Tax Vista

Your weekly tax recap

Edn. 276 - 23rd February 2026

Kasi Viswanathan V

Arbitral Awards: Price Revision or Damages?

Where contractual disputes spanning decades culminate in an arbitral award or settlement in the GST era, the issue is whether the receipt itself attracts GST. The present ruling examined amounts awarded in 2023 and settled in 2024 in respect of works executed between 1996 and 2007-08, with interim bills raised during execution and final bills in 2010-11. The controversy was whether sums received pursuant to pre-GST contracts represent an upward price revision covered by Section 142(2)(a) of the CGST Act, 2017, or constitute compensation or liquidated damages falling outside the charging provision as clarified in Circular No. 178/10/2022 dated 03.08.2022.

The applicant argued that an arbitral award is distinct from the underlying contract. Section 16(1)(a) of the Arbitration and Conciliation Act, 1996 recognizes the separability of the arbitration agreement. On this basis, it was contended that the amounts received were not upward revision of price as per the contract, but additional amounts awarded by the arbitral tribunal as compensation. Reliance was also placed on the circular to submit that compensation or liquidated damages do not constitute supply and therefore do not attract GST. The transitional provisions in Section 142 of the CGST Act were invoked to contend that where no supply took place in the GST regime, GST cannot be attracted merely because the dispute was resolved after 01.07.2017.

The Authority undertook a claim-wise analysis. In all, twelve claims were examined. The Authority focused on three clauses in the contract agreements, viz., clause 34 (Alterations, Additions and Omissions), clause 35 (Extra Items) and clause 36 (Price Adjustment). Wherever the arbitral tribunal had allowed claims by reference to clauses dealing with extra items or price adjustment, the Authority treated the amounts as upward revision of consideration. On that reasoning, it was held that the ingredients of Section 142(2)(a) were satisfied and the revised amount was liable to GST. In contrast, where the award compensated the contractor for breach, such as failure to provide quarry areas or expenditure incurred due to shifting of infrastructure facilities, the Authority held that such amounts did not represent consideration for supply.

Broadly, the claims were classified as follows:

First, claims treated as compensation and therefore not liable to GST included those relating to extra expenditure incurred due to failure to provide quarry areas (claim nos. 1 and 2), cost difference arising from use of higher grade cement (claim no. 6) treated as deviation amounting to breach, and reimbursement for shifting of infrastructure facilities (claim no. 7) not envisaged in the contract.

Secondly, claims treated as price revision and held liable to GST included amounts towards change in methodology for excavation (claim no. 3), price adjustment on extra items (claim no. 8), additional excavation works (claim no. 10), cost of materials for specified works (claim no. 11), deletion or deduction from final bills treated as upward revision (claim no. 9). In addition, certain new works (claim no. 12) were held taxable under GST.

Thirdly, in respect of refund of rebate wrongfully deducted (claim nos. 4 and 5), the taxability was made dependent on whether tax had been discharged under the earlier regime. If tax had not been paid earlier, the reversal was treated as upward revision attracting GST.

Accordingly, claims falling under the second category were held liable to GST, while the third category depended on whether tax had been discharged under the pre-GST regime.

The ruling also affirmed liability under reverse charge on fees paid to the arbitral tribunal, while clarifying that cost of arbitration awarded as compensation does not attract tax, there being no supply. The distinction between tribunal fees and arbitration cost awarded inter se parties brings clarity to an area which was mired in confusion in earlier advance rulings.

Certain aspects of the reasoning merit closer examination.

A substantial portion of the work was executed prior to 2007, at a time when works contracts did not attract service tax. If tax liability did not arise under the then prevailing regime, can settlement of disputes decades later create a liability under GST solely by reason of Section 142(2)(a) of the CGST Act, 2017? Although Section 142(2)(a) does not expressly condition its application on prior taxability under the earlier regime, the provision arguably presupposes the existence of a taxable event under that law.

Another aspect emerging from the facts is that billing appears to have been aligned with amounts approved by the contractee, rather than the contractor's claimed entitlement based on work carried out. If invoices for extra work were raised and tax, wherever applicable, discharged in the pre-GST regime, any subsequent finalisation through arbitration may represent quantification of a pre-existing claim rather than a revision of price in the GST regime.

The more fundamental issue is the point at which price can be said to be revised. Is it when a claim is raised, when it is rejected, when it is quantified by the arbitral tribunal, or when parties ultimately settle? Price, in contractual terms, cannot be unilateral. However, that does not necessarily imply that it stands deferred until final adjudication. Price revision ordinarily refers to escalation mechanisms built into the contract. Disputes relating to quantification of extra work under contractual mechanisms may not, in a strict sense, constitute a price revision. Final determination of the amount does not, by itself, amount to revision of price.

In this context, the decision of the Delhi High Court [2025-VIL-524-DEL] assumes relevance. The Court noted that a conciliation agreement is equivalent to a decree under Section 36 of the Arbitration and Conciliation Act and that the date of finalisation of such settlement is to be treated as the deemed date of communication of judgment for purposes of limitation under Section 54. While rendered in the context of refund, the decision indicates that where tax is otherwise payable at the time of execution of the work, subsequent determination through arbitration or conciliation may only regulate refund of excess tax, rather than defer the incidence of tax itself. Although this "pay first and seek refund later" approach appears administratively straightforward, practical difficulty arises where disputes remain unresolved for extended periods.

The mere fact that amounts are paid under settlement should not colour the character of the receipt. The present ruling correctly proceeds on the basis that what must be examined is whether the award represents value of taxable services or compensation for breach. The change in scope regarding higher grade cement (claim no. 6) was characterised as breach rather than examined as a possible contractual variation. Although the new works were rightly treated as independent supplies, the ruling does not engage with the question of when the underlying work was performed [2026-VIL-30-AAR].

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)