2025 (7) TMI 384 - AAR - GST

Levy of GST - interest awarded under arbitration costs awarded under arbitration - supply or not - time of determination of such supply - rate of tax - HELD THAT - In the present case the transactions pertain to pre-GST period the question of the amounts falling under the ambit of GST in terms of clause 5(e) of Schedule II does not arise. Even otherwise the work contract dated 21.5.2009 does not contain any penalty or compensation clause for delay in payments made by GSL and further there is no clause for recovery of interest on delayed payment. The applicant is not liable to pay GST on the interest awarded under arbitration costs awarded under arbitration received by them - Other questions are not applicable.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) were:

[i] Whether the applicant is liable to pay Goods and Services Tax (GST) on the "interest awarded under arbitration" and "costs awarded under arbitration" received by the applicant?

[ii] If GST is payable, whether any supply is involved, the time of determination of such supply, and the applicable rate of tax?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability to pay GST on interest and arbitration costs awarded under arbitration

Relevant legal framework and precedents: The provisions of the Central Goods and Services Tax (CGST) Act, 2017, especially sections 12 (Time of Supply of Goods), 13 (Time of Supply of Services), and 142 (Miscellaneous transitional provisions) were examined. Section 12(6) and 13(6), which deal with additions to the value of supply by way of interest or penalty for delayed payment, were particularly relevant. The applicant also relied on judicial precedents including National Tobacco Co Ltd and Vazir Sultan Tobacco Ltd, as well as the ruling of Continental Engineering Corporation. Circular No. 178/10/2022-GST dated 3.8.2022 was cited for guidance on what constitutes "consideration" for supply under GST.

Court's interpretation and reasoning: The applicant's primary contention was that the supply (construction of hull of ship and towing services) was completed and invoiced in the pre-GST regime, and therefore no GST liability arises on amounts received subsequently, including interest and arbitration costs. The applicant argued that the principal supply was exempt or taxed under the earlier regime (central excise exemption on hull construction and service tax paid on towing), and the amounts awarded under arbitration do not constitute supply under GST.

The Revenue contended that the interest and arbitration costs awarded post-GST implementation are taxable. They argued that interest for delayed payment is an addition to the value of supply under section 15(2)(d) and taxable under GST. Arbitration services are taxable under reverse charge mechanism as per Notification No. 13/2017-Central Tax (Rate).

Key evidence and findings: The facts showed that the original contract and supply were completed pre-GST, with invoices raised before GST's introduction. The disputed amount of Rs. 1.39 crore was withheld by the buyer (GSL) due to losses claimed in another contract. The applicant wrote off this amount in books in FY 2012-13 but later obtained an arbitration award in 2017 (post-GST) directing payment of principal, interest, and arbitration costs. The applicant received principal in 2020 and interest and arbitration costs in 2024. There was no contractual clause for penalty or interest on delayed payment in the original contract.

Application of law to facts: The AAR noted that section 142(10) and (11) provide that supplies pursuant to pre-GST contracts are liable to tax under GST, except where tax was leviable under VAT or service tax laws, in which case GST is not payable on the same supply. Since the principal supply was completed pre-GST and was exempt or taxed under the earlier regime, no GST applies on the principal amount.

Regarding interest and arbitration costs, the AAR emphasized that for GST to apply, the amounts must constitute "consideration" for a supply under the GST law. Circular No. 178 clarified that payments labeled as penalty or interest are taxable only if they are consideration for an ancillary supply. In this case, the interest was awarded as compensation for delayed payment but there was no contractual basis for such penalty or interest. Arbitration costs awarded under section 31A of the Arbitration Act do not represent supply of goods or services by the applicant to the other party but are costs awarded by the tribunal.

Therefore, the interest and arbitration costs did not amount to a supply under GST.

Treatment of competing arguments: The Revenue's argument that interest and arbitration costs are taxable post-GST was rejected because the underlying supply was pre-GST and the amounts were not consideration for any supply. The applicant's reliance on transitional provisions and Circular No. 178 was accepted. The absence of contractual penalty clauses further supported the applicant's position.

Conclusions: The applicant is not liable to pay GST on interest and arbitration costs awarded under arbitration in respect of supplies made in the pre-GST regime.

Issue 2: If GST is payable, determination of supply, time, and rate

This issue was rendered academic as the answer to Issue 1 was negative. The AAR accordingly ruled that since no GST liability arises, questions of supply characterization, time of supply, and applicable tax rate do not arise.

3. SIGNIFICANT HOLDINGS

The AAR held:

"The applicant is not liable to pay GST on the 'interest awarded under arbitration' & 'costs awarded under arbitration', received by them in terms of paragraph 16 to 18 and 20."

Core principles established include:

• Supplies completed and invoiced in the pre-GST regime, which were exempt or taxed under earlier laws, are not subject to GST on subsequent payments such as interest or arbitration costs.
• Interest or penalty amounts are taxable only if they constitute "consideration" for a supply under GST law, supported by an agreement or contract.
• Costs awarded under arbitration under section 31A of the Arbitration Act do not constitute supply of goods or services and hence are not taxable under GST.
• Section 142(10) and (11) of the CGST Act provide transitional protection against double taxation for supplies already taxed under VAT or service tax laws.
• Circular No. 178 clarifies that payments not representing the "object" of a contract or supply are not consideration for GST purposes.

Accordingly, the ruling concluded that the applicant has no GST liability on the amounts awarded under arbitration in this case.