The Gujarat Authority for Advance Ruling (AAR) recently ruled that the GST is not leviable on escrow deposit pending outcome of arbitral award.
The applicant, Dedicated Freight Corridor Corporation of India Limited, is engaged in the business of construction, maintenance and operation of dedicated freight to undertake this work, they enter into contract with third party contractors. The agreements so entered into contains dispute resolution clause to tackle any eventuality of dispute that may arise between the contractor and the applicant.
NITI Aayog directed PSUs challenging awards to deposit 75% of the amount in an escrow account pending litigation, which was extended to adverse Dispute Adjudication Board (DAB) decisions.
The applicant contended that the deposited amount in the escrow account is not a consideration as per the definition in the CGST Act, 2017. There is no supply of goods/services, as the amount is deposited to revive the construction industry, and it is subject to pending litigation. The applicant has control over the deposited amount, and the contractor requires permission to withdraw it.
In view of the foregoing, it is the Applicant’s claim that he is in complete control of the amount so deposited in the escrow account since the contractor has to obtain his permission to withdraw; that the amount so withdrawn has to be appropriated as per his instruction. Furth safeguard the applicant, the contractor is also required to furnish BG of equivalent amount deposited by the applicant.
The counsel for the revenue submitted that GST should be applicable on the deposited amount into the escrow account until the final outcome of the litigation, considering it falls within the scope of supply under Section 7 of the CGST Act.
A Two-Member Bench of the Authority comprising Riddhesh Raval, Member SGST and Amit Kumar Mishra, Member CGST observed that “The amount deposited by the applicant (75%) in escrow account against bank guarantee pending outcome of the further challenge against Arbitral Award or dissatisfaction against DAB decision, is not liable to GST under the provisions of CGST Act.”
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