1. Arbitration award — Service tax reimbursement claim by contractor — Challenge under Section 37, Arbitration and Conciliation Act. (Para 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 )
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2026 Supreme(Online)(Del) 21983
IN THE HIGH COURT OF DELHI AT NEW DELHI
Prathiba M. Singh, Dinesh Bhatt, JJ
Continental Engineering Corporation Ltd. – Appellant
Versus
Union of India – Respondent
FAO(OS) (COMM) 163/2022 | CM APPL. 29483/2022
Advocates:
For the Appellants/Petitioners: Dr. Amit George, Aditya Swarup, Rupam
For the Respondents: Vedansh Anand, Kush Garg, Urvi Mohan
For the Appellants/Petitioners: Dr. Amit George, Aditya Swarup, Rupam
For the Respondents: Vedansh Anand, Kush Garg, Urvi Mohan
The ground of 'patent illegality' under Section 34(2A) of the Arbitration and Conciliation Act, 1996 is not applicable to international commercial arbitrations, and reimbursement of service tax on input services is permissible if the contract provides for service tax reimbursement.
Headnote:(A) Contract Interpretation - Service Tax Reimbursement - Reimbursement of service tax paid on input services (sub-contractors) is permissible where the contract provides for service tax reimbursement, as such services form an integral part of the project execution. (Para 23, 25)
(B) Arbitration Law - International Commercial Arbitration - Scope of Challenge - The ground of "patent illegality" under Section 34(2A) of the Arbitration and Conciliation Act, 1996 is specifically excluded and not available for setting aside awards rendered in international commercial arbitrations. (Para 27, 28)
(C) Public Policy - Interpretation of Contract - A reasonable interpretation of contract clauses by an arbitral tribunal regarding tax reimbursement does not constitute a conflict with the public policy of India. (Para 30)
Issues: Whether the Appellant is entitled to reimbursement of service tax paid on input services and whether the ground of patent illegality is applicable to an international commercial arbitration.
Legal Category Hierarchy
- arbitration
- contract law
-
tax law
-
service tax
- reverse charge mechanism (Para 6)
-
service tax
- practice and procedure
Table of Contents
2. Claimant argued service tax reimbursement was contractually agreed; respondent argued only service tax on the main contract was reimbursable, not on input services. (Para 15 , 16 , 17 , 18 , 19 )
3. Contract clauses showed clear exclusion of service tax from contractor's liability; reimbursement intended for all services integral to the project, including via subcontractors. (Para 22 , 23 , 24 , 25 , 26 )
4. For international commercial arbitrations, the ground of patent illegality under Section 34(2A) is unavailable; an award may be set aside only on public policy grounds. (Para 27 , 28 , 29 , 30 )
5. Appeal allowed; impugned judgment and review order set aside; arbitrator's award on service tax reimbursement restored. (Para 31 , 32 , 33 )
6. Is the ground of patent illegality available for setting aside awards in international commercial arbitrations?
No. Section 34(2A) of the Arbitration and Conciliation Act expressly excludes international commercial arbitrations from being set aside on the ground of patent illegality. (Para 27 , 28 , 29 )
7. Does an award that runs contrary to express terms of a contract conflict with the public policy of India?
Yes, an award contrary to the express terms of a contract can be set aside as being in conflict with the public policy of India under Section 34(2)(b)(ii). (Para 14 )
8. Is service tax paid by a contractor on input services from subcontractors reimbursable under a contract providing for service tax reimbursement?
Yes, if such input services are integral to the project, the service tax reimbursement clause covers them even if paid indirectly via subcontractors. (Para 23 , 24 , 25 , 26 )
$~2 *
Prathiba M. Singh, J. (Oral)
1. This hearing has been done through hybrid mode.
2. The present appeal has been filed under Section 37(1) of the Arbitration and Conciliation Act, 1996 (hereinafter “ACA, 1996”) challenging the judgment dated 22nd March, 2022 as also the review order dated 2nd May, 2022 passed by the ld. Single Judge in OMP (Comm.) 432/2020 and Review Petition 123/2022, respectively.
3. The background of this matter is that the Appellant Continental Engineering Corporation, a Taiwanese company, was awarded a contract for “Comprehensive Development of Corridor (Outer Ring Road) between Mukarba Chowk to Wazirabad Chowk. SH: C/o Flyovers, Loops, Bridges across supplementary drain, FOBs, Footpath, Cycle Tracks, Widening of Road on embankment, Rain Water Harvesting Scheme, Electrical works and other allied works” (hereinafter “the Project”). In respect of the same, an agreement dated 14th May, 2013 was entered into between the Appellant and Public Works Department (NCTD), Government of India. The stipulated date of start was 21st May 2013 and of completion was 20th May 2015. The total value of the contract was Rs. 442,95,68,517/-.
4. Disputes had arisen between the parties in respect of certain claims under this contract. Accordingly, the Appellant invoked the arbitration clause contained in Clause 25 of the General Conditions of Contract, in terms of which the ld. Sole Arbitrator was appointed. The ld. Sole Arbitrator was a retired Judge of this Court.
5. Further to the arbitration proceedings, Award dated 10th December, 2019 was rendered by the ld. Sole Arbitrator.
6. Before the ld. Sole Arbitrator, the Appellant had, inter alia, claimed for reimbursement of service tax and environmental compensation cess. In the claim for service tax, the Appellant sought reimbursement of a total sum of Rs.5,02,47,953/-. The ld. Sole Arbitrator analysed the entire evidence which was brought on record by the parties. As per the Award, out of the total claim of service tax, a sum Rs.1,38,58,095/- was deposited directly by the Appellant, under the reverse charge mechanism, with the service tax department in respect of input services which it had received from various sub-contractors. The relevant portion of the Award noting the relevant facts is as under:
“It is also not in dispute between the parties that out of the total amount of Rs.5,02,47,953/- (Rupees Five Crores Two Lacs Forty Seven Thousands Nine Hundred Fifty Three Only), the claimant has deposited an amount of Rs.1,38,58,095/- (Rupees One Crore Thirty Eight Lacs Fifty Eight Thousands Ninety Five Only) directly with the Service Tax Department for receiving input services from various sub-contractors appointed by it. On these input services, the service tax has been paid by the Claimant under the reverse charge mechanism and these input services compromise of the following:
(a) Legal consultancy services
(b) Manpower recruitment/supply agency service
(c) Rent a cab scheme operator service
(d) Works Contract service
(e) Transport of goods by road/GTA service
(f) Security detective agency service”
7. Insofar as the remaining amount of Rs. 3,63,89,858/- is concerned, the same were in respect of input services which are not covered under reverse charge and thus the service tax is stated to have been deposited by the vendors and not by the Appellant. This service tax component was part of the invoices raised upon the Appellant by the respective service providers for which the Appellant had made payments to them.
8. After analysing both aspects of the said claim, the ld. Sole Arbitrator partly allowed the claim in terms of paragraphs 60 and 61 of the Award which reads as under:
“60. Under the said two clauses, the Claimant was to satisfy three conditions to claim reimbursement from the Respondent; firstly that it has paid the service tax to the concerned department; secondly, the demand has been raised by the Department for the payment of the service tax from the Claim
