GST on artbitration awards. Arbitration award to attract GST even if infra project was completed under earlier tax regime

Amount received under arbitration award for a contract completed on or before June 30, 2017 will attract GST, Telangana State Authority for Advance Ruling (TSAAR) has ruled. Experts say this ruling can be relied upon in many infrastructure projects completed in the pre-GST regimem and arbitration on pending dues is going on.

The applicant in the said matter Rangareddy (Telangana) based Continental Engineering Corporation executed a works contract for Hyderabad Growth Corridor Ltd (HGCL). The work was completed in the pre-GST era, and the applicant raised certain claims regarding compensation for delay in execution, payment of the difference in rates and other contractual breaches, which was referred to a dispute resolution board on June 16, 2017. An arbitration tribunal passed an order on May 9, 2019, stating over ₹169 crore to be paid to the applicant.

The applicant sought advance ruling on whether GST is applicable on the proposed receipt of money in case of Arbitration claims awarded for work contracts completed in the pre-GST regime. And if the answer is YES, then what will be the classification and rate of GST.

AAR ruling

Based on hearings and submission of facts, AAR discussed six issues related to taxability. Accordingly, there would be no GST on unpaid amounts, including price escalation for works executed in the pre-GST period, refund of excess deductions made and interest on delayed payments of interim payment certificates. Since, supply in all three cases was made in pre-GST regime, these will not attract GST.

Now, arbitration took place after GST’s introduction, which means supply was made in the GST regime. The next issue here is the delay in the completion of the projects due to contractee. AAR highlighted one particular clause of the contract, which said in case of any delay in issuance of drawings or failure to give possession of the site, the engineer will determine the extension of time and amount of cost that the contractor may suffer due to such delays in consultation with the employer and the contractor.

‘Arbitration award under GST’

“Time of supply of the service of tolerance is the time when such determination takes place. However, the contractee/employer has not determined the cost of delay prior to arbitration award. It was determined only by arbitration award on May 09, 2019,” AAR said while terming the date as according to GST Law as the time of supply. It also noted that consideration received for such forbearance would attract GST at the rate of 18 per cent. Similarly, interest on such an amount will also attract GST at the same rate.

Although AAR rulings are binding only on applicant and jurisdictional officer, many of such rulings have provided a base for changes in rules or law by the tax authority. Also, judgments can be referred to in similar cases. Rajat Mohan, a Senior Partner with Chartered Account firm AMRG & Associates, said that this case would help resolve commercial disputes in the infrastructure sector, aiding various private and government agencies to settle pre-GST work-related claims.

“Tax neutralization of pre-GST work-related claims would support in the conclusion of numerous arbitration cases across the country. This case would be a torchbearer for the entire construction and infrastructure sector, unlocking the most critical tangent of commercial arbitration of recent times,” Mohan, who appeared for the applicant in this matter, said.

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