Allahabad HC Sets Aside Arbitral Award on GST Calculation: MoRTH SOP Cannot Override State Government Orders Without Contractual Basis
The Allahabad High Court partly allowed an appeal by the UP Public Works Department, holding that a MoRTH SOP on GST calculation was improperly applied to an item-rate road contract, and remanded the core GST issues to fresh arbitration.
A Division Bench of the Allahabad High Court, comprising Chief Justice Arun Bhansali and Justice Jaspreet Singh, has partly allowed an appeal filed by the Uttar Pradesh Public Works Department against a Sole Arbitrator's award of Rs. 11,35,80,273/- in favour of road contractor M/s Vriddhi Infratech India Pvt. Ltd. The award had directed the Department to pay GST, penalty and interest arising out of a 2016 road-widening contract that straddled the VAT-to-GST transition. The Division Bench found that the Sole Arbitrator's foundational conclusion — that the Ministry of Road Transport and Highways (MoRTH) Standard Operating Procedure dated 19 November 2018 governed GST calculation — was not supported by the contract or any material evidence, and that the State Government Orders dated 9 November 2017 and 10 December 2019, which were binding executive instructions on the Department, had been set aside without cogent reasoning. The judgment, authored by Justice Jaspreet Singh, also lays down a structured framework distinguishing arbitrable from non-arbitrable tax disputes.
The Contract and the GST Transition Dispute
On 27 April 2016, the UP-PWD entered into a contract with Vriddhi Infratech for widening and strengthening of the Bilraya-Panwari Road (SH-21) and Nepalpur-Bijwar Road in District Sitapur — a 44.70 km stretch to be converted from two lanes to four. The total contract price was Rs. 155,89,46,798.65/-. Work was to be completed by 26 April 2018, though the Department granted a time extension, and a completion certificate was issued on 10 April 2019.
The contract was concluded under the old tax regime. The contractor quoted rates inclusive of 4% Value Added Tax. From 1 July 2017, the GST regime replaced VAT, and construction work of this type attracted 12% GST. The 8% difference (approximately) between the old and new regimes became the flashpoint. The contractor demanded GST on running account bills for work done after 30 June 2017, calculated using the MoRTH SOP dated 19 November 2018. The Department insisted that the applicable framework was the State Government Orders dated 9 November 2017 and 10 December 2019, to which it was bound as a State instrumentality.
The contractor first sought adjudication before the Dispute Review Expert (DRE), Sri N.K. Kanodia. The DRE, in findings dated 21 December 2020, held that the State Government Orders were applicable and binding on the Department. The contractor was dissatisfied with the DRE's conclusions on the mode of calculation under those orders, and invoked the arbitration clause.
A Section 11(6) petition was filed and the High Court appointed a Sole Arbitrator on 31 March 2022. The contractor's claim before the Arbitrator totalled Rs. 11,35,80,273/-, comprising GST on work done (Rs. 3,36,25,034/-), GST on price escalation/adjustment (Rs. 94,77,038/-), amounts allegedly deducted unlawfully from the final bill (Rs. 75,90,431/-), penalty at 15% and interest at 18% per annum from March 2019 to July 2023, and the contractor's share of DRE fees (Rs. 66,500/-).
What the Arbitrator Decided
The Sole Arbitrator framed 11 issues. On issues 2 and 3 (whether the MoRTH circular dated 19 November 2018 applied and whether it was excluded because the project was UP-funded), the Arbitrator held that since the contract specifically required all work to be carried out as per MoRTH specifications, and since the State itself had by notification made the MoRTH standard bidding documents applicable to all government contracts above Rs. 5 crores, the MoRTH SOP would govern GST calculation — not the State Government Orders.
On issue 7, the Arbitrator held that GST was also payable on the price adjustment component. On issue 8, the full GST claim was allowed. On issue 9, the Arbitrator invoked Sections 50 and 74 of the UP GST Act, 2017 to award 15% penalty and 18% interest per annum. The DRE fee component (Rs. 66,500/-) was allowed under issue 10. The total award of Rs. 11,35,80,273/- was made subject to final assessment by the GST Authorities, with a direction that any excess paid would be refunded by the contractor.
The Department challenged the award under Section 34 before Commercial Court No. I, Lucknow (Arbitration Case No. 25 of 2024). The Commercial Court dismissed the petition on 18 July 2025, finding no patent illegality and affirming that the Arbitrator's view on the applicability of the Government Orders was based on material evidence. The Department then filed Arbitration Appeal No. 35 of 2025 before the High Court under Section 37.
The Department's Three-Part Argument
Sri Pritish Kumar, Senior Counsel and Additional Advocate General, appearing with Sri Tushar Verma (Additional Chief Standing Counsel), structured the Department's case on three planks.
Non-arbitrability: A dispute about the quantum and mode of tax calculation lies in the exclusive domain of the Taxing Authority. The GST Act is a complete code. Any finding by an arbitrator on tax quantum cannot bind the taxing authority. The award itself recognised this incompleteness by making the quantum subject to final GST assessment, which rendered it inconclusive and non-final.
Inapplicability of MoRTH SOP: The contract incorporated MoRTH specifications only for technical purposes — quality of materials, engineering standards, measurement. The SOP dated 19 November 2018 addressed EPC contracts and was expressly directory, using the word “may” and requiring mutual agreement between parties. The contract in dispute was an item-rate contract, not an EPC contract. The State-funded character of the project made the State Government Orders binding. Reliance was placed on Vidya Drolia v. Durga Trading Corporation : (2021) 2 SCC 1 and the Calcutta High Court's decision in Usha Martin Ltd. v. Eastern Gases Ltd. : (2022) SCC OnLine Cal 3342.
Inconclusiveness of the award: By making the award subject to final GST assessment, the Arbitrator delegated his adjudicatory function to the Taxing Authority and failed to attach finality to the award.
The Contractor's Response
Sri Manish Singh, appearing for Vriddhi Infratech, made four principal submissions. The non-arbitrability objection was raised for the first time before the High Court in the Section 37 appeal — it had not been taken before the High Court at the Section 11(6) stage, not raised under Section 16 before the Arbitrator, and not urged before the Commercial Court. The dispute was never about who pays GST but only about how it is calculated, which is squarely a contractual issue.
On the merits, the State Government Orders themselves, for contracts above Rs. 5 crores, directed adherence to the MoRTH document. Since the parties had agreed to incorporate MoRTH specifications and guidelines, the SOP on GST calculation was covered. The contractor had placed on record reports of a Chartered Accountant, a Chartered Engineer, and an independent auditing firm, none of which was controverted by the Department with any counter-expert evidence.
The scope of an appeal under Section 37 is narrow. Where the Arbitrator has taken a view based on material evidence, interference is impermissible unless the finding is perverse. Reliance was placed on AC Choksi Share Broker (P) Ltd. v. Jatin Pratap Desai : (2025) 5 SCC 321, UCM Coal Co. Ltd. v. Adani Enterprises Ltd. : 2025 SCC OnLine All 7608, and Sanjay Gandhi Post Graduate Institute of Medical Science v. Trishul Enterprises : (2026) SCC OnLine All 367.
The Court's Framework: When Are Tax Disputes Arbitrable?
Justice Jaspreet Singh addressed the non-arbitrability argument first and produced a structured two-category analysis that the judgment designates as Head-A and Head-B.
Head-A (arbitrable) covers disputes that, while involving tax, can be resolved within the contract: which party is contractually liable to pay or deposit tax; which party is entitled to reimbursement; contractual tax-sharing or indemnity clauses; and the interpretation of phrases such as “inclusive of all taxes” in the context of a new tax regime.
Head-B (non-arbitrable) covers tax disputes that intrude on the exclusive domain of the taxing authority: adjudication of whether a transaction is taxable under statute; determination of tax classification, rate, or applicable entry; assessment of whether a party qualifies for a statutory exemption; and disputes between a contracting party and the State in its sovereign fiscal capacity.
On the facts, the Court held that the actual controversy was not whether GST was payable — both sides agreed it was — but which of two competing calculation methodologies governed. That question turned on contractual interpretation: did the MoRTH SOP or the State Government Orders constitute the applicable framework under the contract? This falls squarely within Head-A. The Arbitrator had jurisdiction.
The Court also noted that the Department had not raised non-arbitrability before the Arbitrator under Section 16, had not pleaded it, and the Arbitrator had consequently not framed any jurisdictional issue on this point. Raising it for the first time before the appellate court in Section 37 proceedings could not avail the Department, particularly once the Court had determined the dispute was in any event arbitrable.
Why the Arbitral Award Could Not Be Sustained
The Court turned next to the merits of the Arbitrator's reasoning on the MoRTH SOP, and found multiple points at which the award was built on conjectures rather than evidence or contractual text.
Contract clause on MoRTH specifications: Clause 3 of the special conditions of contract stated that all works shall be carried out as per MoRTH specifications relating to road and bridge works. Clause 45 contained a specific and self-contained provision on tax: the contractor's rates are deemed inclusive of all applicable taxes, and the employer shall deduct tax at source as per applicable law. The Court held that these two clauses operate in separate domains. Borrowing technical specifications for engineering standards does not, without more, import MoRTH guidance on tax calculation.
MoRTH document not placed on record: The Arbitrator concluded that the contract's incorporation of MoRTH specifications extended to the MoRTH SOP on GST. However, the MoRTH document itself was never placed on record to identify which of its clauses related to taxation or whether any tax clause was actually borrowed. In the absence of this material, the Arbitrator's inference was unsupported.
EPC SOP applied to item-rate contract: The MoRTH SOP dated 19 November 2018 addresses EPC contracts in Clause 6. The parties had agreed before the Arbitrator that the contract was an item-rate contract. The Arbitrator held the EPC illustration applicable on the ground that both contract types are similar — without citing any evidence, clause, or reasoning to sustain that equivalence. The SOP's use of “may” in Clause 6 and the requirement of “mutual agreement” in Clause 6.2(iv) confirmed that the SOP was directory, not mandatory.
State Government Orders set aside without reason: The Government Orders dated 9 November 2017 and 10 December 2019 were executive instructions issued by the State Government and were binding on the Department as a State instrumentality. The DRE had also found them applicable. The Arbitrator discarded them solely because he had concluded the MoRTH SOP applied. No independent reason was given for why the Government Orders should yield to a directory, non-statutory guideline. The Court held this reasoning did not withstand scrutiny.
Penalty and interest without adequate factual basis: The Arbitrator directed payment of 15% penalty and 18% interest per annum by reference to Sections 50 and 74 of the UP GST Act, 2017. The Court found no evidence that any notice under Section 73 or Section 74 had been issued by the GST Authorities to the contractor for the period in question, nor any finding that the contractor had actually suffered penalty or interest in a quantified amount attributable solely to the Department's conduct. By 2024 (the year of the award), the maximum three-year assessment period under the GST Act would have run its course, and final assessment orders, if any, would have been the best available evidence. None was placed before the Arbitrator. The Court observed that the Arbitrator had effectively acted as an Assessing Officer.
Transitional provisions of the GST Act ignored: Chapter XX of the GST Act, 2017 contains transitional provisions. Sections 142(2), 142(10) and 142(11) specifically address contracts entered into before 1 July 2017 where upward or downward revisions occur after the appointed date. Neither the Arbitrator, nor the parties, nor the expert witnesses addressed these provisions. The absence of any consideration of these sections was a further basis on which the award's core reasoning was vulnerable.
Award lacked finality: The award directed the Department to pay the full awarded sum but made the entire amount (except the DRE fee component) subject to final assessment by the GST Authorities, with provisions for refund or further payment depending on the outcome. The Court held that this arrangement introduced impermissible ambiguity and deprived the award of finality.
Severability and Remand: Applying Gayatri Balasamy
Having found the award unsustainable on issues 2 to 4 and 8 to 9, the Court considered whether the entire award should fall or whether the valid portion could be severed. The Constitution Bench decision in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. : (2025) 7 SCC 1 was applied. The Court extracted the relevant guardrails: modification is permissible only for severable awards; the error must be patent and apparent on the face of the record; modification may extend to post-award interest adjustment; where the error requires re-adjudication on merits, the court must remand rather than modify.
The bulk of the award — Rs. 11,35,80,273/- plus penalty and interest — arose from issues 2 to 4 and 8 to 9 and could not be sustained. However, two portions were clearly severable and untainted: the finding on issue 1 (that the contract was an item-rate contract, arrived at by consensus of the parties) and the award of Rs. 66,500/- under issue 10 (the Department's unpaid share of the DRE's fee). The Court severed and protected these two components.
Outcome
The Division Bench partly allowed Arbitration Appeal No. 35 of 2025. The judgment of Commercial Court No. I, Lucknow dated 18 July 2025 in Arbitration Case No. 25 of 2024 was set aside. The award of the Sole Arbitrator dated 27 January 2024 was partly modified: findings on issues 2 to 4 and 8 to 9 were set aside and severed from the award. The findings on issue 1 and issue 10 were preserved. The sum of Rs. 66,500/- awarded under issue 10, along with interest at 9% per annum from the date of the award until actual payment, was saved. Issues 2 to 4 and 8 to 9 were remitted for re-adjudication by a fresh Arbitral Tribunal to be constituted as per law, which was directed to proceed in light of the observations made by the Court. The parties were directed to bear their own costs.