18% GST Payable On Fee Paid To Arbitrator: AAR

The West Bengal Authority of Advance Ruling has held that 18% Goods and Service Tax (GST) is payable on fee paid to arbitrators. The bench of Jaydip Kumar Chakrabarti and Shafeeq S the amount awarded as the cost of arbitration will not come under the purview of GST. This is an amount to be paid to the applicant by THDC India Limited as part of compensation in respect of the expense of arbitration that the applicant had to bear. There is no supply of service between the two. This amount is not paid as consideration of any supply. It is a mere flow of money between the two parties as compensation of a part of the expenses incurred for arbitration and the origin of the said transaction is the order of the arbitration tribunal, not any kind of supply. Tax on reverse charge is payable only when the payment of fees is made to the arbitration tribunal. The applicant had entered into three separate contracts in 1996 with THDC India Ltd (formerly Tehri Hydro Development Corporation Limited) for construction works relating to the Tehri Hydro Power Project in Uttarakhand. The packages included major civil works such as intake works and pressure shafts (Package I), machine hall and transformer hall construction (Package II), and tailrace tunnel civil works (Package III) The projects were completed between 2007–08, and final payments for work done were received in 2011, well before GST came into force in July 2017. Multiple disputes arose during execution of the contracts, including extra expenditure on procurement of materials from private sources, costs arising from change in excavation methodology, differential cost for higher-grade cement, price adjustment disputes, refund of excess recoveries and rebates and compensation for delays and suspension of work After failure of the Dispute Resolution Board mechanism, the matter reached arbitration. An arbitral tribunal—constituted pursuant to orders of the Supreme Court of India—passed awards on 1 November 2023 in favour of the applicant, allowing various claims either fully or partially. The total amount allowed under the arbitral awards aggregated to approximately ₹100.17 crore (including arbitration costs). Subsequently, conciliation proceedings before a Disputes Resolution Committee resulted in a settlement dated 24 October 2024, pursuant to which the applicant received ₹94.56 crore. The applicant sought advance ruling on seven key questions. Whether amounts allowed under arbitration awards constitute “supply” under GST? Whether such amounts are in the nature of liquidated damages? Whether GST is applicable since payment was received during the GST regime? Whether GST applies to arbitration costs awarded? If taxable, what would be the SAC classification, rate, time of supply, and invoicing requirements? What is the GST implication where work was executed pre-GST but compensation received post-GST? The application was admitted under Section 97(2)(e) of the GST Act. The applicant contended that the arbitral award is independent of the underlying contract under the doctrine of separability under the Arbitration and Conciliation Act, 1996. Amounts received are in the nature of compensation for breach of contract. Such payments represent liquidated damages and are not consideration for any independent supply. Reliance was placed on CBIC Circular No. 178/10/2022-GST dated 03.08.2022, which clarified that compensation for breach of contract is not automatically taxable under Entry 5(e) of Schedule II of the CGST Act. The applicant emphasized that the flow of money was merely restitutionary—compensating for breach—and not in exchange for tolerating an act or agreeing to refrain from an act. The AAR held that the claims allowed for extra expenditure due to change in the methodology for excavation of control gate shafts, claims allowed due to payment of price adjustment on extra items, claims allowed for deduction or deletion from final bill, for extra expenditure incurred for excavation of compressors and receiver‟s room at the end wall of machine hall, for payment of cost of materials for work of pre-stressed anchor in the blind holes, for extra expenditure for backfilling the behind walls of TRT outlet and claims allowed as refund of rebate wrongfully recovered or deducted and rebate wrongfully deducted from price adjustment are to be considered as supply. On the other hand, the claims allowed for extra expenditure incurred in purchasing boulder, aggregates and sand from private agencies, for operating private quarries, for cost difference for actual use of higher grade of cement, claims allowed as reimbursement of expenditure for shifting of infrastructure facility are not considered as supply. The AAR observed that the claims allowed for extra expenditure incurred in purchasing boulder, aggregates and sand from private agencies, claims allowed for operating private quarries, claims allowed for cost difference for actual use of higher grade of cement and claims allowed as reimbursement of expenditure for shifting of infrastructure facility do not fall in any of the provisions of the contract. Except these claims the rest of the claims allowed by the Arbitration Tribunal vide the Arbitration Awards can be termed as liquidated damages. The AAR ruled that Section 142(2)(a) of the CGST Act, 2017 provides that when the price of any goods or services is revised upwards after the implementation of GST in pursuance of a contract entered into during the legacy tax regime, the person who provided such goods or services shall issue a supplementary invoice/debit note and such supplementary invoice/debit note shall be deemed to have been issued in respect of an outward supply made under the CGST Act. In brief, the following elements should come together for such price revision to be deemed as a supply under GST – there should be an upward price revision; and such price revision should be in pursuance of a contract entered into prior to the appointed day, i.e. 01.07.2017. Ruling Details Applicant’s Name: Karam Chand Thapar & Bros (Coal Sales) Limited Ruling Date: 13/02/2026 Click Here To Read Ruling Read More: Undated Loose Sheets ‘Dumb Documents’ in Search Assessment: ITAT

18% GST Payable On Fee Paid To Arbitrator: AAR

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