Karnataka HC Says Employee Must Invoke Arbitration To Challenge Employer’s Cess-Linked Vehicle-Lease Deduction From Salary

The petitioner, an employee of the fourth respondent, used a vehicle under an agreement permitting deductions from his remuneration for lease-related amounts.

The fourth respondent had leased the vehicle from the second and third respondents under a separate Master Lease Agreement.

After the Government withdrew the Compensation Cess with effect from 22 September 2025, the second and third respondents increased the amount charged to the employer, which in turn sought to deduct the increase from the petitioner’s salary.

The petitioner sought to stop the deductions, obtain a declaration that recovery of GST or input tax credit loss without following the CGST Act’s machinery was unenforceable, and secure a refund of amounts already deducted.

The petition was disposed of by the Karnataka High Court.

The Court considered the petitioner’s reliance on Article 226 of the Constitution and the machinery prescribed under the Central Goods and Services Tax Act, 2017, but did not decide whether the impugned deductions contravened that Act.

It applied the contractual principle that a person who is not a party to an agreement cannot, on the facts presented, assert rights under it where the contracting parties do not dispute their obligations under that agreement.

It also gave effect to the arbitration clause in the petitioner’s agreement with the employer, which covered disputes arising out of or connected with that agreement.

The petitioner cited Radha Krishnan Industries v. State of Himachal Pradesh, (2021) 6 SCC 771, in support of his request for writ review notwithstanding an alternative remedy; the Court did not apply or decide that precedent.

The alleged increase arose from the second and third respondents’ contractual arrangement with the employer and the employer’s acceptance that the resulting cost could be passed on to the petitioner; it was not a demand for tax made by GST authorities.

Because the petitioner was not a party to the Master Lease Agreement, and the employer and the lessors were not in dispute over their obligations under it, the Court found no basis for granting relief against the lessors at the petitioner’s instance.

Whether the employer could rely on the employee’s consent to increased deductions, or whether the agreement permitted those deductions, required interpretation of the parties’ contract and was therefore a dispute between the petitioner and the employer for resolution under their arbitration agreement.

The petition was disposed of with liberty to the petitioner to pursue that remedy; the Court did not determine the substantive legality of the deductions under the CGST Act.