ARBITRATION AWARD ATTRACTS GST

[Mr. M. GOVINDARAJAN]

Arbitration, a form of alternative dispute resolution, is a way to resolve disputes outside the judiciary courts.   The dispute will be decided by one or more persons (the 'arbitrators', 'arbiters' or 'arbitral tribunal'), which renders the ‘arbitration award’. An arbitration decision or award is legally binding on both sides and enforceable in the courts, unless all parties stipulate that the arbitration process and decision are non-binding.

The issue to be discussed in this article whether the arbitration award attracts GST under GST laws with reference to decided case law.

IN RE: M/S. CONTINENTAL ENGINEERING CORPORATION [2021 (10) TMI 635 - AUTHORITY FOR ADVANCE RULING, TELANGANA], the applicant has executed works contract for Hyderabad Growth Corridor Limited.  The work was completed in pre-GST era. The applicant raised certain claims regarding compensation for delay in execution, payment of difference in rates and other contractual breaches which was referred to a dispute resolution board on 16.06.2017. The applicant after notifying to contractee on 25.09.2017 approached an arbitration tribunal.  The arbitral Tribunal initiated proceedings on 20.11.2017 and passed an order on 09.05.2019 for ₹ 169,58,22,197/- to be paid to the applicant.  The components of the award are as below-

• Compensation for delay in execution of the Works and Prolongation Costs – ₹ 1,15,80,62,000;
• Claim for release of wrongful deduction of Liquidated Damages – ₹ 16,60,40,728;
• Payment difference in rates for varied work of ‘Hard Rock Excavation with Controlled Blasting’ plus applicable Price Adjustment 3 (Variation Order 9) -  ₹ 9,95,65,351;
• Non-certification / non-payment of the work of providing and laying selected granular soil. behind reinforced earth structures including compacting completed as per Additional Technical specification A-16 of Vol.2 – ₹ 34,34,507;
• Non-payment for construction of Stone Pitching and Filter Media Works along the Chute Drains – ₹ 77,63,276;
• Nonpayment of the work of Backfilling of GSB Boulder and RCC M30 to improve soil stability 6 of RE Wall foundation -  64,01,809;
• Refund of Seigniorage recovered on use of earth – ₹ 1,68,74,440;
• Claim for payment of 18% Overhead and 10% profit on the additional works of Utility shifting – ₹ 59,56,735;
• Claim for payment of amount due towards Price Adjustment amounts based on WPI Series with Basic year 2004-2005 – ₹ 4,57,25,482;
• Refund of amounts wrongfully deducted from various IPCs towards Labour Cess @ 1%. -  ₹ 5,88,56,076;
• Refund of amount deducted against increase in VAT from 4% to 5% (under Subsequent Legislation, Clause 70.6 of COPA) – ₹ 95,76,882;
• Cost of Arbitration – ₹ 6,0,000,000;
• Interest on delayed payments against interim payment certificates (IPCs) by Employer – ₹ 9,55,64,910;
• Interest @ 10% on the sums To be becoming due from 01.02.2018 calculated at till the date of publishing the Award/ Interest on the total amount payable @ 2% higher than the Bank rate of interest prevalent. on the date of the Award: from the date of publishing the award till the actual date of release of payment by the Respondent to the Claimant– ₹ 1,60,00,000;

The applicant sought for Advance Ruling on the following questions-

• Whether GST is applicable on the proposed receipt of money in case of Arbitration claims awarded for works contract completed in the Pre-GST regime?
• If the answer to the above question is ‘Yes’ then under what HSN Code and GST rate the liability is to be discharged by the applicant?

The applicant submitted the following before the Authority for Advance Ruling-

• They are suppliers of works contract services and have executed the work prior to July, 2017.
• In the course of execution of works certain claims related to work was denied by the employer.
• Against this they had arbitration with the employer and the arbitration was awarded to them in the GST regime.
• The works were completed in the Pre-GST regime and only money was receivable after introduction of GST due to arbitration award.
• The receipt of money is not taxable under the provisions of CGST/ SGST as it doesn’t amount to supply of goods as money is excluded from the definition goods.
• The contract for supply is made prior to introduction of GST but the goods/services are supplied on the appointed day or after the introduction of GST then CGST / SGST is payable under Section 142(10).
• If a price revision is made after introduction of GST then tax is payable under CGST / SGST under Section 142(2)(a). 
• As the works were executed by the applicant are prior to the appointed day these provisions are not applicable to them. 
• There is no man power and operation after the GST as seen from the financial statements.
• If tax was leviable under VAT or service tax on goods or services then CGST/ SGST cannot be levied as enumerated under Section 142(11).
• The amount received on arbitration for execution of work in pre-GST period cannot be taxed under CGST / SGST Act.

The applicant relied on catena of case law to assert that receipt of money cannot be considered as taxable event as the entire work was completed in the Pre-GST regime and only money is receivable in the GST regime.

The Authority for Advance Ruling considered the submissions made by the applicant.    The Authority for Advance Ruling made ruling for each and every component of the claim as discussed above, as below-

• Unpaid amounts including escalation of price for works executed in pre-GST period - The liability to tax under CGST/SGST Acts for works contracts is determined by the time of supply of services in Section 13 read with Section 31 i.e., the provisions pertaining to tax invoice. The time of supply of service according to Section 13(2) is the earliest of the date on which invoice is issued or date of provision of service or date of receipt of payment or date on which recipient shows the receipt of services in his books.  The supply was made prior to introduction of GST.  Therefore it is not covered by Section 13(2) of the CGST/SGST Acts and not taxable.
•  Refund of excess deductions made - The refund of excess deductions both statutory and non-statutory made against the bills raised for the works completed in pre-GST period do not constitute consideration for supplies made under GST period. Therefore these amounts are not taxable under CGST/SGST Acts.
• Interest on delayed payments of interim payment certificates - The interest is claimed on delayed payments on the works executed and payment certificates received in pre-GST period. The time of supply is not in GST period, hence these amounts are not taxable under CGST/SGST Acts.
• Cost of Arbitration - Arbitration as service was supplied independently after the introduction of GST i.e., the tribunal was constituted conclusively on 20.11.2017 and rendered its orders on 09.05.2019 and therefore this supply is taxable  on reverse charge basis under GST.  The taxable rate is @ 9% each. The service tariff code is 998215.
• Liquidated damages – The damages are consideration for tolerating an act or a situation arising out of the contractual obligation. The entry in 5(e) of Schedule II to the CGST Act classifies this act of forbearance.  Such a toleration of an act or a situation under an agreement constitutes supply of service and the consideration or monetary value is taxable @ 9% CGST + 9% SGST.
• Interest on Arbitration Amount - Under Section 15(2)(d) of the CGST/SGST Acts interest for delayed payment against a supply is consideration which is taxable under CGST/SGST Acts. Therefore the interest on amounts eligible to tax under CGST/SGST forms part of value of taxable supply.