GST Reimbursement Denied for Pre-GST Contracts with All-Inclusive Tax Clauses

Facts

The Contract: The Water Resources Department awarded works contracts based on bids submitted before the implementation of GST (pre-July 1, 2017).
The Tax Clause: Clause 2.17.1 of the agreement explicitly stated that the contractor would bear all tax liabilities and barred any subsequent claims for tax reimbursement.
The Dispute: Following the commencement of the GST regime, the contractor sought a 12% reimbursement for the GST liability incurred on works performed after July 1, 2017.
State’s Refusal: The State rejected the claim, relying on the “all-inclusive” nature of the contractual clause (2.17.1).
Initial Ruling: A Single Judge initially ruled in favor of the contractor, ordering the Department to verify and reimburse the GST amounts. The State challenged this via an intra-court appeal.

Decision

Final Verdict: Partly in favour of Revenue / Writ Petition Dismissed.
Ratio Decidendi:
- Contractual Supremacy: The Court held that under Clause 2.17.1, the parties had agreed that the entire tax burden rested solely on the contractor. The transition to the GST regime did not automatically override these specific contractual terms.
- Availability of Alternative Remedy: The Court noted the presence of an Arbitration Clause within the agreement. It ruled that a writ petition was not the appropriate forum for deciding a dispute regarding contractual tax liability, especially when a specialized dispute resolution mechanism (arbitration) was available.
- Premature Reimbursement: The Court observed that a direction for reimbursement could not be issued without the contractor first proving actual payment of the GST and resolving the interpretation of the contract through arbitration.
- Outcome: The Single Judge’s order was set aside. The contractor was granted liberty to pursue the claim through arbitration.

Key Takeaways

Scrutinize “All-Inclusive” Clauses: For pre-GST legacy contracts, the presence of a clause that fixes all tax liabilities on the contractor is a significant hurdle for seeking GST “top-ups” from Government departments.
Arbitration vs. Writ: Tax reimbursement disputes arising from Government contracts are primarily seen as contractual disputes rather than constitutional ones. Professionals should prioritize the Arbitration route over Article 226 (Writ) unless the tax levy itself is challenged as unconstitutional.
Bid Preparation: This ruling serves as a reminder that when bidding for long-term projects, “Change in Law” clauses must be robustly drafted to allow for the pass-through of new taxes like GST, specifically overriding general “all-inclusive” tax clauses.
Burden of Proof: Reimbursement is not a “standard” right. The contractor must demonstrate that the tax was not factored into the original bid and provide evidence of actual remittance to the exchequer before seeking recovery from the principal.

HIGH COURT OF CHHATTISGARH

State of Chhattisgarh

D.A. Enterprises

SANJAY K. AGRAWAL and Amitendra Kishore Prasad, JJ.

WA No. 159 of 2023

OCTOBER 15, 2024

Rahul Tamaskar, Govt. Adv. for the Appellant. Jitendra Pali, Adv. for the Respondent.

ORDER

Sanjay K. Agrawal, J.- This intra-court appeal at the instance of the State of Chhattisgarh has been filed calling in question legality, validity and correctness of the judgment & order dated 17-11-2022 passed in WPT No.94/2020 by which the writ petitioner’s writ petition has been allowed and it has been directed by the learned Single Judge that tax liability of the writ petitioner qua the Central Goods and Services Tax (GST) in the works contract executed by the writ petitioner be quantified and it be reimbursed to him.

2. The aforesaid challenge has been made in the following factual backdrop: –

3. On 2-2-2017, item rate tender was published by the Water Resources Department of the State for civil work in Maniyari Tank Scheme, Padampur Tank Scheme and Agar Diversion Scheme at Mungeli in response to which the writ petitioner submitted its tender. The State Government finding the writ petitioner to be the successful bidder, executed Agreement Nos.10, 11, 12, 13, 14, 15, 16, 17 & 18 and issued work orders in favour of the writ petitioner for the year 2017-18. As per the terms of the contract and Annexure P-3 filed along with the writ petition, all dues regarding taxes including the Sales Tax, Octroi duties, etc. levied on the contractor’s work by Government and local bodies or private individuals were payable by the contractor and the Water Resources Department will grant a certificate for the quantities actually used on the work but will not entertain any claim on this account. In the meanwhile, during the pendency of contract, the Central Goods and Services Tax Act, 2017 came into force with effect from 1-7-2017. On 23-8-2019 and 4-102019, the writ petitioner made representation to the Executive Engineer, Water Resources Department for payment of 12% GST amounting to Rs. 1,85,64,264/- stating therein that when the agreements were executed on 14-6-2017, GST was not payable and it came into force with effect from 1-7-2017 by which the writ petitioner is liable to pay GST at the rate of 12% and the GST payable was Rs. 1,85,64,264/-, but the amount of GST has not been paid to him, therefore, it be paid to him by issuing appropriate writ / direction, etc.

4. The representation submitted by the writ petitioner was not decided by the State Government leading to filing of W.P.(T) No.41/2020 in which the writ court by order dated 25-6-2020, directed the competent authority to decide the representation of the writ petitioner for reimbursement of the GST tax liability. The State Government by order dated 27-8-2020 decided the representation holding that as per clause 2.17.1. of the contract, all taxes are payable by the contractor and there is no provision of refund of GST and rejected the representation of the writ petitioner accordingly.

5. Feeling aggrieved and dissatisfied with the order dated 27-82020, the writ petitioner filed another writ petition before this Court namely, W.P.(T)No.94/2020 claiming that the State authorities be directed to release the amount of claim raised by him in respect of additional tax to be paid under the Central Goods and Services Tax Act, 2017 (for short, ‘the Central GST Act’) or in alternative, the writ petitioner be paid 10% additional amount of contracts/work orders so that he can pay GST without any financial burden. The State filed its return stating inter alia that as per clause 2.17.1. of the contract, all taxes mentioned in clause 2.17.1. of the agreement are required to be paid by the contractor and the writ petitioner is the contractor. Even after commencement of new tax regime under the GST Act, additional tax liability to be paid is required to be born by the writ petitioner and as such, the writ petition deserves to be dismissed.

6. The learned Single Judge by its impugned order allowed the writ petition and directed the writ petitioner to make a fresh claim showing the difference of tax liability that was incurred at the time of submission of bids and the excess tax paid by him in light of the introduction of the GST and upon such claim made by the writ petitioner, the State will process the same and reimburse the same after due scrutiny and enquiry against which this writ appeal has been preferred on behalf of the State.

7. Mr. Rahul Tamaskar, learned Government Advocate appearing for the State / appellants herein, would submit that the writ petition as framed and filed was not maintainable, there is no statement made in the writ petition that the writ petitioner has paid GST as per clause 2.17.1. of the agreement, which is required to be paid by the writ petitioner contractor and the earlier representation has also been rejected finding no merit. Furthermore, as per Section 9 of the Central GST Act, the writ petitioner is responsible to make payment of the amount of GST and the writ petition is conspicuously silent as to the details of GST paid and the relief sought was to arbitrarily pay the amount of GST or 10% additional amount of public money, which has no basis and as such, the dispute is arbitrable as per clause 4.3.29 of the contract agreement and reference can be made to the Arbitral Tribunal constituted under the provisions of the Chhattisgarh Madhyastham Adhikaran Adhiniyam, 1983. As such, the impugned order deserves to be set aside and the instant writ appeal deserves to be allowed.

8. Mr. Jitendra Pali, learned counsel appearing for the respondent herein / contractor, would support the impugned order and submit that there was no agreement to pay the amount of GST on coming into force of the Central GST Act with effect from 1-7-2017 which other Departments like Public Works Department, Chhattisgarh Rural Road Development Agency, Urban Administration Department and Public Health Engineering Department had already reimbursed the said additional tax liability arising from GST implementation and in view of the decision of the Supreme Court in the matter of Deputy Commissioner of Income-tax v. Pepsi Foods Ltd. (SC)/(2021) 7 SCC 413 , the learned Single Judge has rightly held the State to be responsible to pay the additional tax liability in shape of GST and therefore the writ appeal deserves to be dismissed.

9. We have heard learned counsel for the parties and considered their rival submissions made herein-above and also went through the record with utmost circumspection.

10. It is not in dispute that agreements were entered into between the writ petitioner and the State through the Water Resources Department for execution of various works and work orders were issued in favour of the writ petitioner on 14-6-2017. As per clause 2.17.1. of the contract agreement, all dues regarding taxes including the Sales Tax, Octroi duties, etc. levied on the contractor’s work by Government and local bodies or private individuals were payable by the contractor. It appears that the writ petitioner made representation vide Annexure P-6 attached with the writ petition for release of 12% GST amount without giving any particulars whether he has incurred and paid the GST liability to the competent authority as per clause 2.17.1. of the contract agreement and the said representation was rejected pursuant to the order passed by the writ court against which he has filed second writ petition in which this Court has directed to verify and return the additional tax liability which the writ petitioner is required to pay in the form of GST.

11. It is appropriate to mention that GST came into force with effect from 1-7-2017 and sub-section (119) of Section 2 of the Central GST Act defines “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract. By virtue of Section 9 of the Central GST Act and mirror provisions contained in the Chhattisgarh Goods and Services Tax Act, 2017, read with clause 2.17.1. of the contract agreements, the writ petitioner is required to pay GST, as all taxes were required to be paid by the writ petitioner / contractor.

12. It appears that in this case, the writ petitioner without making payment of GST and without making any statement in the writ petition that the said 12% GST has been deposited by him well in time, sought reimbursement of the GST liability suffered by it on account of introduction of GST, whereas, clause 2.17.1. of the contract agreements is absolutely clear and all the tax liability are to be born by the contractor which the writ petitioner had already included in the tax quotient in their price while filing tender. Clause 4.3.29 of the agreement provides for arbitration clause and the dispute in works contract is also cognizable by the Arbitration Tribunal constituted under the Chhattisgarh Madhyastham Adhikaran Adhiniyam, 1983, despite that, suppressing the said fact, the writ petitioner filed writ petition despite having the arbitration clause.

13. In our considered opinion, since there is arbitration clause in the agreement, the dispute like the present one, which is about tax liability (GST), could have been decided by the remedy of arbitration. However, the contracts of different Departments relied upon by the writ petitioner had a clause for making payment with respect to new taxes and therefore that parity cannot be claimed with the present contract, as the writ petitioner is governed by the terms of the contract entered between the State and him. The present writ petition for reimbursement without actual payment of GST could not have been allowed by the learned Single Judge. Therefore, the impugned order passed by the learned Single Judge directing to verify and reimburse the GST amount, deserves to be and is accordingly set aside and consequently, the writ petition filed by the writ petitioner stands dismissed. The writ petitioner is at liberty to avail the remedy of arbitration clause in accordance with law. However, it is made clear that any of the observations made in this order are only for the purpose of deciding the writ appeal and the Arbitration Tribunal, if recourse is made, shall decide the same strictly in accordance with law, without being prejudiced by any of the observations made herein-above.

14. The writ appeal stands allowed. No order as to cost(s).