Madras HC held that in Pre GST Works Contracts – Enhanced GST rates shall be borne by the awarder

Fact and Issue of the Case

Writ petition is filed under Article 226 of the Constitution of India, to issue a Writ of Mandamus, directing the respondents to consider the various representations issued by the petitioner to the respondents and direct the respondents to pass appropriate orders in terms of G.O.Ms.No.296 dated 09.10.2017 and in tune with the Judgment of this Court in W.P.Nos.21196 and 21198 of 2019 dated 01.08.2019 and consequently direct the respondents to enter into a fresh supplemental agreement for the purposes of GST within a time frame as fixed by this Court.

The petitioner entered into a contract with Tamil Nadu Water Supply and Drainage Board for laying Under Ground Sewerage works for Karaikudi Municipality, Sivagangai District. An agreement was entered into between them on 25.01.2016. It is seen from the contract that quotation given by the petitioner was inclusive of TNVAT and Excise Duty components. As per Clause 46 of the Contract, deduction at source towards sales tax shall be made at 2% for civil works contract and at 5% for all other works contract. With effect from 01.07.2017, GST Regime came into force. The distinction between civil works and other works became irrelevant since all the works contract for construction activities came to be taxed at 12%. Since the tax regime had undergone a change, it became necessary to re-work the terms of the contract.

The Government of Tamil Nadu considered the prevalent situation and issued G.O.Ms.No.296 Finance (Salaries) Department, dated 09.10.2017. The Government took note of the fact that the price bid to be quoted should be inclusive of taxes and duties. The supplier, while raising bills and tax invoice post-GST, will now have to collect GST from the purchaser at of supply and remit the same to the respective Government. The entire GST on the supply will have to be finally borne by the purchaser. Now the question that arises consideration is under which category the petitioner’s case will fall.

Observation of the Court

The court carefully considered the rival contentions and went through the materials on record. The agreement between the parties was entered into on 25.01.2016. The nature of work was to provide Under Ground Sewerage Scheme to Karaikudi Municipality in Sivagangai District including maintenance of the scheme for five years. The contract price was Rs.102,63,58,582/- only. There can be no doubt that this contract price included cost factor, profit margin and tax component(TNVAT and Excise Duty). There can also be no doubt that during the relevant time, rate of tax was 2% for civil works contract and 5% for other works contract. There is again no doubt that it has now been enhanced to 12% under the GST. The Government itself has taken a policy decision that this additional tax burden will have to be borne only by the purchaser and not by the contractor. I went through the bid documents. It can be seen therefrom that the bill of quantities contains number of items and for each item, the petitioner had quoted a particular rate. It will not be difficult to arrive at the exact price for each item after deducting the tax component. Since the policy that is manifest from G.O.Ms.No.296 of 2017 dated 09.10.2017 is that this additional tax burden should be taken care of only by the purchaser, the reworking has to be done only in terms of paragraph No.10(a) of the said Government Order and Paragraph No.10(c) of the said Government Order will be applicable only if along with the tender notification, the TWAD Board has also enclosed their schedule of rates. In the case on hand, no such schedule of rates was enclosed. Hence, I sustain the contention of the petitioner’s counsel that the quotation in the instant case was on itemwise basis.

The petitioner’s counsel draws my attention to the order dated 01.08.2019 passed by the Principal Seat in W.P.Nos.21196 and 21198 of 2019. The writ petitioner herein was the writ petitioner in those cases. The petitioner had entered into a contract with Salem City Municipal Corporation. After analysing the terms of the contract, the writ petitions were disposed of by holding that the parties will be covered by paragraph Nos.10(a) and 12 of G.O.Ms.No.296, Finance(Salaries) Department, dated 09.10.2017. The case on hand is of no different.

For the sake of clarity, let me visualise a hypothetical situation. If for laying a pipeline, the cost factor and the profit margin of the contractor is Rs.100/-, and the tax is Rs.2.00/-, the contract price will be Rs.102.00/-. Since GST has enhanced the rate of tax from 2% to 12%, the contract price will have to be re-worked to Rs.112.00/-. Regarding the cost factor and profit margin of the contract, there cannot be a contest. As a result of GST, there will be an additional tax liability of 10%. The policy decision of the Government is that this additional tax burden will have to be borne by the Board. In other words, instead of paying Rs.102/- as contract price, they must pay Rs.112.00/-.

It appears that the petitioner had already entered into a revised agreement. The petitioner’s counsel submitted that the petitioner was under compulsion to sign the revised agreement. The officials of TWAD Board had stated that unless the petitioner signed the revised agreement, the Board cannot release the funds. Of course, the learned Standing counsel would strongly deny this allegation.

There may not have been any physical coercion or compulsion. I can however easily visualise the situation in which the contractor was placed. The petitioner was obviously faced with liquidity crunch and therefore, he signed the revised agreement. But then, we are concerned with the rights of the parties. The question is how the agreement should be reworked.

At this stage, the learned Standing counsel would draw attention to paragraph No.11 of the G.O.Ms.No.296, Finance(Salaries) Department, dated 09.10.2017 and submitted that the respondents would undertake the exercise of calculating tax component by applying all the three formulas and the value of the subsumed tax can be arrived at values estimated in (a) or (b) or (c ), whichever is higher. The petitioner’s counsel made it clear that the petitioner should not be saddled with tax liability. When the petitioner entered into an agreement with the respondent Board, the contract price comprised three components, namely, cost factor, profit margin and tax component. There cannot be any contest regarding the cost factor and profit margin. The tax liability will have to be borne by the respondent Board. The respondents are directed to rework the terms of the contract and enter into a revised agreement with the petitioner. The entire exercise shall be concluded within a period of eight weeks from the date of receipt of a copy of this order.