Facts of the Case

The petitioner, TPC Infra and Green Energies, represented by its Managing Partner, had undertaken works awarded by the fourth respondent, the Divisional Engineer (Highways), Highways C and M Division, Tirupur. During 2017, the fourth respondent issued two work orders among various works, and the petitioner completed the sanctioned work in accordance with the prescribed specifications.

The petitioner received a total consideration of Rs.6,80,53,046/- after deduction of tax at source by the fourth respondent.

Subsequently, the Directorate General of GST Intelligence called for the petitioner’s records and conducted an investigation. During the investigation, the fourth respondent was also summoned. Thereafter, a Show Cause Notice dated 29.06.2022 was issued stating that the services rendered to the State of Tamil Nadu under the work orders attracted GST.

Accordingly, the authorities demanded:

  • CGST: Rs.43,36,106/-
  • SGST: Rs.43,36,106/-

After receiving the show cause notice, the petitioner issued a notice to the fourth respondent seeking payment of Rs.92,72,213/-. Since no response was received from the fourth respondent, the petitioner approached the Madras High Court seeking a writ of mandamus directing the fourth respondent to pay the GST amount payable to the Union of India and the State of Tamil Nadu in relation to the concerned work orders.

The writ petition specifically concerned Work Orders CR Nos.116 to 120/2016-17, DR No.99/2016-17, and CR Nos.84/2016-17 to 89/2016-17.

Issues Involved

The principal issues before the Court were:

  1. Whether the GST liability arising in respect of the works executed by the petitioner for the State Government department should ultimately be borne by the petitioner-contractor or by the fourth respondent contracting department.
  2. Whether the terms of the original contract were required to be reworked after the introduction of GST.
  3. Whether the tax component embedded in the contract price should be recalculated in accordance with G.O.Ms.No.296, Finance (Salaries) Department, dated 09.10.2017.
  4. Whether the principle laid down in Subaya Constructions Company vs Tamil Nadu Water Supply and Drainage Board was applicable to the petitioner’s case.
  5. Whether the fourth respondent should enter into a revised agreement after reworking the contractual tax component.

Petitioner’s Arguments

The petitioner’s case, as emerging from the judgment, was that it had executed the sanctioned works in accordance with the specifications prescribed by the fourth respondent and had already received the contractual consideration after deduction of tax at source.

Thereafter, the DGGI investigation resulted in a show cause notice demanding CGST and SGST on the services rendered under the Government work orders. Since the GST demand arose in connection with those works, the petitioner called upon the fourth respondent to bear and pay the applicable tax amount.

The petitioner sought a writ of mandamus on the basis that the GST burden connected with the Government works contract should not be imposed upon the contractor without appropriate reworking of the contractual tax component. The petitioner relied upon the legal position already considered in Subaya Constructions Company vs Tamil Nadu Water Supply and Drainage Board, where the Court had directed recalculation of the tax component and revision of the contractual arrangement.

Respondent’s Arguments

The judgment records representation on behalf of respondents 1 and 4 by the Government Advocate and on behalf of respondents 2 and 3 by the Senior Standing Counsel assisted by Junior Standing Counsel.

The order does not separately reproduce a detailed, independent set of respondent submissions in the present writ petition. However, while discussing the precedent in Subaya Constructions Company, the Court noted the submission concerning paragraph 11 of G.O.Ms.No.296 dated 09.10.2017, under which the exercise of calculating the tax component could be undertaken by applying the prescribed three formulas, with the value of subsumed tax being arrived at according to the mechanism stated in the Government Order.

Accordingly, the judgment’s reasoning proceeded on the framework that the contractual tax component had to be recalculated and the contract terms reworked rather than leaving the contractor saddled with the tax liability.

Court Order / Findings

The Madras High Court observed that the issue had already been considered by a learned Single Judge in:

Related Case Law: Subaya Constructions Company vs Tamil Nadu Water Supply and Drainage Board

W.P.(MD) No.15967 of 2020, decided on 08.03.2021

In that case, the Court had directed the respondent Board to:

  • calculate the tax component in the contract price;
  • rework the same in terms of paragraph 10(a) of G.O.Ms.No.296 dated 09.10.2017;
  • rework the terms of the contract; and
  • enter into a revised agreement with the contractor.

The earlier decision recognized that the contract price comprised three components:

  1. Cost factor
  2. Profit margin
  3. Tax component

The Court noted the principle from the earlier ruling that there could be no dispute regarding the cost factor and profit margin, while the tax component required appropriate treatment under the Government Order framework.

Following the above precedent, the High Court held in the present case that:

The tax liability ought to be borne by the fourth respondent.

The Court accordingly directed the fourth respondent to:

  • rework the terms of the contract;
  • enter into a revised agreement with the petitioner; and
  • complete the entire exercise within eight weeks from the date of receipt of a copy of the order.

Consequently:

  • the writ petition was allowed;
  • no costs were imposed; and
  • the connected miscellaneous petition was closed.

Important Clarification

This judgment is significant because the Court did not treat the post-GST tax burden arising from the Government works contracts as a liability that could simply be left upon the contractor without contractual adjustment.

The Court followed the earlier ruling in Subaya Constructions Company vs Tamil Nadu Water Supply and Drainage Board and held that the tax liability ought to be borne by the fourth respondent contracting authority, with a corresponding obligation to rework the contractual terms and enter into a revised agreement.

A further important clarification is that the present order arose in the context of a show cause notice dated 29.06.2022 and the petitioner’s prayer for a writ of mandamus. The Court’s operative direction focused on the contractual allocation and reworking of the tax burden; it directed the fourth respondent to revise the contractual arrangement within eight weeks.

It is also important that the judgment itself does not record a detailed adjudication on classification, valuation, exemption eligibility, place of supply, or the substantive correctness of every component of the DGGI demand. The decisive finding was on who should bear the tax liability in the contractual setting before the Court and the necessity of reworking the contract.

Sections / Legal Provisions Involved

Article 226 of the Constitution of India — The writ petition was instituted seeking issuance of a writ of mandamus.

CGST and SGST levy on works contract services — The show cause notice asserted that services rendered to the State of Tamil Nadu under the work orders attracted GST and quantified CGST and SGST liabilities.

G.O.Ms.No.296, Finance (Salaries) Department, dated 09.10.2017 — Central to the Court’s reasoning through the precedent relied upon.

Paragraph 10(a) of G.O.Ms.No.296 — Relevant for calculation and reworking of the tax component in the contract price.

Paragraph 11 of G.O.Ms.No.296 — Referred to in the related precedent concerning the prescribed methodology/formulas for determination of the subsumed tax component.

Show Cause Notice No. OR No.38/2021-GST dated 29.06.2022 — The GST demand proceeding that triggered the petitioner’s claim against the fourth respondent.

Link to download the order -https://www.mytaxexpert.co.in/uploads/1783324063_1263compressed.pdf

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