Introduction
The intersection of taxation and arbitration raises a fundamental question as to when does a dispute involving tax remain contractual and arbitrable, and when does it enter the exclusive domain of statutory tax authorities? In the matter of Uttar Pradesh Public Works Department v. M/s Vriddhi Infratech India Pvt. Ltd., Arbitration Appeal No. 35 of 2025, decided by the Hon’ble High Court at Allahabad, the Hon’ble High Court examined this question in the context of a government road-construction contract affected by the transition from the erstwhile VAT regime to GST.
The Hon’ble High Court drew a significant distinction between a contractual dispute concerning the manner in which tax is to be borne or calculated between contracting parties and a statutory tax dispute requiring determination of taxability, classification, rate or liability. While the former may be arbitrable, the latter remains within the exclusive jurisdiction of the taxing authorities. Applying this distinction, the Court held that the dispute between the parties was arbitrable. However, it found that the Sole Arbitrator had erred in treating the MoRTH GST SOP as applicable merely because the contract incorporated MoRTH technical specifications. The Court consequently severed the vulnerable portions of the award and remitted them for fresh adjudication.
Factual Matrix
The Uttar Pradesh Public Works Department (“Department”) awarded a contract to M/s Vriddhi Infratech India Pvt. Ltd. (“Contractor”) for widening and strengthening specified stretches of roads in Sitapur District from two lanes to four lanes. The contract, valued at approximately Rs. 155.89 crore, was executed on 27 April 2016, when the prevailing tax regime was based on VAT and other applicable taxes. The work was subsequently completed within the extended period, and a completion certificate was issued on 10 April 2019.
The introduction of GST on 1 July 2017 materially altered the tax framework applicable to the ongoing contract. The Contractor had originally quoted rates inclusive of the then-applicable VAT. Following the introduction of GST, the Department became liable to pay GST on the relevant work, which was to be deposited by the Contractor with the GST authorities. The dispute was not over whether GST was payable; rather, it concerned the methodology for calculating the GST component in respect of work performed after the transition to the GST regime.
The Contractor relied upon the MoRTH SOP dated 19 November 2018, which prescribed a methodology for determining the impact of GST on contracts entered into before the GST regime but completed thereafter. The Department, however, relied upon the Uttar Pradesh Government Orders dated 9 November 2017 and 10 December 2019, contending that these governed the calculation of GST for the contract.
The dispute was first considered by the Dispute Review Expert (“DRE”), who held that the Department was liable to pay GST on the relevant price adjustment and that the State Government Order was binding for determining its quantum. The Contractor thereafter invoked arbitration. The Sole Arbitrator ultimately awarded substantial sums towards GST, refund of deductions, interest and penalty. The total award amounted to approximately Rs. 11.35 crore, in addition to 15% penalty and 18% interest, with certain amounts made subject to final assessment by the GST authorities.
The Department challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The Commercial Court dismissed the challenge on 18 July 2025, following which the Department preferred an appeal under Section 37 before the Allahabad High Court.
Issues
The principal issues before the Court were:
- Whether a GST-related dispute arising from a contractual relationship is arbitrable;
- Whether incorporation of MoRTH technical specifications also incorporated the MoRTH GST SOP;
- Whether the State Government Orders governed the calculation of GST under the contract; and
- Whether the award of interest and penalty was legally sustainable.
Arbitrability of Tax-Related Contractual Disputes
The Hon’ble High Court first examined whether the dispute was inherently non-arbitrable and, in doing so, reaffirmed the settled distinction between sovereign or statutory functions and private contractual rights. It categorised tax-related disputes into two broad heads:
Head-A, comprising disputes arising out of the contract itself, such as allocation of tax liability, reimbursement obligations, or interpretation of contractual tax clauses, which remain purely contractual and therefore arbitrable; and
Head-B, involving issues that fall within the exclusive domain of statutory tax authorities, such as taxability of a transaction, applicable rates, classification, exemptions, and determination of statutory tax liability, which cannot be decided by an arbitral tribunal.
Applying this framework, the Court held that the present dispute clearly fell within Head-A, as there was no contest over GST applicability, rate, classification, or statutory liability. The issue was limited to whether GST was to be computed under the MoRTH SOP or the Uttar Pradesh Government Orders, making it a matter of contractual interpretation rather than tax adjudication. The Court further noted that the plea of non-arbitrability had not been raised before the arbitral tribunal or the Commercial Court and was introduced for the first time in appeal, and therefore rejected the objection as untenable.
MoRTH SOP vis-à-vis State Government Orders
The more substantial question concerned the applicability of the MoRTH SOP. Although the contract required execution in accordance with MoRTH technical specifications, this incorporation was confined to engineering aspects such as standards, materials, measurements, and construction methodology. It did not extend to financial or taxation guidelines, nor did it override the separate tax clause under which rates were inclusive of applicable taxes and tax deduction obligations were separately allocated.
Crucially, the MoRTH SOP itself was not placed on record, and there was no contractual stipulation giving it precedence over the agreement or binding State Government Orders governing GST computation. The Court held that a directory guideline could not displace binding State instructions, and the Arbitrator erred in treating technical incorporation as a gateway to import unrelated tax provisions into the contract.
Interest and Penalty
The Hon’ble High Court discovered significant flaws in the penalty and interest award. There was no proof that the GST authorities had sent the Contractor a notice under Sections 73 or 74, despite the Arbitrator’s award of a 15% penalty and 18% interest under GST law.
It was observed that the statutory liability to pay GST rested upon the Contractor as assessee. If tax was not paid within the prescribed period, the resulting interest and penalty would ordinarily follow against the assessee. To recover such amounts from the Department, the Contractor was required to establish that the Department’s failure or delay had directly caused the liability and that such liability was contractually recoverable from the Department.
The Arbitrator had not undertaken this exercise. Instead, it proceeded on the assumption that non-payment of GST by the Department automatically entitled the Contractor to interest and penalty. The Court found this approach insufficient.
The Hon’ble High Court also criticised the award for making the amounts payable subject to a future assessment by the GST authorities. Since the contract had been completed in 2019, the relevant tax position should have been capable of being established by the time the award was made in 2024. Leaving the final liability open resulted in an award lacking the requisite certainty and finality.
Scope of Section 37 and Severability
The Court acknowledged that its jurisdiction under Section 37 is narrow and cannot be equated with ordinary appellate review. Courts cannot reappreciate evidence or substitute their own interpretation merely because another view is possible. Intervention is justified only within the limited grounds available under Section 34.
Nevertheless, the Court found that the present award suffered from errors going to the root of the relevant findings. The Arbitrator had incorrectly treated the MoRTH SOP as contractually applicable, failed to properly consider the binding State Government Orders, and awarded interest and penalty without establishing the underlying statutory liability.
The Court then considered whether the entire award should be set aside. Referring to the Supreme Court’s decision in Gayatri Balasamy v. ISG Novasoft Technologies Ltd., it recognised the doctrine of severability, under which legally and practically separable portions of an award may be preserved while defective portions are removed or remitted.
Accordingly, the Court preserved the finding that the contract was an item-rate contract and the award of Rs. 66,500/- towards the Department’s share of the DRE fee. The findings concerning GST calculation, applicability of the MoRTH SOP and State Government Orders, and consequential interest and penalty were severed and remitted for fresh consideration.
Holding
The Allahabad High Court partly allowed the appeal and set aside the Commercial Court’s judgment affirming the arbitral award. It held that the GST dispute was arbitrable, as it concerned the contractual methodology for calculating tax rather than determination of statutory tax liability.
However, the Court found the Arbitrator’s findings on the applicability of the MoRTH SOP, the State Government Orders, and the consequential award of interest and penalty unsustainable. These portions were severed and remitted to the Arbitral Tribunal for fresh adjudication. The severable award of Rs. 66,500/- towards the DRE fee was preserved, along with applicable post-award interest.
AMLEGALS Remarks
A significant ruling in the nexus of government contracts, taxes, and arbitration is Uttar Pradesh Public Works Department v. M/s Vriddhi Infratech India Pvt. Ltd. Its primary contribution is to provide a clear distinction between statutory tax disputes, which are solely the purview of tax authorities, and contractual tax disputes, which are arbitrable. The Court reiterated that an arbitral tribunal cannot decide matters pertaining to taxability, classification, or statutory responsibility, even though parties may arbitrate matters pertaining to the allocation or computation of tax under a contract.
The judgment also cautions against the overbroad incorporation of external documents into contracts. Technical specifications meant for engineering purposes cannot, by default, be read as importing separate taxation frameworks unless expressly provided. It further emphasises the need for strict evidentiary and contractual grounding before awarding interest or penalties linked to statutory obligations. Ultimately, the decision strikes a balance between arbitral autonomy and statutory authority, reiterating that arbitrability depends on the nature of the dispute, while the enforceability of an award rests on its fidelity to the contract, applicable law, and evidence on record.
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