Statutory Variation Clause Applicable: Madras HC Upholds Arbitral Awards Granting Full GST Reimbursement and Sets Aside Conflicting Award [Read Order]

The Madras High Court dismissed the petitions filed by the Integral Coach Factory (ICF) and simultaneously set aside a solitary conflicting arbitral award, all revolving around the applicability of the statutory variation clause (SVC) for GST rate hikes.

Internal Coach Factory (ICF) filed petitions against Arbital awards section 34 of the Arbitration and conciliation act, 1996. Indira Industries filed a petition against the conflicting arbitral award for applicability of the Statutory variation clause (SVC).

The dispute centered on the contractual obligation to reimburse contractors for a statutory increase in the Goods and Services Tax (GST) rate from 5% to 12% on the final product.

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ICF, the government entity, contested the awards, arguing that Clauses 2.8 and 2.9 of the General Conditions of the Contract (GCC) mandated the contractors to pass on any additional Input Tax Credit (ITC) benefit to ICF by way of price reduction.

Their entire case was predicated on the assumption that the rate increase had led to an additional, unabsorbed ITC benefit for the contractors.

However, the contractors, led by Indra Industries and others, relied on the explicit SVC (Clause 3.0 of the Purchase Orders), which obligated ICF to reimburse the full tax amount due to statutory changes occurring after the bid date.

The respective Arbitral Tribunals, whose awards were challenged, had previously ruled in favour of the majority of contractors (except in the case of Arb.O.P. No. 128 of 2024), finding that the SVC was indeed applicable.

The tribunals correctly held that ‘availment’ and ‘utilization’ of ITC are distinct concepts under GST law. They emphasized that the 'benefit of ITC' as contemplated in the GCC clauses would only arise if there was a corresponding change in the input tax regime, not merely a change in the output tax rate.

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The High Court bench comprising Justice Abdul Quddhose noted that ICF’s reliance on its internal Joint Procedure Order (JPO) No. 1/2019 was misplaced as it was not part of the signed contract and therefore not binding on the contractors.

The Court observed that ICF failed to produce any evidence to disprove the Chartered Accountant certificates provided by the contractors, which certified that no additional ITC benefit had accrued.

The Court held that the arbitral awards favouring the contractors contained the only "possible view" based on the contractual terms and the legal position on GST.

The Court addressed a separate, conflicting award where the Arbitral Tribunal had rejected an identical claim. The Court noted that the tribunal had misapplied the GCC clauses (which were only applicable at the time of quoting the rates) and had completely disregarded evidence showing that the contractors had established their entitlement to reimbursement under the SVC.

The court dismissed the petitions filed by ICF (Arb.O.P.(Com.Div.) Nos.602 of 2023, 74, 423 to 429 of 2024, and 92 & 172 of 2025).

The court set aside the conflicting arbitral award (Arb.O.P. No. 128 of 2024) and granted the affected contractor liberty to initiate fresh arbitration proceedings.

In result the petition filed by the Indira Industries was allowed and the petitions filed by the ICF were dismissed.

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