Madras High Court Directs Chennai Corporation To Reimburse Contractor's GST Burden After VAT Change

The Madras High Court on 7 July held that government contractors are entitled to reimbursement of additional GST paid due to the transition from the VAT regime to the GST regime if the change in tax law occurred after the award of contracts.

A Bench of Justice C. Saravanan directed the Greater Chennai Corporation to reimburse the GST burden incurred by Sakthi Constructions for the remaining works under government contracts that were awarded before the introduction of GST on 1 July 2017. He observed:

“There is no doubt that on account of increase in the tax component due to implementation the respective GST Enactments with effect from 01.07.2017, the respective Petitioners are entitled for reimbursement in terms of the principle akin to Section 64-A of Sale of Goods Act, 1930”.

Sakthi Constructions had been awarded government contracts by the Greater Chennai Corporation when the VAT regime was in force. After GST was introduced on 1 July 2017, the contractor became liable to pay GST on the remaining works executed under the contracts.

The contractor subsequently sought reimbursement of the additional GST paid due to the change in the tax regime. However, the Corporation rejected the claim, contending that the contractor had not sought price adjustment during the execution of the works and had raised the claim only after completion of the contracts.

Before the High Court, Sakthi Constructions argued that the shift from VAT to GST increased its tax liability and that the additional burden had to be borne by the Corporation under the General Conditions of Contract and the State Government's G.O.Ms. No.296 dated 9 October 2017.

The Court held that Clause 43.2 of the General Conditions of Contract required adjustment of the contract price when there was a change in taxes during the execution period. It observed that the clause incorporated the principle under Section 64A of the Sale of Goods Act, 1930, which provides for adjustment of prices due to changes in taxes.

It further relied on Clause 6 of G.O.Ms. No.296, Finance (Salaries) Department dated 9 October 2017, which provides that after the introduction of GST, the supplier would collect GST from the purchaser while raising bills and tax invoices and remit it to the Government, with the tax ultimately being borne by the purchaser.

The Bench also held that the Corporation could not withhold the retention amounts merely because audit objections were pending. It observed that audit objections raised by the Accountant General could not be a ground to deny release of the amounts due to the contractors. It stated:

“In my view, the retention amounts are to be refunded back unless there are reasons for appropriating the retention amounts on account of the works executed by the respective Petitioners under the contract. Merely because the audit objections were raised by the Audit General would not be a ground for not processing the amount claimed by the respective Petitioners for refund of the aforesaid retention amounts”.

However, the Bench declined to decide the contractors' claims relating to price escalation, holding that such claims involved disputed questions of fact and had to be resolved through the contractual dispute resolution mechanism.

Accordingly, the High Court directed the Greater Chennai Corporation to reimburse the GST component arising from the change in the tax regime and refund the retention amounts with commercial interest, while leaving the issue of price escalation to be pursued separately under the contract.

For Petitioner: Mr.V.P.Senguttuvel, Senior Counsel

For Respondent: Mr.Pramod Kumar Chopda, Senior Counsel