In the case of Angerlehner Structural and Civil Engineering Company v. Municipal Corporation of Greater Bombay 2022 SCC OnLine Bom 1145, the Bombay High Court held that the Respondent cannot shift its burden of Goods and Services Tax (“GST”) on the Applicant, when the contract between the parties does not contemplate the shifting of burden of tax arising out of the interest payable by the Respondent due to the Respondent’s delay in making payments to the Applicant.
On occurrence of dispute between the Municipal Corporation of Greater Mumbai (hereinafter referred to as “the Respondent”) and Angerlehner Structural and Civil Engineering Company (hereinafter referred to as “the Applicant”), a foreign entity, the parties referred the dispute to Arbitration pursuant to the Arbitration agreement between the parties, and an Award was passed thereto.
The Respondent, aggrieved by the Award passed by the Arbitral Tribunal, challenged the Award before the Bombay High Court, which was dismissed by the Applicant and thereafter before the Supreme Court, which was also dismissed.
The Applicant filed an Execution Application before the High Court for the enforcement of Award and to direct the Respondent to pay the principal amount along with interest amount awarded to the Applicant by the Arbitral Tribunal.
Thereafter, the Respondent deducted the amount of GST payable by the Respondent on Reverse Charge Mechanism (“RCM”) from the total amount awarded to the Applicant, and deposited the remainder amount in the Applicant’s account.
When the Execution Application came up before the High Court for compliance and final disposal, the Applicant brought it to the notice of the High Court that the Respondent did not deposit the entire amount due and payable under the Award but only deposited the amount after withholding the amount of GST payable by the Respondent.
ISSUE BEFORE THE BOMBAY HIGH COURT
Whether the Respondent is entitled to deduct the amount of GST payable on RCM from the amount awarded to the Applicant by the Arbitral Tribunal?
CONTENTIONS OF THE PARTIES
The Applicant contended that a liability to pay GST could not be fastened upon the Applicant by any means as there existed no liability to pay any GST, since the GST regime came into force much after the contract between the Applicant and the Respondent was concluded and after the Arbitral Award was passed. Thus, the GST law could not be made applicable in the present case as it does not have a retrospective effect.
The Applicant submitted that under Sections 9(3), (4) and (5) of the Central Goods and Services Tax Act, 2017 (“CGST Act”) read with Sections 5(3), (4) and (5) of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”), the Respondent was liable to pay GST under RCM as the Applicant is a foreign supplier not subject to any GST liability.
The Applicant relied upon Notification No. 10/2017-Integrated Tax (Rate) issued by the Government of India, Ministry of Finance (Department of Revenue), dated 28.06.2017 and argued that the said Notification clearly casts the liability on the Respondent to pay the GST, if applicable, as the Applicant is located in a non-taxable territory and the recipient of the service, i.e., the Respondent is located in the taxable territory.
The Applicant further asserted that the Respondent is entitled to avail Input Tax Credit (“ITC”) for the GST paid under RCM if the supplies are used or will be used for business or in furtherance of business activities. Thus, the Respondent would be unjustly enriched as the Respondent would be entitled to ITC even though the Respondent paid GST from the monies due to the Applicant.
The Respondent contended that the GST Law came into effect in 2017 and although the contract between the parties was not in existence at the time when the Arbitral Award was passed, the said Award was under challenge at the time of introduction of the GST regime. Thus, GST would be applicable on the consideration along with interest payable under the contract.
The Respondent argued that under Clause 3 of the contract between the parties, it was agreed that all the taxes were to be borne by the Applicant, due to which the liability to pay GST could not be foisted upon the Respondent and Applicant would be liable to pay the same.
The Respondent stated that though the Notification No. 10/2017 dated 28.06.2017 imposed a burden on the person located in taxable territory to pay the GST on RCM, however, the burden of tax could be shifted by the parties by entering into a contract to the contrary as held by the Supreme Court in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran (2012) 5 SCC 306.
The Respondent thus submitted that as the Applicant had agreed to bear all the taxes under the contract, the Respondent was entitled and justified to deduct from the monies due to the Applicant the GST payable by the Respondent.
DECISION AND FINDINGS
The High Court noted that it is not in dispute that the services rendered by the Applicant to the Respondent is governed by the IGST Act, as the Applicant has provided inter-State supply of services.
Further, the High Court pointed out that it is not in dispute that Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 is applicable in the present case, as the Applicant being the supplier or services is located in a non-taxable territory and the Respondent is the recipient located in the taxable territory. Thus, the Respondent is liable to pay the GST on RCM as provided under Section 5(3) of the IGST Act.
The High Court observed that the Respondent would be entitled to withhold the amount of GST liability from the total dues payable to the Applicant when a contract exists between the parties to shift the entire tax liability on one party, in light of the Supreme Court’s decision in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran (2012) 5 SCC 306.
To determine whether a contract existed between the parties to shift the entire tax liability on the Applicant, the High Court took into consideration Clause 3 of the contract between the parties, and held that the said clause did not contemplate the payment of any taxes that have arisen on account of payment of interest due to the Respondent’s default to make payment in a timely manner.
The High Court stated that the liability to pay GST had arisen only due to the dispute between the parties regarding the payment of due amount to the Applicant by the Respondent. As the Respondent failed to make payments, the Applicant invoked Arbitration pursuant to which an Arbitral Award was passed.
The High Court noted that although the Respondent challenged the said Award all the way up to the Supreme Court, the challenge was unsuccessful and during the period of challenge the GST law came into force. The interest on amount due was granted under the Arbitral Award, which is subjected to the levy of GST under Section 15(2)(d) of the CGST Act read with Section 20 of the IGST Act.
The High Court observed that the said liability of GST arising on the interest amount was certainly not in contemplation of the parties when the contract was entered into in 2001. On perusal of Clause 3 of the contract, the High Court held that:
“22. … 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. I am therefore of the opinion 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 28 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, the High Court held that the Respondent is liable to discharge the GST on RCM as the same could not be deducted from the dues of the Applicant payable pursuant to the Award, and directed the Respondent to deposit the amount so deducted as GST into the Applicant’s bank account.
In the present decision, the Bombay High Court has laid down a crucial factor which shall come into play in contracts between the parties which stipulate that the entire burden of tax would be shifted to one party.
The High Court emphasized that a contract which only provides for the shifting of burden of tax on one party, does not contemplate the shifting of burden of tax which would arise out of interest payable by other party due to delay in making payments to the first party.
The Respondent had delayed in making payments to the Applicant, and the Respondent was directed by the Arbitral Tribunal to pay the entire amount along with interest to the Applicant. The said interest amount accrued to a great extent due to the challenges made against the Arbitral Award by the Respondent before the High Court and thereafter the Supreme Court, which took a considerable period of time.
The High Court took note of the fact that the interest amounted to a significant portion of the amount payable by the Respondent to the Applicant, and similarly, a major portion of the GST levied was pursuant to such interest amount.
Thus, the High Court held that the contract executed between the parties in 2001 did not contemplate in any manner that the tax, which was to be borne by the Applicant, would include the tax on interest accumulated solely due to the Respondent’s actions. Resultantly, the High Court disallowed the shifting of burden of tax and directed the Respondent to pay the amount deducted as GST to the Applicant.
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