The AAR, Gujarat in M/S. Dedicated Freight Corridor Corporation Of India Limited [Advance Ruling No. GUJ/GAAR/R/2023/31 dated 3 November 2023] has ruled that no GST is leviable on the amount deposited by the assessee in an escrow account against bank guarantee pending outcome of the further challenge against Arbitral Award or dissatisfaction against Dispute Adjudication Board (“DAB”) decision, as the amount deposited in an escrow account by the assessee, cannot be termed as consideration for the supply, since the assessee is agitating its ease, feeling aggrieved by the decision rendered against it. Thus, the same is outside the scope of ‘consideration' as defined under GST.

Facts:

• M/s Dedicated Freight Corridor Corporation of India Limited (“the Applicant”) is engaged in the business of construction, maintenance and operation of dedicated freight corridors. 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.
• That, NITI Aayog for revival of the construction sector and pursuant thereto, had directed that if PSUs are challenging any award/order passed against them by the Arbitral Tribunal, they are required to deposit 75% of the amount directed to be paid in such award/order, in an Escrow Account against bank guarantee submitted by the contractor for the same amount, without prejudice to the final order of the Court in the matter under challenge. Further, this deposit of 75% amount into escrow account by the PSU is subject to the fact that the contractor may ask for payment of 75% of the amount awarded, after justifying the utility of such payment supported with authentic documents
• Further, the amount so deposited by the Applicant in an escrow account, cannot be withdrawn by the contractor on his own volition. As per the Arbitral Award Escrow Account Agreement, the Banker shall act as the trustee of the escrow account and in terms of the agreement, the concerned banker shall withdraw and appropriate the amounts from the said escrow account strictly in accordance with the instructions issued by the Applicant to the contractor.
• Furthermore, in case the Applicant succeeds in the challenge/appeal, the amount so deposited & utilised by the Contractor, is required to be paid back along with applicable interest. If the contractor fails to do so, the Applicant can en-cash the bank guarantee submitted by the contractor. In the event where the challenged order/award is passed in favour of the contractor, the Applicant will be liable to pay the remaining 25% of the amount along with any remaining balance in the escrow account.

Issue:

Whether the amount of 75% deposited by the Applicant in escrow account against bank guarantee pending outcome of the further challenge against Arbitral Award or dissatisfaction against DAB decision, is liable to GST?

Applicant’s submissions:

• Even though the Applicant has parted away with 75% of the disputed amount required to be paid in terms of the DAB decision/arbitral award, the same has not been finally ‘paid' to the contractor but only ‘deposited' in an escrow account in accordance with directions of NITI Aayog.
• In terms of Section 7 of the Central Goods and Services tax Act, 2017 (“the CGST Act”), it cannot be said that there is any supply of goods/services since there is no sale, transfer, barter, exchange or disposal made or agreed to be made for consideration by a person in the course or furtherance of business.
• That the amount so ‘deposited' in the escrow account does not form part of consideration, therefore, the subject transaction cannot be considered as ‘payment made or to be made' since the amount has been ‘deposited' only with the view to revive the construction industry.
• Moreover, the amount so deposited is disputed and the same is yet to be finally decided by the appropriate authority, therefore, it cannot be said that the ‘payment is to be made' by the Applicant to the contractor since on account of the pending litigation and there is no liability upon the Applicant to pay any amount to the contractor. Moreover, there may arise a situation where the contractor has withdrawn the amount so deposited by the Applicant and has utilised the same for ongoing project/s, however, even in such a situation the transaction is neutral in nature as the contractor has submitted a bank guarantee of an equivalent value of the amount deposited in the escrow account.

Held:

• Observed that the amount deposited into an escrow account cannot be withdrawn without the explicit approval of the Applicant and can only be withdrawn subject to the condition that the supplier [contractor] provides a bank guarantee for the said amount.
• Noted that the Applicant does not term the deposited amount as a consideration for the supply since it is agitating its ease, feeling aggrieved by the decision rendered against the Applicant. Thus, the same is outside the scope of ‘consideration' as defined under Section 2(31) of the CGST Act.
• Opined that the payment made into an escrow account would not fall within the ambit of supply to be leviable to GST in view of our finding in respect of consideration.
• Held that the amount deposited by the Applicant 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.
• Further held that the moment the Supplier [contractor] finally succeeds in the dispute/the assessee accepts the adverse decision, the above ruling would be rendered infructuous.