Calcutta High Court Mandates Bank Guarantee, Declaring Appropriation of GST Funds by Bank as 'Clearly Impermissible' and reserved 'for Tax Authorities'
Safiya Malik
The High Court at Calcutta, in its Commercial Division, Single Bench of Justice Shampa Sarkar, directed Karur Vysya Bank to secure an arbitration award totalling Rs. 8,40,52,832 through a bank guarantee. The dispute cantered around allegations of wrongful withholding of GST amounts related to lease rental payments. The court granted a conditional stay on the arbitration award, contingent upon the bank furnishing the required bank guarantee, effective until the resolution of the bank’s application challenging the award.
The dispute emerged from two agreements executed on September 29, 2020—a Designated Account Agreement (DAA) and an Assignment for Agreement (AFA)—between Karur Vysya Bank (the petitioner) and Srei Equipment Finance Limited (the respondent). According to these agreements, Karur Vysya Bank was obligated to transfer the GST component collected from lease rentals payable by Mahalaxmi Infra Contract Limited directly into a designated escrow account maintained for the respondent.
The respondent alleged the bank had illegally withheld a total sum of Rs. 5,95,93,332, specifically pertaining to GST, as of March 31, 2023. Despite repeated notices demanding transfer of this GST amount, the bank did not comply, leading to termination of the agreements and subsequent arbitration initiated by the respondent.
Advocate Rupak Ghosh, representing Karur Vysya Bank, argued before the court that the arbitrator failed to appreciate essential evidence and documents supporting the bank's stance. He asserted that the respondent had waived its right to claim GST reimbursement by not explicitly identifying these amounts as "excluded amounts" as per the agreements. He further stated that the bank adjusted the amounts received from Mahalaxmi Infra Contract Limited into its accounts due to outstanding liabilities owed by the respondent. Ghosh contended that the arbitrator denied the bank an opportunity to submit vital documents such as the loan sanction letter and an RBI circular, thus severely prejudicing the bank's defense. Additionally, allegations were made regarding bias and procedural irregularities, suggesting the arbitrator had acted hastily and unfairly in rendering the award.
On the other side, Advocate Swatarup Banerjee, appearing for Srei Equipment Finance Limited, countered these allegations, stating that the arbitrator had indeed granted ample opportunity to the bank to submit documents. Banerjee stated that despite repeated reminders, the petitioner had delayed or failed to produce necessary documentation, leading to the exclusion of certain materials from consideration. It was stated that the arbitrator had allowed additional submissions even after the conclusion of pleadings, providing adequate fairness to both sides.
The court extensively referenced the arbitration proceedings, noting that both parties had consented to arbitration and agreed that the matter could be decided without witness examination, relying solely on documentary evidence and exchanged correspondence. The key issue revolved around the interpretation of specific clauses related to the transfer and adjustment of GST amounts.
In interpreting Clause 2.3(e) and Clause 5.3 of the AFA, Justice Sarkar stated:
"The money that the respondent adjusted and appropriated from the designated account towards its other alleged dues from the claimant was money earmarked for being handed over to the claimant as a mere courier to carry it to the appropriate tax counters."
The court further clarified the fundamental principle underlying GST obligations:
"Under the law for the time being in force, a person who acquires any specified goods or obtains any specified service is required to pay a percentage of the price... It is an obligation that the seller of the goods or the provider of services must discharge by operation of law."
Addressing allegations of waiver and acceptance of the GST adjustments through insolvency proceedings, Justice Sarkar noted:
"Nothing has been shown by the respondent that subsequent to the issuance of such notices, the claimant withdrew its objection in such regard. Nothing has also been shown...that the impugned adjustments were considered or credited to the respondent before arriving at the figure fixed as the quantum of debt payable by the claimant to the respondent post the resolution plan."
In response to allegations of arbitrator fraud, the court decisively held:
"The threshold to prove fraud and corruption on the part of the learned Arbitrator in the making of the award would be much higher than a criticism of the findings of the learned Arbitrator."
The court concluded with the directive:
"The petitioner must secure the sum of Rs.8,40,52,832/- by furnishing a bank guarantee to the satisfaction of the learned Registrar Original Side, Calcutta. The bank guarantee shall be kept renewed from time to time. There shall be unconditional stay of the award for a period of four weeks from date, and the stay shall continue till disposal of the application under Section 34 of the Arbitration Conciliation Act, 1996, upon compliance of this order."
“All observations made are tentative and the application for setting aside the award will be decided independently and on its own merits.”
Case Title: Karur Vysya Bank vs. Srei Equipment Finance Limited
Case Number: AP-COM/947/2024
Bench: Justice Shampa Sarkar
[Read/Download order]
