TAX DISPUTES DETERMINING INTER SE CONTRACTUAL OBLIGATIONS ARE ARBITRABLE WHILE FISCAL REGULATORY MATTERS REMAIN NON-ARBITRABLE

The Appellant (PWD) and Respondent entered into a contract on 27.04.2016 for road widening at a total price of Rs. 155.89 Crores.

The contract commenced under the old tax regime (VAT) but work continued after 01.07.2017 following the introduction of Goods and Service Tax (GST).

A dispute arose regarding the calculation of GST on running bills and price adjustments.

The Respondent successfully invoked arbitration, leading to an award dated 27.01.2024, which applied the Ministry of Road Transport and Highways (MoRTH) Standard Operating Procedure (SOP) dated 19.11.2018 for calculations.

This awarded the Respondent Rs. 11.35 Crores plus 15% penalty and 18% interest.

The Commercial Court, Lucknow affirmed the award under Section 34 of the Arbitration and Conciliation Act, 1996 ("the Act") on 18.07.2025.

The Appellant challenged this in the present Section 37 appeal.

1. Whether a dispute relating to the quantum and manner of tax calculation is arbitrable.

2. Whether the Technical Specifications borrowed from MoRTH in the contract also made MoRTH’s tax-related SOP binding over State Government Orders.

3. Whether the Arbitral Tribunal can delegate its duty by making an award subject to final assessment by Tax Authorities.

The Court applied Section 37 and Section 34 of the Arbitration and Conciliation Act, 1996, which severely restrict the scope of judicial interference to "patent illegality" and "fundamental policy of Indian Law".

It categorized tax disputes into Head-A (arbitrable contractual obligations like inter-se liability/indemnity) and Head-B (non-arbitrable statutory determinations like tax rates/classification).

Reliance was placed on Vidya Droliya v. Durga Trading Corpn. regarding the non-arbitrability of sovereign functions.

Reliance was placed on Gayatri Balasamy v. ISG Novasoft Technologies Ltd., establishing that courts may modify an award only through severing invalid portions if they are independent of valid portions.

Sections 142(2), (10), and (11) of the GST Act, 2017 were noted as the substantive law for transitional tax revisions.

The Court first held the dispute arbitrable under "Head-A," as it concerned which calculation method (MoRTH vs. State GO) applied between the parties, rather than challenging the State’s taxing power.

However, the Court found the award patently illegal because the Arbitrator assumed that borrowing "technical specifications" (engineering standards) for road construction implicitly imported MoRTH’s financial/tax SOPs.

The Court reasoned that tax is governed by statutory law and executive instructions (State GOs), which are binding on the Department.

The Arbitrator erred by applying an EPC-contract SOP to an "item-rate" contract without evidence of mutual consent or contractual basis.

The award lacked finality and was perverse as it calculated penalties/interest under Section 50 of the GST Act without evidence of an actual tax demand or assessment by the authorities, effectively acting as an "Assessing Officer".

It set aside the Commercial Court’s judgment and modified the Arbitral Award. Applying the doctrine of severability, the Court upheld the findings on Issue 1 (contract type) and Issue 10 (reimbursement of DRE fees of Rs. 66,500).

The findings on GST calculation, interest, and penalties (Issues 2–4, 8, and 9) were set aside and remitted to a newly constituted Arbitral Tribunal for fresh adjudication in light of the High Court’s observations.

Parties were directed to bear their own costs.