Contractual GST Disputes are Arbitrable (But Not Statutory Tax Determinations): Head-A/Head-B Test and Severability-Based Remand under Sections 34–37
1. Introduction
This decision arises from a familiar post-GST transition problem in public works contracts: a contract priced under the VAT regime was executed across the “appointed date” (01.07.2017), after which GST became applicable. The dispute was not about whether GST applied in law, but about how the “GST impact” and reimbursement between the employer-department and contractor should be calculated for work performed after GST’s introduction, and whether the Ministry of Road Transport and Highways (MoRTH) SOP (19.11.2018) or Uttar Pradesh Government Orders (09.11.2017 and 10.12.2019) governed that calculation.
Parties: The appellant is the Uttar Pradesh Public Works Department (PWD). The respondent is a contractor, M/s Vriddhi Infratech India Pvt. Ltd.
Key issues:
- Whether disputes with a taxation dimension—particularly GST calculation and reimbursement under a contract—are arbitrable.
- Whether MoRTH’s SOP/circular (19.11.2018) could be treated as contractually binding for GST computation merely because MoRTH technical specifications were incorporated into the contract.
- Whether the arbitral award, which made payments “subject to final assessment” by GST authorities and awarded penalty/interest with reference to GST statutes, suffered from patent illegality/perversity.
- Whether the High Court could partly set aside/sever the award and remit limited issues for re-adjudication, saving the remaining portions.
2. Summary of the Judgment
The High Court partly allowed the Section 37 appeal. It held:
- Arbitrability: The dispute was arbitrable because it fell within a “contractual tax dispute” category (the Court’s “Head-A”), not within non-arbitrable statutory/fiscal determination disputes (“Head-B”).
- Merits / patent illegality: The arbitrator’s core reasoning—treating MoRTH’s GST SOP as binding and displacing binding State Government Orders—was found unsustainable due to lack of contractual/material foundation and inadequate reasoning; further, the award of interest/penalty by effectively acting as an assessing authority was criticized.
- Finality problem: The award’s “subject to final assessment” structure was treated as creating ambiguity and undermining finality, especially given timelines under the GST regime.
- Severability: Applying the Supreme Court’s severability/modification principles in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. : (2025) 7 SCC 1, the Court set aside and severed findings on issues nos. 2–4 and 8–9, and remitted those issues for fresh adjudication by a reconstituted arbitral tribunal “as per law”.
- Portions saved: The Court protected the finding on issue no. 1 (item rate contract, based on parties’ consensus) and saved the award of Rs. 66,500/- (issue no. 10: PWD’s share of DRE fee) with post-award interest at 9% p.a.
3. Analysis
3.1 Precedents Cited (and How They Shaped the Outcome)
A. Arbitrability framework: Vidya Droliya v. Durga Trading Corporation : (2021) 2 SCC 1
The appellant relied on Vidya Droliya v. Durga Trading Corporation : (2021) 2 SCC 1 to argue “tax disputes” are non-arbitrable. The High Court accepted Vidya Droliya as the governing source for “arbitrability” postulates (in rem vs in personam, sovereign functions, third-party effects, and statutory exclusion), and then used those principles to craft a more granular taxonomy for tax-related disputes:
- Head-A (arbitrable): inter se contractual obligations about tax payment/reimbursement/indemnity; interpretation of “inclusive of all taxes”; allocation of economic burden between contracting parties.
- Head-B (non-arbitrable): disputes that encroach on the taxing authority’s exclusive domain—classification, rate, exemption eligibility, statutory taxability, challenges to fiscal notifications, or disputes between a party and the State as sovereign/tax authority.
This “Head-A/Head-B” articulation is the decision’s most explicit doctrinal contribution: it operationalizes Vidya Droliya for GST-era contract disputes by separating contractual incidence/allocation from statutory determination.
The appellant invoked Usha Martin Ltd. v. Eastern Gases Ltd. : (2022) SCC OnLine Cal. 3342 to argue that an arbitral tribunal cannot “delegate” adjudication to a third party—here, by making the award “subject to final assessment” by the GST authority. While the High Court did not treat the award as invalid solely on that principle, it used the “subject to assessment” structure as one of the markers of ambiguity and lack of finality, especially when the tribunal had already quantified liability and added penalty/interest.
C. Narrow scope under Sections 34/37: AC Choksi Share Broker (P) Ltd. v. Jatin Pratap Desai : (2025) 5 SCC 321 and allied line
The respondent relied on AC Choksi Share Broker (P) Ltd. v. Jatin Pratap Desai : (2025) 5 SCC 321 (and High Court decisions) to emphasise limited interference under Section 37. The High Court agreed with the doctrinal limits but held interference was warranted because the arbitrator’s approach crossed into:
- reading into the contract what was not there (MoRTH SOP being binding for tax), and
- failing to base conclusions on cogent record material, thereby implicating perversity/patent illegality standards.
D. The Court’s own Section 37 compass: UCM Coal Co. Ltd. v. Adani Enterprises Ltd. : (2025) SCC OnLine All 7608
The High Court relied substantially on its earlier exposition in UCM Coal Co. Ltd. v. Adani Enterprises Ltd. : (2025) SCC OnLine All 7608, which in turn quotes and synthesizes Supreme Court authorities. It reproduced the settled “no merits appeal” approach, but used that same framework to justify interference where the award is:
- based on no evidence / ignores vital evidence,
- contrary to the terms of the contract (Section 28(3)), or
- vitiated by patent illegality going to the root.
The decision deploys the “restrictive interference” narrative from:
The High Court uses these to show it is conscious of restraint, and then frames the present interference as falling within the “root illegality” category.
The Court leaned on Jan De Nul Dredging India (P) Ltd. v. Tuticorin Port Trust : (2026) 3 SCC 186 to underscore that Section 37 courts cannot reappraise evidence or substitute contractual interpretation. Paradoxically, it then sets aside part of the award; it justifies this by characterizing the arbitrator’s MoRTH-SOP application as not a competing plausible interpretation but as a conclusion lacking contractual foundation, hence “vulnerable”.
The remedial architecture of the judgment is driven by Gayatri Balasamy v. ISG Novasoft Technologies Ltd. : (2025) 7 SCC 1. The High Court extracted and summarized its “guardrails”:
- Only severable awards are amenable to modification; composite/indivisible awards are not.
- Correction must be of a patent, face-of-record nature; debatable errors cannot be “modified” into correctness.
- Post-award interest adjustments may be modified without disturbing merits.
- Where correction requires re-adjudication, the matter should be remanded.
Using this, the Court preserved the DRE-fee component and item-rate-contract finding, while remitting core GST-methodology and monetary claims for fresh adjudication.
3.2 Legal Reasoning (What the Court Actually Did)
A. The new “Head-A/Head-B” test for tax-related arbitrability
A central doctrinal move is the Court’s bifurcation of tax disputes into:
- Head-A (arbitrable): inter-party contractual allocation and reimbursement of tax burdens, interpretation of contract clauses (“inclusive of all taxes”), indemnity/tax-sharing, and whether tax is an “extra cost”.
- Head-B (non-arbitrable): any dispute requiring statutory determination (taxability, classification, rate, exemption, legality of tax arrangements) or affecting the taxing authority’s exclusive regulatory role and third-party rights.
Applying that taxonomy, the Court held the present dispute was not about statutory taxability, rate classification, exemption, or a direct contest with the tax department; it was essentially about whether MoRTH SOP or UP Government Orders governed inter se computation for reimbursement/payment. Hence, it fell under Head-A and was arbitrable.
B. Section 16 point (waiver/late objection) — but not dispositive
The Court noted the department did not raise “non-arbitrability” before the arbitral tribunal under Section 16 and raised it for the first time at Section 37 stage. Although the Court still examined arbitrability on merits and rejected the objection, the reasoning implicitly signals that parties should not expect to keep jurisdictional objections in reserve.
C. Contract interpretation and the MoRTH SOP: “technical specs” ≠ “tax SOP”
The Court’s key merits intervention is its conclusion that the arbitrator’s reliance on the MoRTH SOP (19.11.2018) was not supported by:
- the contract’s text (MoRTH incorporated for “technical specifications”);
- any “order of precedence” clause elevating MoRTH SOP over State Government Orders on taxation; or
- evidence that the relevant MoRTH standard bidding document’s tax clauses were incorporated, or that the SOP was intended to apply to this item-rate contract.
The Court contrasted:
- Clause 3 / Technical Specifications: “All the works shall be carried out as per MoRTH specification...”
- Clause 45 / Tax: rates “inclusive of ... taxes” and deduction at source “as per applicable law”.
Against that structure, the Court treated UP Government Orders (09.11.2017, 10.12.2019) as binding executive instructions on the department regarding GST computation for ongoing contracts, and criticized the arbitrator for discarding them without adequate justification.
D. EPC-vs-item-rate mismatch and “directory SOP” reasoning
The High Court emphasized that MoRTH SOP clause 6 is framed for “Payments for EPC Contracts” and uses “may” and “mutual agreement” language, suggesting a directory guidance tool rather than mandatory regime. Since the tribunal found the contract to be an item-rate contract, the Court found it problematic that the SOP’s EPC illustration was applied without:
- contractual authorization, or
- evidentiary foundation that the SOP’s methodology was industry-accepted for item-rate contracts, or
- proof that no other item-rate-specific guidance existed.
E. Penalty/interest: tribunal cannot function as an “assessing officer”
The arbitrator awarded 15% penalty and 18% interest by reference to Sections 50 and 74 of the U.P. GST Act, 2017, reasoning that non-payment by the department caused statutory consequences. The High Court faulted this approach because:
- GST is largely self-assessed; the assessee (contractor) has statutory duties to timely pay and mitigate.
- There was no clear finding, tied to statutory proceedings, showing that penalty/interest was actually levied/demanded for this contract and period, or that non-payment was solely attributable to the department.
- The tribunal’s approach blurred the line between contractual reimbursement and statutory adjudication, echoing the Court’s Head-A/Head-B boundary.
F. “Subject to final assessment” — finality and timing
The award’s mechanism—pay now, later adjust after GST department’s final assessment—was treated as adding ambiguity and undermining finality. The Court also reasoned that since the project completed in 2018–19, by the time of the 2024 award, the “final assessment” should ordinarily have been available or determinable; thus, the arbitral quantification without anchoring to definitive tax determinations was viewed with skepticism.
G. Transitional provisions (GST Act) as an ignored “vital” dimension
A particularly notable part of the High Court’s critique is that the tribunal (and parties) failed to engage with transitional provisions of the GST statute—specifically the judgment flags “Chapter XX” and references “Section 142 (2), 142 (10) and 142 (11)”. The Court did not finally decide their applicability; rather, it treated the omission as undermining the reasoning integrity of the award because the dispute squarely concerns pre-appointed-date contracts with post-appointed-date revisions/adjustments.
3.3 Impact (Why This Judgment Matters)
A. A practical arbitrability map for GST-era contract disputes
The Head-A/Head-B framework supplies a workable filter for courts and tribunals faced with tax-adjacent disputes:
- Arbitration can decide who bears the tax cost and how reimbursement works under the contract (Head-A).
- Arbitration cannot decide questions that effectively determine statutory incidence, classification, rate, exemptions, or bind tax authorities (Head-B).
This is likely to be cited in future infrastructure disputes where “tax change” clauses, “inclusive of taxes” clauses, and transitional GST treatment intersect.
B. Evidence discipline: do not “import” MoRTH tax methodologies without proof
The Court’s insistence on contractual and evidentiary foundations is a warning against casual incorporation arguments (“MoRTH specs are part of the contract, therefore MoRTH tax SOP applies”). Parties relying on external standards will likely need to:
- produce the relevant standard bidding document in full,
- identify the precise incorporated clauses, and
- establish an order-of-precedence or mutual adoption of the SOP methodology.
C. Limits on awarding statutory penalty/interest in arbitration
Although arbitration can award contractual interest and damages, this judgment signals a higher threshold where the claimed amounts are framed as “statutory” GST penalty/interest. Tribunals may need to insist on:
- clear causal linkage,
- proof of actual levy/payment/demand under GST proceedings, and
- contractual basis for shifting such consequences.
D. Section 37 remedy design: severability + remand is now a mainstream option
By severing and remitting only specific issues, the Court demonstrates a calibrated post-award remedy aligned with Gayatri Balasamy. Practically, this may encourage:
- partial preservation of uncontested components, reducing wasted arbitral effort, and
- targeted re-adjudication of legally infirm portions rather than “all-or-nothing” outcomes.
4. Complex Concepts Simplified
- Arbitrability: whether a dispute can legally be decided by arbitration instead of courts/tribunals created by statute.
- In rem vs in personam: in rem affects the world at large (status/rights against everyone) and is usually non-arbitrable; in personam affects only parties inter se and is usually arbitrable.
- Section 16 (kompetenz-kompetenz): the arbitral tribunal’s power to decide its own jurisdiction; parties should raise jurisdiction/non-arbitrability objections before the tribunal.
- Sections 34 and 37 review limits: courts do not re-try the case; they interfere only on narrow grounds like patent illegality, perversity, and public policy (as statutorily narrowed post-2015 amendments).
- Patent illegality / perversity: an error that goes to the root—e.g., deciding without evidence, ignoring vital evidence, or rewriting the contract.
- Severability of an award: if one portion of an award is invalid but can be cleanly separated, courts may set aside only that part and preserve the rest.
- GST self-assessment and “final assessment”: taxpayers file returns and pay tax based on self-assessment; tax authorities may later scrutinize and pass orders. Private adjudication cannot replace statutory assessment processes.
- Transitional provisions (GST): statutory rules that govern how pre-GST contracts/rights/liabilities are treated after GST’s commencement—critical where prices, tax components, or adjustments straddle 01.07.2017.
5. Conclusion
The Allahabad High Court’s decision contributes a structured and practical rule-set for GST-related contract arbitration. It clarifies that tax-adjacent disputes are not automatically non-arbitrable: where the dispute concerns the contractual allocation and reimbursement of tax burdens (Head-A), arbitration is permissible; where it would require statutory fiscal determinations reserved to tax authorities (Head-B), it is not.
On merits, the Court reinforces a core arbitration principle: tribunals must decide in accordance with the contract and the record, and cannot import external SOPs on taxation merely because technical specifications were incorporated. It also warns against arbitral quantification of statutory penalty/interest without clear legal and evidentiary anchoring, and flags the importance of GST transitional provisions to such disputes.
Finally, the judgment is significant procedurally: it operationalizes Gayatri Balasamy v. ISG Novasoft Technologies Ltd. : (2025) 7 SCC 1 by severing invalid portions of an award, preserving separable components, and remitting limited issues for fresh adjudication—an approach likely to shape how courts craft remedies in complex, partially infirm arbitral awards.