The Dedicated Freight Corridor Corporation of India Limited (DFCCIL), a government-owned
entity engaged in the construction and operation of freight corridors, has sought clarification
regarding the Goods and Services Tax (GST) implications on the deposit of 75% of disputed
amounts into an escrow account during ongoing disputes or arbitration proceedings.
DFCCIL enters into contracts with third-party contractors for its projects, and disputes arising
from these contracts are subject to resolution mechanisms defined in the General Conditions
for Contract (GCC), which incorporates provisions from the Federation Internationale Des
Ingenieurs – Conseils (FIDIC). The FIDIC’s GCC includes the formation of a Dispute Adjudication
Board (DAB) for internal dispute resolution. If either party is dissatisfied with the DAB’s decision,
they can proceed to arbitration.
The situation involves a government-owned corporation, DFCCIL, disputing certain issues with
its contractors. The main question is whether the 75% of the disputed amount that DFCCIL has
deposited in an escrow account, pending the resolution of the dispute through a Dispute
Adjudication Board (DAB) or an Arbitral Tribunal, is subject to Goods and Services Tax (GST)
under the CGST Act, 2017.
DFCCIL argues that this deposit is not a payment made to the contractor and does not fall
under the definition of ‘consideration’ or ‘supply’ as per the CGST Act. They emphasize that the
amount can only be withdrawn under certain conditions, including providing a Bank
Guarantee (BG).
The ruling authority agrees with DFCCIL, stating that the deposit in the escrow account, under
the NITI Aayog’s directive, is not considered a ‘consideration’ or a ‘supply’ under the CGST Act.
They highlight that the amount is not directly paid to the contractor and can only be
withdrawn subject to specific conditions, including the provision of a BG. The ruling is valid until
the dispute is resolved against DFCCIL or accepted by DFCCIL.
The authority clarifies that if the contractor eventually succeeds in the dispute or if DFCCIL
accepts an adverse decision, this ruling becomes irrelevant. Additionally, the authority
reserves the right to recover any interest on the GST amount if there’s a delay due to the non-acceptance of an adverse decision. The second and third questions raised by DFCCIL about
the ‘time of supply’ and Input Tax Credit become unnecessary due to the negative ruling on
the first question.
| SW Point of View: Considering the specific circumstances, it’s advisable for DFCCIL to understand that the 75% deposit made in the escrow account, as per NITI Aayog’s directive, is not currently subject to GST under the CGST Act, 2017. This is because the deposit, pending resolution of the dispute, doesn’t qualify as ‘consideration’ or a ‘supply’ as defined in the Act. However, it’s crucial for DFCCIL to stay vigilant, especially as this ruling is applicable only until the resolution of the dispute or acceptance of an adverse decision. If the contractor prevails or DFCCIL accepts an unfavorable outcome, the GST dynamics might change. Moreover, DFCCIL should be prepared to address any potential interest liabilities on the GST amount due to delays resulting from the non-acceptance of an adverse decision. |
