An Issue As To Which Party Would Bear The GST Expenses Under The Agreement Is Arbitrable: Delhi High Court

The bench of Justice Yashwant Varma held that a dispute surmised on the Pricing Clause in an agreement wherein the inter se liabilities of the parties regarding the payment of taxes are given can be referred to arbitration.

The Court held that in situations where "debatable and disputed facts" arise or in respect of "good reasonable arguable cases", the Court should force parties to raise the same before the Arbitral Tribunal which has the primary jurisdiction to decide all disputes including jurisdictional challenges which may be raised including with respect to non-arbitrability.

Facts

The parties entered into a Gas Sale Agreement dated 18.12.2015 wherein the petitioner purchased certain quantity of the gas from the respondent. Clause 15.9 was the arbitration agreement and the pricing was as per Clause 10.6 of the agreement. A dispute arose when the petitioner averred that it has been wrongly made to pay the GST on the sum total of the price of gas against Clause 10.6 of the agreement. It asserted that the GST was to be paid by the Respondents without any obligation of the petitioner to reimburse it for the same.

On failure of the parties to amicably settle the dispute, the petitioner issued the notice of arbitration. In its reply, the respondent denied its liability to reimburse the petitioner and refused arbitration. Accordingly, the petitioner approached the Court for the appointment of the arbitrator.

Contention of the Parties

The petitioner sought the appointment of the arbitrator on the following grounds:

• The dispute between the parties is purely a contractual dispute and the parties have an arbitration agreement between themselves, therefore, an arbitrator must be appointed.
• The dispute does not pertain to the sovereign function of the state to collect taxes, but simply an issue as to which party would ultimately bear the GST/VAT costs as per the pricing clause in the agreement.
• The agreement provides that the price is inclusive of royalty and exclusive of various taxes, cess, VAT, Service Cess, Education Cess as well as other statutory levies payable on purchase of gas from 'Source' by the respondent or those leviable at the point of sale by the respondent to the petitioner. However, it does not include any GST amount that the respondent might have incurred during the transmission between its various units.

The respondent objected to the maintainability of the petition on the following grounds:

• The respondent is bearing the burden of GST on its inter-unit billing connected with the supply of gas and since it is not entitled to claim Input Tax Credit, it would be entitled to recover the GST cost from the petitioner.
• The dispute is non-arbitrable as it pertains to taxation powers of the State.

Analysis by the Court

The Court held that an issue that purely relates to the inter-se liability of the parties regarding the burden of GST is not related to the taxing power of the State, therefore, the same is arbitrable.

The Court held that a dispute surmised on the Pricing Clause in an agreement wherein the inter se liabilities of the parties regarding the payment of taxes is given can be referred to arbitration.

The Court observed that the petitioner is seeking reference to arbitration on the ground that it was not liable to bear the GST and VAT costs as per the pricing clause under the agreement. The Court held that it is not disputing, assailing or questioning any tax imposed by the State on it but merely states that the burden of any tax paid by the respondent in the course of transmission of natural gas between its various units cannot be passed onto it or it could not be held liable to reimburse the respondent for the same.

The Court referred to the judgment of the Supreme Court in the case of Vidya Drolia (2021) to hold that in situations where "debatable and disputed facts" arise or in respect of "good reasonable arguable cases", the Court should force parties to raise the same before the Arbitral Tribunal which has the primary jurisdiction to decide all disputes including jurisdictional challenges which may be raised including with respect to non-arbitrability.

Accordingly, the Court referred the parties to arbitration.

Case Title: Spectrum Power Generation Limited v. GAIL (India) Limited, ARB. P. 746 of 2022

Citation: 2022 LiveLaw (Del) 1149

Counsel for the Petitioner: Mr. Raghvendra Singh, Mr. Abhishek Gupta and Mr. Mohit Mishra, Advs.

Counsel for the Respondent: Mr. Anish Chawla, Mr. Neeraj Kumar and Mr. Utkarsh Mishra, Advs.

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