The Allahabad High Court has held that disputes arising out of contractual obligations even when linked to GST compliance or tax reimbursement are arbitrable and do not fall within the category of sovereign taxation functions.
The issue arose in a petition under Section 11(4) of the Arbitration and Conciliation Act, 1996 filed by Shri Pramhans Enterprises against Varanasi Aurangabad NH-2 Toll way. The applicant, a Varanasi-based partnership firm engaged in road construction and maintenance, sought appointment of an arbitrator for recovery of pending dues.
According to the firm, it executed work orders issued by the respondent and raised invoices. However, an amount of Rs 58,82,594 remained unpaid. A settlement letter dated April 25, 2022 acknowledged the liability. Part payment was released, but a balance of Rs 46,73,814 continued to remain outstanding. The respondent later withheld payment citing alleged non-compliance with GST requirements and demanded an indemnity bond.
After an arbitration notice dated January 6, 2025 did not receive any response, the applicant approached the High Court. The respondent opposed the plea and argued that the dispute involved GST liability and input tax credit issues which fall within the domain of taxation law and are therefore non-arbitrable.
The Court examined Clause 10 of the agreement, which provided for arbitration, and noted that the existence of the arbitration agreement was not disputed.
Relying on the Supreme Court’s decision in Vidya Drolia vs. Durga Trading Corporation, the Court observed, “from the law laid down in the aforesaid decisions, it is evident that disputes relating to sovereign functions such as imposition or levy of tax are non-arbitrable. However, disputes arising out of contractual obligations between parties, even if they involve issues of tax reimbursement or compliance, do not fall within the category of non-arbitrable disputes”.
The Court distinguished between challenges to the validity of tax levy and disputes arising from contractual relationships. It noted, “in the present case, neither party is questioning the validity or legality of levy of GST. The dispute is essentially with regard to payment of the contractual dues, which has been withheld by the respondents on the ground of alleged non-compliance of GST obligations by the applicant”.
Therefore, the Court held that the dispute is contractual in nature and capable of being resolved through arbitration. It clarified “in the opinion of this Court, such a dispute is contractual in nature and is, therefore, arbitrable. It is always open to the respondents to raise their defence or counterclaim before the arbitral tribunal with regard to GST compliance or any consequential liability”.
Consequently, the Court allowed the application and proposed the appointment of Justice Shishir Kumar (Retd.) as the sole arbitrator, subject to his consent.
