Contractual service-tax reimbursement covers project-related input services procured through subcontractors.

The appellant, a Taiwanese company, was awarded a PWD contract for development of a road corridor in Delhi.

The contract included provisions for reimbursement of service tax actually and genuinely paid by the contractor.

The arbitrator allowed reimbursement of ₹1,38,58,095 in service tax paid directly by the appellant under the reverse-charge mechanism, but rejected the balance of its service-tax claim, which related to amounts included in subcontractors’ or vendors’ invoices.

The arbitrator also awarded environmental compensation cess; that finding was not challenged and attained finality.

On the Union of India’s Section 34 challenge, the Single Judge set aside the service-tax award, holding that the tax related to services obtained from third parties rather than the contract works.

The appellant’s review was dismissed, and it appealed under Section 37.

1. Whether the contract clauses permitted reimbursement of service tax paid on services obtained by the appellant for carrying out the Project, including services obtained through subcontractors.

2. Whether the service-tax award could be set aside as patently illegal or contrary to public policy in an international commercial arbitration.

Sections 34(2)(b)(ii) and 37 of the Arbitration and Conciliation Act, 1996 govern challenges to arbitral awards on public-policy grounds and appeals from Section 34 decisions; Section 34(2A) permits setting aside an award for patent illegality only where the arbitration is not an international commercial arbitration.

The Court relied on Urban Infrastructure Real Estate Fund v. Neelkanth Realty (P) Ltd., (2026) 4 SCC 166, for the rule that patent illegality is unavailable as a ground to set aside an award in an international commercial arbitration.

The Court referred to Steel Authority of India Limited v. British Marine, 2026:DHC:7593-DB.

Under the relevant contract clauses, service tax actually and genuinely paid by the contractor was reimbursable; an arbitrator’s reasonable interpretation of the contract is not to be displaced under Section 34 merely because the court prefers another interpretation.

The Court read Clause 37(i) of the GCC and Clause 14 of the Instructions to Bidders as excluding service tax from the taxes otherwise payable by the contractor and providing for its reimbursement upon proof of actual payment.

In the context of the Project, services such as manpower, transport and security could be engaged to execute the contracted works; the fact that the appellant obtained them through service providers did not, by itself, take their service tax outside the contract.

The arbitrator had allowed only the amount directly deposited by the appellant and had rejected the balance where the required proof of payment by the vendors was absent.

The arbitrator’s approach was therefore reasonable, and the Single Judge should not have set the award aside.

Further, because the arbitration was international commercial arbitration, patent illegality was not an available ground for setting aside the award; the service-tax reimbursement was not shown to conflict with public policy.

It held that the appellant was entitled to the service-tax reimbursement of ₹1,38,58,095 awarded by the arbitrator.