M/S Angerlehner Structural And Civil ... vs Municipal Corporation Of Greater ... on 7 June, 2022
AI Legal Insights
This GST case law examines the applicability of GST under the Reverse Charge Mechanism (RCM) for services received from foreign entities. The Bombay High Court in M/S Angerlehner Structural And Civil ... vs Municipal Corporation Of Greater ... addressed whether the Municipal Corporation of Greater Mumbai (MCGM) could deduct GST from the interest component of an arbitral award payable to an Austrian company. The court ruled that MCGM, as the service recipient, was responsible for bearing the GST liability under RCM, clarifying the obligations under the GST Act when dealing with foreign service providers. This case highlights the implications for governmental bodies regarding GST compliance.
This case clarifies the applicability of GST on interest payments made to foreign entities and clarifies that the burden of RCM under the GST Act falls on the service recipient, in this case, MCGM. This affects governmental bodies engaging with foreign entities, as they cannot deduct GST from payments owed under RCM.
- Recipient of services from foreign entities liable for GST under Reverse Charge Mechanism (RCM).
- GST on interest component of arbitral awards payable to foreign entities is applicable.
- Financial burden of RCM statutory liability rests solely with the service recipient.
- Deduction of GST from amounts owed to service providers under RCM is impermissible.
QWho is liable to pay GST on import of services?
Under the Reverse Charge Mechanism (RCM), the recipient of services located in India is liable to pay GST on services imported from outside India. The supplier of services, being outside India, is not liable to collect or remit GST.
QWhat is the reverse charge mechanism (RCM) under GST?
Reverse Charge Mechanism (RCM) shifts the responsibility of paying GST from the supplier of goods or services to the recipient. This mechanism is applicable in specific scenarios, such as import of services or when notified categories of goods or services are supplied.
Ruling Summary
Judgment Summary
1. Outcome
The Court directed the Municipal Corporation of Greater Mumbai (MCGM) to pay the withheld amount of ₹67,94,965.02 to the Applicant. The application was disposed of with the ruling that upon payment, the arbitral award would be considered fully satisfied.
2. Core Issue
The central legal issue was whether the MCGM was justified in deducting Goods and Services Tax (GST) from the interest component of an arbitral award payable to the Applicant (a foreign entity), or whether the financial burden of this tax, statutorily payable by MCGM under the Reverse Charge Mechanism (RCM), must be borne by MCGM itself.
3. Key Facts
* The Applicant, an Austrian company, was awarded a sum in an arbitral award against MCGM on 23rd June 2014, which included a principal amount and interest.
* MCGM's challenges to the award were dismissed by the Bombay High Court and the Supreme Court, with the final dismissal on 22nd November 2021. The Supreme Court granted MCGM time until 31st March 2022 to make the payment.
* The GST regime was introduced in India in 2017, after the arbitral award was passed but before the final payment was made.
* On 31st March 2022, MCGM paid the award amount but withheld ₹67,94,965.02, claiming it was for GST payable on the interest component of the award.
* The Applicant contested this deduction, leading to the present dispute in the Execution Application.
4. Arguments
Applicant's Arguments (M/s Angerlehner):
* The liability to pay GST on services supplied by a person in a non-taxable territory (Austria) to a person in a taxable territory (MCGM in India) falls on the recipient of the service (MCGM) under the Reverse Charge Mechanism (RCM) as per the IGST Act.
* Notification No. 10/2017-Integrated Tax (Rate) explicitly mandates that the recipient of such imported services is liable to pay the integrated tax.
* If MCGM were allowed to deduct the tax from the Applicant's dues and then claim Input Tax Credit (ITC), it would amount to unjust enrichment, as MCGM would get credit for a tax it did not bear financially.
Respondent's Arguments (MCGM):
* GST is leviable on the interest component of the award as it constitutes consideration for a delayed payment for a supply, as per Section 15(2)(d) of the CGST Act.
* While acknowledging its statutory liability to pay the tax under RCM, MCGM argued that the ultimate financial burden could be shifted contractually.
* Clause 3 of the contract between the parties stipulated that the Applicant's bid prices included all "taxes and duties," thereby contractually shifting the financial burden of all taxes, including this GST, onto the Applicant.
* MCGM cited the Supreme Court's decision in Rashtriya Ispat Nigam Ltd. to support the principle that parties can contractually agree to shift the incidence of indirect tax.
5. Court’s Reasoning
* The Court first acknowledged that the statutory liability to deposit the GST with the government under the RCM indeed rests with MCGM, a point conceded by MCGM itself. This is based on Section 5(3) of the IGST Act and Notification No. 10/2017, as the Applicant is a service provider located in a non-taxable territory.
* The pivotal question then became whether Clause 3 of the contract shifted the financial burden of this tax to the Applicant.
* The Court analyzed Clause 3, which stated that "rates and prices bid... shall... include all... taxes, and duties." The Court interpreted this clause to cover only those taxes that could have been reasonably contemplated by the parties at the time of entering the contract and submitting the bids.
* The GST liability in question did not arise from the primary supply of services but from the interest awarded due to MCGM's default in making timely payments. This specific tax liability, arising from a future law (GST) on interest for delayed payment, could not have been foreseen or priced into the bids by the Applicant when the contract was made in 2001.
* Therefore, the Court concluded that Clause 3 did not cover the GST liability on interest for delayed payment.
* Since the contract did not effectively shift the financial burden, the statutory position prevails. Under the RCM, MCGM is liable to pay the tax from its own funds and cannot deduct it from the amount payable to the Applicant.
6. Statutory References
* Central Goods and Services Tax Act, 2017 (CGST Act):
* Section 9(3), 9(4), 9(5) (Reverse Charge Mechanism)
* Section 15(2)(d) (Inclusion of interest in the value of supply)
* Integrated Goods and Services Tax Act, 2017 (IGST Act):
* Section 5(3) (Levy of tax on inter-State supplies under RCM)
* Section 20 (Application of CGST Act provisions to IGST Act)
* Notification:
* Notification No. 10/2017-Integrated Tax (Rate) dated 28th June 2017 (Notifies categories of services for RCM, including import of services).
* Arbitration and Conciliation Act, 1996:
* Section 34 & 37 (Mentioned in the history of the litigation).
7. Precedents Cited
* Rashtriya Ispat Nigam Ltd. V/s. Dewan Chand Ram Saran [(2012) 5 SCC 306]: Cited to affirm the legal principle that parties to a commercial contract can mutually agree to shift the financial burden of an indirect tax from the statutory assessee to the other party. The High Court distinguished the facts of the present case from this precedent based on the interpretation of the specific contract clause.