2025 (5) TMI 305 - HC - GST

Scope of terms of contract between parties - GST liabilities for the job-work - Interpretation of clause 12 of the agreement dated 05.02.2018 - applicable GST Charges to be paid by the exporter to the processor - HELD THAT - Section 34 of the Arbitration and Conciliation Act provides a limited scope for judicial interference with arbitral awards. Court can set aside an award only on specific ground such as patent illegality or it violates public policy. The award must be demonstrably illegal on its face such as being contrary to a fundamental provisions of law or the terms of the contract. The award must be in violation of the fundamental policy of the Indian law or against justice and immorality and this includes situations were the award is induced by fraud or corruption - The Court reviewing the award under Section 34 of the Arbitration and Conciliation Act 1996 is not an appellate body. It cannot re-appreciate the evidence. The Court s limited role is only to ensure that arbitral award is not fundamentally flawed or perverse. In the impugned arbitral award the arbitrator has only directed the petitioners to give indemnity bond in favour of the respondent. The law as on date is also well settled as this Court under Section 34 of the Arbitration and Conciliation Act cannot modify an arbitral award. The reasons given by the arbitrator for arriving at the conclusion in his arbitral award are justifiable reasons. The view taken by the arbitrator is also a legal and plausible view. Therefore there is no scope for interference by this Court under Section 34 of the Arbitration and Conciliation Act 1996 as the arbitrator has passed the award only based on the evidence available on record and in accordance with the law. Conclusion - This Court is of the considered view that the petitioners have not satisfied any of the grounds available under Section 34 of the Arbitration and Conciliation Act 1996 for challenging the award. The impugned arbitral award does not suffer from any perversity or patent illegality. There is no merit in this petition and the same is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the arbitral tribunal and subsequently by the High Court were:

a) Whether clause 12 of the agreement dated 05.02.2018 mandates the first petitioner (exporter) to incur GST liabilities for the job-work done by the respondent (processor)?

b) Whether the first petitioner is liable to pay the differential GST demand made by the GST authorities in the event of crystallisation of the liability?

c) Whether the first petitioner can deny liability in respect of GST proceedings initiated by the GST authorities for the invoices raised by the respondent?

d) Whether the first petitioner is entitled to retain the original sale deeds of the respondent after taking NOC from the IDBI Bank?

e) Whether the respondent can withhold the applicable security deposit of the first petitioner until the GST proceedings attain finality?

f) Whether the first petitioner is liable to reimburse all costs incurred by the respondent in challenging the GST demand laid by it for the benefit of the first petitioner?

g) Whether the arbitration proceedings are invalid due to the respondent joining the second petitioner, who is not a party to the arbitration agreement?

h) Whether the respondent proved entitlement under the contract to seek indemnity from the first petitioner for GST liabilities, interest, penalty, and litigation costs arising from various show cause notices?

i) Whether the reliefs claimed by the respondent in prayers (a), (b), (c), and (d) are beyond the scope of the agreement dated 05.02.2018?

j) Whether the first petitioner is entitled to refund of security deposit with interest, based on admissions by the respondent?

k) What other reliefs are the parties entitled to?

2. ISSUE-WISE DETAILED ANALYSIS

a) Interpretation of Clause 12 of the Agreement and GST Liability (Issues a, b, c, h, i)

Relevant legal framework and precedents: The Arbitration and Conciliation Act, 1996, specifically Section 34 on challenge to arbitral awards, and the CGST Act, 2017, including Sections 50 and 74 relating to interest and penalty on GST non-payment. The Supreme Court decision in Rashtriya Ispat Nigam Ltd. vs. Dewan Chand Ram Saran was relied upon for contractual interpretation of tax liabilities.

Court's interpretation and reasoning: Clause 12 states only that "The applicable GST Charges to be paid by the exporter to the processor." The rate of GST was not specified. The arbitrator found the language clear and unambiguous, imposing the liability on the petitioners to pay the applicable GST. The arbitrator held that since the applicable GST rate for processing prawns was 18% (as per GST authorities), the petitioners were liable to pay the differential GST amount over the 5% charged by the respondent in invoices.

Key evidence and findings: The petitioners admitted that other processors charged and received 18% GST from them. The respondent received show cause notices from GST authorities demanding 18% GST plus interest and penalty. The respondent challenged these demands before appropriate authorities and courts. The petitioners were aware, or ought to have been aware, of the applicable GST rate.

Application of law to facts: The arbitrator applied the principle that when a party undertakes to bear tax liability, that party must bear it in full. The petitioners' obligation to pay "applicable GST" was interpreted to mean the correct statutory rate, i.e., 18%. The petitioners cannot evade liability by relying on invoices raised at 5%. The arbitrator held the petitioners liable to indemnify the respondent for the differential GST amount, interest, penalty, and legal costs arising from the GST proceedings.

Treatment of competing arguments: The petitioners argued that the agreement limited their GST liability to 5% as per invoices, and that the respondent alone was liable for statutory compliance and any penalties or interest. They contended that the arbitrator rewrote the contract by imposing indemnity for interest, penalty, and legal costs, which were not stipulated in the agreement. The petitioners also argued that the respondent failed to inform them timely about the show cause notices.

The arbitrator rejected these contentions, noting that interest and penalty are consequential to non-payment of GST and arise under GST law, and that the petitioners had agreed to pay the applicable GST amount. The arbitrator found the petitioners' denial of knowledge and liability untenable, especially since they paid 18% GST to other processors. The arbitrator held that the indemnity claim was within the scope of the agreement.

Conclusions: The petitioners are liable to pay the differential GST amount of 13%, and to indemnify the respondent for interest, penalty, and legal costs arising from the GST demands, as per clause 12 read with the statutory provisions. The arbitrator's interpretation was a plausible and legally sound construction of the contract.

b) Return of Security Deposit and Interest (Issues e, j)

Relevant legal framework: Provisions of the contract, particularly clause 4, which stipulated return of security deposit within four months of termination without interest, failing which interest at 18% per annum would be payable. The Arbitration and Conciliation Act, 1996, Section 31(7)(a) on interest awards.

Court's interpretation and reasoning: The arbitrator partially allowed the petitioners' counterclaim for refund of security deposit, awarding Rs. 2,81,43,566/- against the claimed Rs. 3,18,03,894/-. However, the arbitrator did not award interest on the security deposit despite the respondent's prior agreement to pay interest at 12% per annum from 10.03.2021.

Key evidence and findings: Emails from the respondent agreeing to pay interest at 12% per annum on the security deposit were on record. The agreement required interest payment at 18% if delayed beyond four months, but the parties agreed to 12% post-termination. The respondent failed to return the deposit within the stipulated time.

Application of law to facts: The petitioners contended that the arbitrator erred in not awarding interest as agreed. The respondent contended that the arbitrator's discretion to award interest under Section 31(7)(a) was properly exercised. The Court noted that Section 31(7)(b), which deals with post-award interest, was not applicable here as the interest claim arose before arbitration.

Treatment of competing arguments: The petitioners argued for enforcement of the respondent's prior undertaking to pay interest. The respondent relied on the arbitrator's discretion and the absence of a specific contractual provision. The Court found that the arbitrator's discretion was exercised reasonably, but the failure to award interest despite the respondent's undertaking was a point of contention.

Conclusions: The petitioners were entitled to refund of the security deposit, as awarded. The arbitrator's decision not to award interest despite respondent's undertaking was noted but not interfered with, as the award falls within the arbitrator's discretion.

c) Return of Title Deeds (Issue d)

The arbitrator directed the petitioners to return the original sale deeds of the respondent, which were held as security. The petitioners were not entitled to retain the deeds after taking NOC from the bank. This issue was straightforward and resolved in favour of the respondent.

d) Validity of Arbitration Proceedings (Issue g)

The petitioners contended that the arbitration was invalid because the respondent joined the second petitioner, who was not party to the arbitration agreement. The arbitrator held the arbitration valid. The Court upheld this finding, noting no infirmity in the arbitrator's ruling on joinder and jurisdiction.

e) Costs of Litigation and Indemnity (Issues f, h)

The arbitrator held that the petitioners must indemnify the respondent for costs incurred in challenging the GST demands, including legal fees. The petitioners argued this was beyond the scope of the contract. The arbitrator reasoned that these costs were consequential to the petitioners' failure to pay the correct GST amount, and thus within the indemnity scope.

The Court accepted this reasoning, finding it consistent with the contract and statutory provisions.

3. SIGNIFICANT HOLDINGS

"Clause 12 of the agreement clearly fixes the liability on the petitioners and the petitioners cannot escape the liability by raising technical objections."

"Interest, penalty and legal costs are consequential payments arising from non-payment of the differential GST amount and the arbitrator was justified in directing the petitioners to indemnify the respondent for those amounts."

"The arbitrator's interpretation of clause 12, imposing liability on the petitioners to pay the applicable GST amount including the differential GST of 13%, interest, penalty and legal costs, is a plausible and legally sound construction."

"The arbitrator's discretion in awarding interest on the security deposit was exercised reasonably, and the failure to award interest despite respondent's undertaking does not warrant interference."

"Section 34 of the Arbitration and Conciliation Act, 1996, provides limited scope for judicial interference, and the Court cannot re-appreciate evidence or modify the award. The impugned award does not suffer from perversity or patent illegality."

"The arbitration proceedings are valid despite the respondent joining a party not originally a party to the arbitration agreement."