Delhi High Court holds GST liability issue on parties is arbitrable

Delhi High Court holds GST liability issue on parties is arbitrable

Suggests them to approach the arbitral tribunal for resolution

The Delhi High Court has held that an issue of the liability of the Goods and Services Tax (GST) on the parties is not related to the taxing power of the state. Thus, a dispute surmised on the Pricing Clause in an agreement regarding the payment of taxes can be referred to arbitration.

The bench of Justice Yashwant Varma held that in such situations the court should force parties to raise the same before the arbitral tribunal, which has the primary jurisdiction to decide such disputes, including jurisdictional challenges, which may be raised on non-arbitrability also.

In December 2015, the parties entered into a Gas Sale Agreement, wherein the petitioner purchased a certain quantity of the gas from the respondent. A dispute arose when the petitioner averred that it was wrongly made to pay GST on the total price, which was against the agreement. It asserted that GST was to be paid by the respondent without any obligation to reimburse the petitioner.

Since the dispute could not be settled amicably between the two, the petitioner issued the notice of arbitration. The respondent denied its liability to reimburse the petitioner and refused arbitration.

The petitioner then approached the court for appointing an arbitrator on the ground that the dispute was purely contractual, and the parties had an arbitration agreement. The dispute did not pertain to the sovereign function of the state to collect taxes but was simply an issue as to which party would ultimately bear the GST and the Value Added Tax (VAT) costs.

The agreement provided that the price was inclusive of the royalty and exclusive of various taxes and other statutory levies payable on the purchase of gas from a 'source' by the respondent or those leviable at the point of sale by the respondent. However, it did not include a GST amount that the respondent might incur during the transmission between its various units.

The respondent objected, stating that it was bearing the burden of GST on its inter-unit billing connected with the supply of gas. Since it was not entitled to claim Input Tax Credit (ITC), it would be entitled to recover the GST cost from the petitioner. It added that the dispute was non-arbitrable, as it pertained to the taxation powers of the state.

However, the court observed that the petitioner was seeking reference to arbitration on the ground that it was not liable to bear the GST and VAT costs as per the pricing clause under the agreement. The petitioner was not disputing or questioning any tax imposed by the state on it but merely stating that the burden of any tax paid by the respondent could not be passed onto it and it could not be held liable to reimburse it to the respondent.

The court referred to the judgment of the Supreme Court in the Vidya Drolia case, wherein it was held that in such situations the court should force parties to raise the same before the arbitral tribunal.

Accordingly, Justice Varma referred the parties to an arbitration.