of Competing Arguments: The respondents argued that GST was variable and not included in the bill of quantities or rates quoted. They relied on contract clauses permitting deduction of taxes and royalties and contended that the contractor failed to specify GST rates at bid submission, thus not entitled to GST payments. The Court found that the respondents' approach was inconsistent with the contract terms and statutory provisions, especially given the detailed government advisory on GST implementation. - Conclusion: The respondents were obliged to include GST separately in the running bills and payments to the contractor. The failure to do so was contrary to the contract and statutory requirements. Issue 3: Legality of Deduction of 2% GST from Running Bills - Relevant Legal Framework and Precedents: Clause 41.1 of the General Clauses of Contract permits deduction of taxes and royalties at source. However, the contract required rates exclusive of GST, and GST was to be paid separately. - Court's Interpretation and Reasoning: The Court held that the deduction of 2% GST from the contractor's running bills was illegal and contrary to the contract terms. The contract did not authorize deduction of GST from bills but required GST to be added over and above the quoted rates. - Conclusion: The 2% GST deductions made by the respondents were unlawful and must be refunded to the petitioner. Issue 4: Applicability and Compliance with NRIDA Communication dated 06.06.2018 on GST Implementation - Relevant Legal Framework and Precedents: The communication by the National Rural Infrastructure Development Agency dated 06.06.2018 provided comprehensive guidelines for GST implementation in PMGSY works contracts. It categorized works into four categories (A, B, C, D) with specific instructions for each regarding GST treatment. - Court's Interpretation and Reasoning: The Court analyzed the petitioner's contract and found it falls under Category B - works sanctioned after 01.07.2017 where GST was not accounted for in the original proposal and tenders have been completed. For Category B works, the communication directs following the procedure under Category A for ongoing works, which includes: Separating the value of subsumed taxes from the contracted amount to arrive at the actual value of work. Entering into supplemental agreements adjusting contract value by deducting subsumed taxes and adding GST at 12%. Contractor raising bills with GST separately, which the employer pays and remits to the government. The Court found that the respondent authorities failed to follow these prescribed procedures in the petitioner's case. - Application of Law to Facts: The respondent department did not enter into supplemental agreements or adjust contract values as per the communication. GST was neither added to bills nor paid separately, and deductions were made instead. - Conclusion: The respondent authorities are directed to comply with the NRIDA communication dated 06.06.2018, follow the prescribed procedure for Category B works, and adjust contract values and GST payments accordingly. Issue 5: Effect of Contract and Statutory Provisions on GST Payment and Recovery - Relevant Legal Framework and Precedents: The CGST Act and AGST Act, along with contract terms, govern GST payment and recovery. The contract specified rates exclusive of GST, requiring GST to be added and paid separately. The CGST Act's reverse charge provisions place GST liability on the recipient in certain cases. - Court's Interpretation and Reasoning: The Court reconciled the contract terms with the statutory provisions and government advisory. It held that while GST liability may rest with the department under reverse charge, the contract and government guidelines require the department to adjust contract values and pay GST separately to the contractor for onward remittance. The Court observed that the failure to do so led to the petitioner's grievance and potential legal exposure for non-deposit of GST. - Conclusion: The contract and statutory provisions mandate that GST be accounted for separately and paid appropriately. The department must comply with these requirements to ensure lawful discharge of GST obligations. 3. FINAL COURT DIRECTIONS AND CONCLUSIONS - The respondent authorities are directed to follow the procedure prescribed under Category A of the NRIDA communication dated 06.06.2018, applicable also to Category B works, including: Separating the value of subsumed taxes from the contract value. Entering into supplemental agreements adjusting contract value accordingly. Adding GST at prevailing rates in all future bills and payments. Paying GST amounts to the contractor for onward deposit to the government. - The amount illegally deducted @ 2% GST from the petitioner's running bills is to be refunded. - The entire exercise is to be completed within three months from the date of receipt of the certified copy of the order. - The writ petition is allowed and disposed of with no order as to costs.