Contractual Disputes Involving Tax Compliance Arbitrable, Not Sovereign Tax Levy Issues: Allahabad High Court

The Allahabad High Court has recently reiterated that while disputes relating to sovereign functions such as imposition or levy of tax are non-arbitrable, but disputes arising out of contractual obligations between parties, even if they involve issues of tax reimbursement or GST compliance, remain arbitrable.

A bench of Justice Vikas Budhwar relying on rulings in Vidya Drolia vs. Durga Trading Corporation and other precedents, 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".

Allowing an application under Section 11(4) of the Arbitration and Conciliation Act, 1996, filed by Shri Pramhans Enterprises, the court proposed the name of former Judge Justice Shishir Kumar to be appointed as the sole arbitrator, subject to his consent, to resolve its dispute with Varanasi Aurangabad NH-2 Tollway Private Limited.

The dispute traces back to work orders issued by Varanasi Aurangabad NH-2 Tollway Private Limited to Shri Pramhans Enterprises, a Varanasi-based partnership firm carrying out road construction and maintenance work. According to the firm, the work was completed and invoices were raised, but payments amounting to Rs 58,82,594 were withheld.

The parties later exchanged a settlement letter dated April 25, 2022, in which the outstanding amount was acknowledged. Out of the withheld sum, Rs 12,08,780 was released on February 14, 2022, leaving a balance of Rs 46,73,814 still unpaid. In a communication dated November 22, 2022, the company stated that further payment was being held back due to alleged non-compliance with GST requirements and asked the firm to furnish an indemnity bond.

When an arbitration notice issued on January 6, 2025, did not receive any response, Shri Pramhans Enterprises moved the High Court under Section 11(4) of the Arbitration and Conciliation Act, 1996. The firm relied on Clause 10 of the agreement dated April 25, 2022, which provided that disputes between the parties were to be resolved through arbitration.

The respondent company resisted the request, arguing that the dispute concerned GST liability and related taxation issues, including Input Tax Credit, which fall within the realm of statutory taxation matters and therefore lie outside the jurisdiction of an arbitral tribunal.

The Court, however, noted that while considering an application under Section 11, its role is confined to examining whether an arbitration agreement exists and whether the dispute is prima facie capable of being referred to arbitration, without going into the merits of the claims.

Referring to the facts of the case, 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".

Holding the dispute to be contractual in nature, the court said:

"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".

Accordingly, the court proposed the name of retired Judge Justice Shishir Kumar as sole arbitrator, subject to his consent being obtained in terms of Section 11(8) read with Section 12(1) of the Act.

It clarified that if consent is not received or disclosures require reconsideration, the matter would be listed again for the appointment of another arbitrator, and the arbitrator's fees shall be governed by the Fourth Schedule to the Act.

For Petitioner (Shri Pramhans Enterprises): Advocates Kirti Kumar Nirkhi, Rahul Agarwal, Sarvesh Mani Pandey, Shobhit Saxena, Vikas Kumar Pandey.

For Respondent (M/s Varanasi Aurangabad NH-2 Tollway Private Limited): Advocates Kaushalendra Nath Singh, Sumit Khare (for Indranath Singh).