Facts of the Case

The petitioner, Shri Balakrishna G. Godse, proprietor of M/s. B.G. Godse Engineers and Contractors, a Class I Contractor, had executed a highway works contract with the State of Karnataka's Public Works, Ports and Inland Water Transport Department. A dispute regarding the contract was pending before a Sole Arbitral Tribunal at Dharwad (C.M.P. No. 100014/2021). During the arbitration, the petitioner filed an interim application under Order VI Rule 17 read with Section 151 of the CPC seeking leave to amend the pleadings and incorporate an additional claim concerning payment of GST at 12%, as against 4% KVAT payable under the earlier tax regime, contending he was compelled to pay the higher rate to avoid penalty. The Arbitrator rejected the amendment application, holding that the Arbitral Tribunal lacked jurisdiction to decide the claim and that the petitioner could seek recovery separately in accordance with law. The petitioner challenged this rejection before the Karnataka High Court under Articles 226 and 227 of the Constitution.

Issues Involved

  1. Whether the Arbitral Tribunal had jurisdiction to entertain a claim for the GST-versus-KVAT rate differential arising out of the same works contract.
  2. Whether the amendment application, though filed at a relatively later stage of arbitration, ought to have been allowed.

Petitioner's Arguments

  • The additional claim for the GST rate differential (12% GST as against 4% KVAT under the old regime) pertained directly to the contractual work and was connected with the agreement, and thus fell within the scope of the arbitration clause.
  • Declining the amendment would seriously prejudice the petitioner and could lead to a miscarriage of justice, whereas allowing it would cause no serious prejudice to the State.

Respondent's Arguments

  • The proposed amendment was barred by limitation since the petitioner had failed to raise the claim at the first instance.
  • The proposed amendment was outside the purview of the Arbitral Tribunal's jurisdiction.

Court Order / Findings

  • The Court held that Clause 4.1 of the contract's arbitration provision covered any dispute or difference arising out of or connected with the agreement, and since the additional claim of GST at 12% as against 4% KVAT pertained to the very same contractual work, the Arbitrator's reasoning that the Tribunal lacked jurisdiction over the claim was not sustainable.
  • The Court rejected the State's objection that the amendment was belated, holding that where a dispute has financial implications, the petitioner deserved a fair opportunity to substantiate his entitlement, especially since no malafide or oblique motive was found in seeking the amendment.
  • The writ petition was allowed, permitting the petitioner to raise the additional claim by way of the proposed amendment, while granting the State liberty to file an additional statement in response.

Important Clarification

A claim for reimbursement of the tax-rate differential arising from the transition between tax regimes (such as KVAT to GST) on a works contract is a dispute "connected with" the agreement, and therefore falls within a broadly worded contractual arbitration clause; an arbitrator cannot decline jurisdiction over such a claim on the ground that it involves GST rather than the core contractual dispute, provided it is raised through a proper amendment application without mala fides.

Sections Involved

  • Order VI Rule 17, Code of Civil Procedure, 1908 – governs amendment of pleadings, applied here to arbitral proceedings.
  • Arbitration and Conciliation Act, 1996 – governs the arbitration clause and procedure under which the dispute, including the GST-differential claim, was to be settled.
  • Central/Karnataka Goods and Services Tax Act, 2017 – the regime under which the disputed 12% GST rate was levied, as against the earlier 4% KVAT rate.

Decision – In Favour of

The decision was in favour of the Assessee on the procedural question, with the amendment permitted and the substantive GST-rate-differential claim remitted to the Arbitral Tribunal for adjudication on merits.

Case Details

  • Court: High Court of Karnataka, Dharwad Bench
  • Case Number: Writ Petition No. 104679 of 2023 (GM-RES)
  • Neutral Citation: 2023:KHC-D:9994
  • Coram: Hon'ble Mr. Justice Sachin Shankar Magadum
  • Date of Order: 04 September 2023

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