The GST Dilemma in Arbitration Awards - When Compensation Becomes Consideration
Disputes are inherent to large infrastructure and construction contracts. Projects that span several years often encounter delays, design modifications, cost escalation, scope changes, and unforeseen circumstances. These developments frequently lead to disagreements between contracting parties, particularly regarding additional expenditure or withheld payments. When such disputes remain unresolved, they are typically referred to arbitration, which may ultimately result in substantial financial awards.
However, once such arbitration awards are received, an important question arises under GST - whether amounts received pursuant to arbitration awards are liable to GST. This issue has become increasingly important in infrastructure, EPC, and government contracts, where arbitration awards often involve substantial sums.
The complexity arises because arbitration awards are rarely uniform. A single arbitration award may include payments for additional work, price escalation, cost reimbursement, or compensation for delays and contractual breaches. Since the nature of these payments differs, the GST implications also vary. Therefore, each component of the arbitration award must be carefully examined to determine whether it constitutes consideration for the supply or merely compensation for loss.
This important issue has been examined in detail by the West Bengal Authority for Advance Ruling in Karam Chand Thapar & Bros (Coal Sales) Ltd. [2026-VIL-30-AAR (13.02.2026)], which provides significant clarity on the taxability of arbitration awards under GST.
From Contract Execution to Arbitration Award - The Journey to GST Dispute
Karam Chand Thapar & Bros (Coal Sales) Ltd. entered into three contracts with THDC India Ltd. in 1996 for the execution of civil works relating to the Tehri Hydro Power Project. The work was completed between 2007 and 2008, and final payments were made in 2011. However, disputes arose during contract execution regarding additional expenditure, price adjustments, and wrongful deductions.
These disputes were ultimately referred to arbitration, and the Arbitral Tribunal passed awards in November 2023, allowing certain claims in favour of the applicant. Subsequently, the parties entered into conciliation proceedings and executed a settlement agreement in October 2024, pursuant to which the applicant received approximately ₹94.56 crores.
Since the amount was received during the GST regime, the applicant approached the Advance Ruling Authority to determine whether receipts from arbitration awards were liable to GST. Against this factual backdrop, the Authority proceeded to examine the central legal issue regarding the taxability of arbitration awards under GST.
The Real Legal Question - When Does an Arbitration Award Become Taxable Under GST?
The principal issue before the Authority was whether amounts received pursuant to an arbitration award should be treated as a taxable supply under GST or merely as non-taxable compensation.
The applicant contended that the amounts received pursuant to the arbitration award were compensatory in nature. According to the applicant, such payments represented reimbursement for losses or damages arising from contractual disputes and therefore could not be treated as consideration for any supply. In other words, the applicant argued that there was no fresh supply of goods or services at the time of the arbitration award, and hence, GST should not be applicable.
On the other hand, from the revenue perspective , such payments could be viewed differently. The department could treat certain components of arbitration awards as additional consideration for services already rendered. Where the arbitration award relates to additional work executed, price escalation, or upward revision of contract value, the payment may be regarded as consideration for supply and therefore taxable under GST.
To resolve this issue, the Authority adopted a careful and structured approach. It was observed that arbitration awards cannot be treated as a single, uniform transaction. An arbitration award may contain several claims, each arising from different circumstances and having different legal implications . Some claims may relate to additional work executed, while others may relate to damages for breach of contract or cost escalation.
Recognising this distinction, the Authority held that each component of the arbitration award must be examined independently. The taxability of the arbitration award, therefore, depends upon the nature of the individual claim allowed by the arbitral tribunal. If a claim represents additional consideration for supply, GST would apply. However, if the claim represents compensation or liquidated damages, GST would not apply, particularly in light of Circular No. 178/10/2022 issued by the CBIC.
This analytical approach adopted by the Authority forms the foundation of the ruling and provides valuable guidance for determining GST implications of arbitration awards in future cases.
Reliance on Circular No. 178/10/2022 - The Key to Understanding Taxability of Arbitration Awards
An important and decisive factor in the present ruling was the Authority's reliance on CBIC Circular No. 178/10/2022-GST dated 03.08.2022, which addresses the taxability of liquidated damages, compensation, penalties, and similar payments under GST. This circular was issued by the Government precisely to address disputes relating to whether such payments constitute supply under GST.
The circular clarifies an important legal principle: every payment arising from a contract does not automatically become taxable under GST. In particular, where an amount is paid as compensation for breach of contract, such payment does not necessarily constitute consideration for supply. If the payment merely compensates the aggrieved party for loss, damage, or inconvenience, it represents only a flow of money from one party to another, and not a supply of goods or services.
The circular further explains that for a transaction to qualify as a supply under GST, there must be a reciprocal arrangement between two parties. In other words, one party must agree to do something, refrain from doing something, or tolerate a particular act in return for consideration. However, where compensation is paid for breach of contract, and the recipient does not undertake any such obligation, there is no supply under GST.
Thus, the circular makes a clear distinction between consideration for supply and compensation for loss. While the former is taxable, the latter is not.
The Authority found this clarification highly relevant in the context of arbitration awards. Since arbitration awards often include claims for damages, compensation, and additional payments, the circular provided a useful framework for determining taxability. Accordingly, the Authority proceeded to analyse each claim allowed under the arbitration award in the light of this circular and determine whether the amount represented additional consideration or liquidated damages.
This reliance on Circular No. 178/10/2022 is a crucial part of the ruling and reinforces the principle that the taxability of arbitration awards depends on the true nature of the payment rather than merely on the fact that the payment arises from an arbitration award.
The Crucial Distinction - Additional Consideration vs. Compensation
One of the most important aspects of this ruling is the Authority's distinction between additional consideration for supply and compensation for loss or damage. The Authority observed that the arbitration award did not relate to a single type of claim. Instead, the arbitral tribunal had allowed various claims arising from different circumstances during the execution of the contract. Therefore, it was necessary to examine each claim separately before determining the GST implications.
The Authority noted that certain claims allowed by the arbitral tribunal related to additional work executed by the applicant or upward revision of the contract price. In such cases, the applicant had either performed extra work beyond the original scope of the contract or incurred additional costs directly linked to the execution of the project. In these situations, the arbitration award merely determined the amount payable for the additional work or the revised contract value.
The Authority held that such payments could not be treated as compensation. Instead, these amounts represented additional consideration for services already rendered. Although the payment was made later through arbitration, the underlying nature of the transaction remained the same - namely, supply of services. Therefore, such payments were held to be taxable under GST.
In contrast, the Authority also identified claims that were compensatory in nature . These claims relate to losses suffered by the applicant, such as cost escalation, delays, or other circumstances that lead to additional expenditure. In such cases, the payments were not made for any additional supply of services. Rather, they were intended to compensate the applicant for losses or damages arising during execution of the contract.
The Authority observed that such payments fall within the category of liquidated damages or compensation, which do not constitute consideration for supply . Relying on Circular No. 178/10/2022, the Authority held that these payments represent merely a flow of money from one party to another and therefore fall outside the scope of GST.
Thus, the Authority adopted a careful and balanced approach by distinguishing between payments for additional work and payments for compensation. Where the arbitration award related to additional consideration, GST was held to be applicable. However, where the award represented liquidated damages or compensation for loss, GST was held not applicable.
This distinction formed the basis for determining GST applicability to different components of the arbitration award. It also reflects the Authority’s attempt to align the decision with the principles laid down in Circular No. 178/10/2022, thereby ensuring that genuine compensation remains outside the scope of GST while additional consideration for supply remains taxable.
Application of the Above Principle to Arbitration Awards
Applying the above distinction, the Authority analysed the various claims allowed by the arbitral tribunal and classified them based on their true nature. Claims relating to additional work, price adjustments, or upward revision of contract value were treated as additional consideration for supply and therefore held taxable under GST. On the other hand, claims for compensation for losses, delays, or cost escalation were treated as liquidated damages and held to be outside the scope of GST under Circular No. 178/10/2022.
Thus, the Authority reinforced the principle that the taxability of arbitration awards cannot be determined uniformly and must depend upon the nature of each individual claim allowed under the arbitration award.
Pre-GST Contracts but Post-GST Arbitration Awards - Whether GST Still Applies?
Another important legal issue examined by the Authority was whether GST would apply where the underlying services were executed during the pre-GST regime, but the payment pursuant to the arbitration award was received after the introduction of GST.
The applicant argued that the contracts were executed much before the introduction of GST and the work had already been completed during the earlier tax regime. According to the applicant, since the services were rendered in the pre-GST period, any amount received later pursuant to arbitration proceedings should also be treated as pre-GST and therefore outside the scope of GST.
However, the Authority examined the issue in the light of the transitional provisions contained in Section 142 of the CGST Act, 2017, particularly Section 142(2)(a) and Section 142(10).
Section 142(2)(a) provides that where, in pursuance of a contract entered into prior to the appointed day, the price of goods or services is revised upwards after the introduction of GST, the supplier shall issue a supplementary invoice or debit note, and such additional amount shall be deemed to be an outward supply under GST. The Authority observed that an arbitration award determining additional amounts payable for work already executed effectively results in an upward revision of the contract price. Therefore, such additional amounts would fall within the ambit of Section 142(2)(a) and become liable to GST.
Further, the Authority also took note of Section 142(10) of the CGST Act, 2017, which provides that, save as otherwise provided in Section 142, the goods or services supplied after the appointed day shall be liable to GST. This provision reinforces the principle that transitional situations must be examined carefully, and where additional consideration arises after the introduction of GST, the same may attract GST unless specifically excluded.
Applying these provisions, the Authority observed that where arbitration awards determine additional consideration or upward revision of contract value, such additional amounts cannot merely be treated as delayed payments relating to the pre-GST period. Instead, they represent additional value of supply determined subsequently, and therefore become liable to GST under the transitional framework of Section 142.
The Authority therefore concluded that receipt of arbitration award after GST cannot automatically be treated as non-taxable merely because the underlying contract relates to the pre-GST period. If the arbitration award results in enhancement of contract value or additional consideration, GST would become applicable in terms of Section 142(2)(a) read with Section 142(10) of the CGST Act, 2017.
This finding assumes considerable importance, particularly in the context of long-term infrastructure and EPC contracts executed prior to GST but settled through arbitration after the introduction of GST. The ruling clarifies that the decisive factor is not the timing of execution of the contract, but whether the arbitration award results in upward revision of consideration under the transitional provisions of the GST law.
Taxability of Arbitration Costs - A Distinction Between Service and Reimbursement
The Authority observed that arbitration proceedings involve services provided by the arbitrators. The arbitrators provide professional services to resolve disputes between the parties. Such services fall within the scope of legal and arbitration services, which are taxable under GST. Therefore, the Authority held that arbitration services provided by the arbitral tribunal constitute a taxable supply of services.
Since the applicant was the recipient of arbitration services, the Authority further held that GST would be payable under the Reverse Charge Mechanism (RCM). In other words, even though the arbitrators provide the services, the liability to pay GST would fall on the recipient of such services, namely the applicant. The Authority also noted that such arbitration services would be classifiable under SAC 998215 and would be subject to GST at the applicable rate.
However, the Authority made an important distinction between arbitration services and reimbursement of arbitration costs. In many arbitration proceedings, the tribunal may direct one party to reimburse the other party's arbitration expenses. Such reimbursement does not represent consideration for any supply between the contracting parties. Instead, it merely compensates one party for the expenditure incurred during arbitration.
The Authority therefore held that while arbitration services themselves are taxable under GST, the reimbursement of arbitration costs awarded by the tribunal would not attract GST . This is because such reimbursement does not involve any supply of goods or services between the parties and is merely compensatory.
Conclusion - Taxability of Arbitration Awards Depends on the Nature of the Claim
The ruling of the West Bengal Authority for Advance Ruling in Karam Chand Thapar & Bros (Coal Sales) Ltd. [2026-VIL-30-AAR (13.02.2026)] provides significant clarity on the GST implications of arbitration awards. The Authority has adopted a practical and legally sound approach by examining the nature of each claim allowed under the arbitration award rather than treating the entire award as a single transaction.
The ruling makes it clear that arbitration awards cannot be uniformly treated as taxable or non-taxable. Where the arbitration award relates to additional work executed, upward revision of contract price, or additional consideration for services, such payments retain the character of supply and therefore attract GST. On the other hand, where the arbitration award represents liquidated damages, compensation for breach of contract, or reimbursement of losses, such payments do not constitute consideration for supply and hence fall outside the scope of GST, particularly in light of CBIC Circular No. 178/10/2022-GST dated 03.08.2022.
This decision is of considerable importance to infrastructure companies, EPC contractors, government contractors, and public sector undertakings, where disputes frequently result in arbitration awards involving multiple claims of varying nature. The ruling highlights the need for taxpayers to carefully analyse each component of an arbitration award before determining GST liability, rather than adopting a uniform approach.
More importantly, the ruling reinforces a broader principle under GST law - the taxability of a transaction depends on its true nature and substance, and not merely on the fact that payment has been received pursuant to an arbitration award. This principle is likely to guide future disputes and provide clarity in determining GST implications of arbitration settlements involving complex contractual claims.
By: CA Raj Jaggi & Adv Kirti Jaggi
CAclubindia
