The Delhi High Court has set aside an arbitral award that had rejected the claim of Spectrum Power Generation Limited seeking a refund of GST reimbursed to GAIL (India) Limited on natural gas transmission charges. 

The bench of Justice Avneesh Jhingan has observed that the arbitral tribunal committed a patent illegality by concluding, without admissible evidence, that GAIL had deposited the GST with the authorities and by wrongly invoking the principles of waiver and estoppel against the power generator. 

Spectrum Power Generation Limited operates a natural gas-based power plant, while GAIL is engaged in the business of supplying natural gas. The parties entered into a Gas Sale Agreement (GSA) on December 18, 2015, under which GAIL agreed to supply natural gas until July 5, 2021.

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Following the implementation of the Goods and Services Tax (GST) regime, GAIL raised invoices seeking reimbursement of GST paid on transmission charges for natural gas. Spectrum reimbursed the GST amounts but later initiated arbitration seeking a refund, contending that no GST was legally payable on such transmission and that the movement of gas was merely between GAIL’s own units rather than a taxable supply. 

The arbitral tribunal rejected Spectrum’s claims, holding that under the contractual terms the buyer was liable to reimburse the tax paid, that Spectrum had failed to dispute invoices within the stipulated contractual period, and that after paying the GST for more than three years it was estopped from raising objections. The tribunal also recorded that GAIL had deposited the GST with the tax authorities and had therefore not been unjustly enriched. 

Before the High Court, Spectrum argued that the tribunal had relied upon GST payment receipts whose admissibility had never been decided during the arbitration proceedings. It further contended that the receipts themselves did not establish that GST relating to transmission charges for gas supplied to the petitioner had actually been deposited.

Spectrum also argued that the tribunal had wrongly invoked waiver and estoppel, particularly when the Gas Sale Agreement required any waiver to be in writing and no such written waiver existed. 

GAIL, on the other hand, defended the award, contending that the tribunal had adopted a plausible interpretation of the contract, that Spectrum had continued paying GST without protest for years, and that the limited scope of judicial review under Section 34 did not permit reappreciation of evidence or contractual interpretation. 

The High Court agreed with the arbitral tribunal on one important aspect. It held that the tribunal’s interpretation of the Gas Sale Agreement regarding reimbursement of taxes was a plausible contractual interpretation and therefore did not warrant interference under Section 34.

The Court reiterated the settled principle that interpretation of contractual provisions primarily lies within the domain of the arbitral tribunal and courts cannot substitute another possible interpretation merely because they may have arrived at a different conclusion. 

However, the Court found serious flaws in the tribunal’s factual findings regarding GAIL’s alleged deposit of GST.

It noted that Spectrum had objected to the admissibility of GST payment receipts produced by GAIL’s witness. Although the tribunal had deferred the decision on admissibility, it never actually ruled on the objection before relying upon those very documents to conclude that GST had been deposited with the authorities.

Justice Jhingan observed that no GST returns, purchase registers, sales registers, books of account or other supporting evidence had been produced to establish that the GST collected from Spectrum had in fact been deposited with the tax authorities. The four GST payment receipts alone could not establish such payment, particularly when their admissibility had never been determined. 

The Court held that reliance on documents whose admissibility remained undecided amounted to a serious procedural error and violated principles of natural justice. Consequently, the tribunal’s finding that GAIL had deposited the GST and had therefore not been unjustly enriched was held to be perverse. 

The High Court also rejected the tribunal’s conclusion that Spectrum had waived its right to challenge reimbursement by continuing to pay GST for several years.

The Court emphasised that waiver requires a conscious and intentional relinquishment of a known legal right. The burden to establish waiver lies upon the party asserting it. GAIL had produced no evidence demonstrating that Spectrum was fully aware of its legal rights yet deliberately chose to abandon them.

Accordingly, the Court held that the essential ingredients of waiver had neither been examined by the tribunal nor proved through evidence, rendering the finding legally unsustainable. 

The High Court similarly found that the doctrine of estoppel had been incorrectly applied.

The Court explained that estoppel requires a clear representation by one party, reliance upon that representation by the other party, and alteration of position based on such reliance. In the present case, GAIL was independently liable to discharge any GST payable irrespective of whether Spectrum reimbursed the amount.

Since GAIL had not altered its position based upon any representation by Spectrum, the essential ingredients of estoppel were absent. Therefore, invoking estoppel against Spectrum constituted a patent illegality in the arbitral award. 

The Court also examined Clause 12.6 of the Gas Sale Agreement, which required the buyer to make payment first and raise any invoice dispute within fourteen days.

The High Court observed that the clause itself contemplated payment before raising objections so as to ensure uninterrupted gas supply. It further held that every invoice seeking reimbursement of GST created a recurring cause of action. Consequently, the tribunal could not reject the entire claim solely because earlier invoices had been paid without dispute.

The Court also noted that invoices continued to be raised even after Spectrum had objected to the GST reimbursement in September 2020, making it impermissible to hold that all future claims stood waived merely because earlier payments had been made. 

Allowing the petition, the Delhi High Court held that the arbitral tribunal’s findings regarding deposit of GST, waiver of rights, and estoppel suffered from patent illegality and could not be sustained.

The Court set aside the arbitral award dated September 30, 2024, and allowed Spectrum Power Generation Limited’s petition under Section 34 of the Arbitration and Conciliation Act.

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