Contract was amended due to change in Tax Regime due to change in tax structure.

Case Title: Subaya Constructions Company Ltd. v. Tamil Nadu Water Supply and Drainage Board

Court: High Court of Madras

Petition No.: W.P.(MD) No. 15967 of 2020

Date of Judgment: 8 March 2021

Category of Dispute: Rate of GST / Reworking of Contractual Tax Components Post-GST

Relevant Provisions:

Clause 46 of contract (pre-GST TDS deduction)

G.O.Ms. No. 296 Finance (Salaries) Department dated 9-10-2017

Para 10(a), 10(b), 10(c) and Para 11 of the above GO

Relevant Sections of CGST Act: Sections 9 and 15 (levy and value of supply)

Facts of the Case [Paras 2–5, 9–12]

• The petitioner entered into a contract with the Tamil Nadu Water Supply and Drainage Board on 25.01.2016 for underground sewerage works for Karaikudi Municipality, inclusive of TNVAT and excise duty [Para 2].
• Clause 46 of the contract prescribed TDS of 2% for civil works and 5% for other works [Para 3].
• With the introduction of GST from 01.07.2017, the tax regime changed—works contracts were uniformly taxed at 12%, necessitating contract reworking [Para 3].
• G.O.Ms.No.296 dated 09.10.2017 laid down three methods (para 10(a), (b), (c)) to compute subsumed tax in contract value [Para 5].
• The petitioner claimed its contract should be reworked using method 10(a) (bid had break-up of taxes), but the respondents applied 10(c) (SOR-based estimation) [Paras 6–7].
• Petitioner alleged coercion in signing a revised agreement due to fund-release pressure post-GST [Para 12].

Question(s) in Consideration [Paras 6–7, 13]

• Whether the petitioner’s contract should be revised using clause 10(a) or 10(c) of G.O.Ms. No. 296 for determining the GST impact?
• Whether the petitioner can be bound by a revised agreement allegedly signed under financial duress?

Observation of Court [Paras 8–15]

• The court noted the contract clearly included a tax component at pre-GST rates (2%-5%) and that post-GST, this increased to 12% [Para 9].
• The government policy under G.O.Ms. No. 296 mandates that the GST burden be borne by the purchaser, not contractor [Para 9].
• The contract had item-wise quoted rates inclusive of taxes, and there was no departmental schedule of rates attached to the tender, making clause 10(c) inapplicable [Para 9].
• The court referred to its own previous ruling in W.P.Nos. 21196 and 21198 of 2019 (Subaya with Salem Municipal Corp.), where clause 10(a) was applied [Para 10].
• Court accepted the petitioner’s explanation that the revised agreement was signed due to financial compulsion, not free consent [Paras 12–13].
• Paragraph 11 of the GO allows adopting the highest value among (a), (b), or (c), but the tax burden must still fall on the Board, not the contractor [Para 15].

Judgment of the Court [Paras 14–16]

• The High Court directed the respondent Board to rework the contract terms applying para 10(a) of G.O.Ms. No. 296 [Para 14].
• The Board is required to recalculate the tax component and revise the agreement accordingly, ensuring that the contractor is not saddled with GST burden [Para 15].
• The entire exercise must be completed within 8 weeks of receipt of the order [Para 15].
• Writ petition allowed. No costs [Para 16].

Between Fine Lines

1. GST transition altered tax rates, warranting contract price restructuring in public works.
2. The government policy mandates that increased GST burden is to be borne by the purchaser, not the contractor.
3. When item-wise tax breakup is given, method 10(a) from G.O.Ms. No. 296 applies for reworking.
4. A revised agreement signed under financial compulsion does not negate the petitioner’s right to seek proper tax adjustment.
5. The court reaffirmed that public authorities must act in line with declared tax policies and equitable treatment.

Summary of Referred Cases