Facts of the Case

The petitioner, a successful bidder executing works for Southern Railway under a contract agreement dated 24.07.2020, was owed approximately Rs. 5.6 crore in bills for work done between April 2022 and April 2023. However, the first respondent — the Commissioner of Central Excise and Service Tax — had written to the Railways stating that the petitioner had unpaid Service Tax dues of Rs. 1,97,50,308, a dispute that was, by the petitioner's account, already pending before the Supreme Court. On the strength of that communication, the Railways (second respondent) withheld the petitioner's entire Rs. 5.6 crore in bills, rather than only the disputed Rs. 1.97 crore.

The petitioner filed this writ petition seeking a mandamus directing the Commissioner to issue a No Claim Certificate so that the Railways could release the payments due under the contract.

Issues Involved

  1. Whether Southern Railway was justified in withholding the petitioner's entire outstanding bill amount (Rs. 5.6 crore) merely because a much smaller Service Tax dispute (Rs. 1.97 crore) was pending against the petitioner.

Petitioner's Arguments

  • Even assuming the petitioner is ultimately liable for the disputed Rs. 1,97,50,308 in Service Tax dues, the Railways cannot withhold the entire Rs. 5.6 crore owed under the contract; at most, the disputed amount alone could be retained.
  • The Service Tax dispute is pending adjudication before the Supreme Court and has not attained finality.

Respondent's Arguments

  • No separate substantive defence is recorded from the Railways or the Central Excise and Service Tax department in this brief order; the matter was resolved on the proportionality of the withholding itself.

Court Order / Findings

  • The Court held that Southern Railway was entitled to retain only the disputed amount of Rs. 1,97,50,308 pending resolution of the Service Tax dispute, and was directed to release the balance of the Rs. 5.6 crore owed to the petitioner within six weeks.
  • The writ petition was allowed to this extent, with no order as to costs.

Important Clarification

This dispute concerns Service Tax dues under the pre-GST Finance Act, 1994 regime (and their recovery mechanism), not GST law. Its broader, generally useful principle is one of proportionality: a government body cannot withhold an entire contractual payment to a vendor merely because a much smaller, disputed tax demand exists against that vendor elsewhere — only the disputed sum, not the whole payment, can reasonably be retained pending resolution.

Sections Involved

  • Finance Act, 1994 — Service Tax provisions (the disputed liability arose under this regime, pre-dating GST)
  • Constitution of India, 1950 — Article 226

Decision – In Favour of

Allowed in favour of the petitioner — Southern Railway was directed to release the balance payment, retaining only the disputed Service Tax amount.

Case Details

  • Court: Madurai Bench of the Madras High Court
  • Case No.: W.P.(MD) No. 21313 of 2023 with W.M.P.(MD) No. 17720 of 2023
  • Coram: Justice S. Srimathy
  • Date of Order: 22.09.2023

Link to Download the Order

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