[Opinion] GST Implications on Issues arising from Arbitration Awards

CA Sri Harsha – [2023] 146 taxmann.com 484 (Article)

We all know arbitration is one of the alternate dispute resolution mechanisms widely used. Whenever there is a dispute between the parties to the contract and the contract provides for arbitration, the dispute is to be resolved by opting to arbitration. Both the parties to the contract appoint an arbitrator and thereafter an arbitration tribunal gets constituted. The arbitration tribunal hears both the parties and passes an award. The award is equivalent to a decree of court unless it is stayed. The general trend is that the courts do not involve much in the arbitration matters respecting the party autonomy. Only in rarest occasions, the courts interfere with the awards. In other words, the award of the arbitration tribunal is almost final and binding on the parties.

With the above brief background on arbitration, we shall proceed in this article to deal with various issues that arise from the arbitration award that have implications under the GST laws. Needless to say, that the spectrum of arbitration is very wide, and it is not possible to cover analysis on each aspect. Hence in this article, we restrict ourselves to analysis of those major issues which we have handled.

Issue #1:

A contract has been entered prior to introduction of GST laws. The said work is exempted from payment of service tax. The service provider has completed the provision of service and claimed majority of the amounts under the said contract. There were certain disputes between the provider and receiver qua the price of the contract. The matter has reached arbitration after the introduction of GST laws and an award was passed in favour of provider allowing his claim for additional price. The recipient has agreed to pay the said amount. Now, the recipient pays the amount to provider in GST regime. Whether such amount is subjected to GST?

Response:

From the facts above, it would be evident that the provision of service has been completed during the service tax regime. The dispute is with relation to the price of the contract which has been completed in all respects. There is no supply happening during GST regime except for receiving the money as per the arbitration award.

In this background, let us proceed to examine the tax implications under the GST laws. Section 142(10) of CGST Act states that save otherwise provided, the goods or services or both supplied on or after the appointed day in pursuance of contract entered prior to the appointed day, shall be liable to tax under the provisions of CGST Act. In other words, in light of Section 142(10), though the contract is entered prior to GST regime, if the goods or services or both are supplied during GST regime, then the tax under GST laws is applicable. However, the said section is subject to any other provisions dealing with similar situations.

This brings us to the provisions of Section 142(11)(b) and Section 142(11)(c). Section 142(11)(b) states that, notwithstanding anything contained in Section 13, no tax is required to be paid under the CGST Act, to the extent that the tax was leviable on the said services under the provisions of service tax law. Section 142(11)(c) states that, where any tax was paid on a supply both under VAT and service tax law, tax shall be leviable under the provisions of CGST Act to the extent of supplies made after the appointed day and the taxable person is entitled to take credit of taxes that were paid under the earlier regime.

On a combined reading of Section 142(10), Section 142(11)(b) and Section 142(11)(c), the following scenarios are evident:

• • If the service is already leviable under the provisions of service tax law, then there cannot be any tax under the provisions of CGST Act to such an extent, notwithstanding anything contained in Section 13, that is time of supply for services.
  • However, if a transaction is subjected to both VAT and service tax, let us say, a works contract service, then there will be a tax to the extent of supplies made under the GST regime, though the contract is entered prior to the GST regime. If the taxpayer has paid tax on such supplies (that are yet to be provided and provided in GST regime), he can claim the credit of such taxes.

In Scenario – 1, let us assume that the contract in the issue is a pure service. Then, in terms of Section 142(11)(b), there cannot be any tax under the provision of CGST Act, though the amount is received under GST regime. This is because, the said service is leviable to tax under the service tax and hence the said service cannot be subjected to tax under the provisions of CGST Act. This presents us with two incidental questions. One being, since the service is exempted during the service tax regime, can it be said to be ‘leviable to tax’ in terms of Section 142(11)(b), to fall under its ambit? Second, assuming we pass the muster of the first aspect, then, whether the receipt of amount under GST regime, would not create any tax implications under provisions of CGST Act? Let us proceed to examine the same.

In our opinion, the issue is fairly settled, that ‘leviable to tax’ includes the scenarios, where there is no requirement to pay tax because of an exemption. Even the service is exempted, it can still be said, the same is leviable to tax. Payment of tax is fiscal aspect and should not be confused with the liability/leviable to tax. Hence, we can conclude that though the service is exempted under the service tax regime, we can still say that the same is leviable to tax and accordingly falls under the ambit of Section 142(11)(b).

The second issue, as to the receipt of the award amount during GST regime, would create any issue under the provisions of CGST Act is to be now analysed. This also, in our view, should not create any issues, especially, when the provisions of Section 142(11)(b) use the expression ‘notwithstanding anything contained in Section 13’. In other words, the receipt of payment may have created any issue in other situations, since the receipt also triggers the time of supply (that is time when tax is to be paid). However, since the provisions of Section 142(11)(b) in clear terms state that there cannot be any tax under the provisions of CGST Act, notwithstanding anything contained in Section 13, the receipt alone cannot trigger any tax under CGST Act.

In Scenario – 2, let us assume that the contract in the issue is a works contract service. In such a scenario, we must analyse the implications under the provisions of CGST Act from the lens of Section 142(10) and Section 142(11)(c). From a close reading of the two sections, it would be evident that there would be tax implications under the provisions of CGST Act, only where there are supplies made under the said Act. In the instant case, from the facts, it is evident that, there is no supply happening after the introduction of GST laws. The supply has been completed/terminated prior to GST regime. In such a case, there cannot be any tax under the provisions of CGST Act, since there is no supply. However, the incidental question, that, whether receipt of award amount create any issues under the provisions of CGST Act, needs to be analysed.

If one observes that expression ‘notwithstanding anything contained in Section 13’ used in Section 142(11)(b), however, not used for Section 142(11)(c). Would that make, the receipt of the amount taxable under the provisions of CGST Act?

In our view, there cannot be any tax under the provisions of CGST Act, without establishing a supply in the first place. As discussed earlier, since there is no supply during the GST regime, the receipt of money (award amount) cannot alone imply there will be a tax liability.

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