When a contractor pays a State tax and the employer refuses to reimburse it, two questions tangle: was the tax payable at all, and who may decide that? In O.M.P. (COMM) 257/2016, decided on 16 October 2026, the Delhi High Court answered both in a dispute from the Delhi Metro's Phase-II works. Larsen & Toubro had paid about Rs 4.46 crore as Delhi VAT on panels procured for 25kV switching stations and claimed reimbursement under the contract; a three-member tribunal returned a NIL award, finding the goods had moved from outside Delhi — and from abroad — as an incident of the contract, so DVAT was never attracted. Justice Om Prakash Shukla upheld the award: the question was arbitrable, the tribunal applied the governing Division Bench authority, and even an incorrect application of law is not by itself a ground for interference under Section 34.
The dispute
DMRC awarded a consortium led by L&T a January 2008 contract for the design, supply, installation and commissioning of 25kV rigid overhead contact system switching stations for Delhi MRTS Phase-II. L&T procured high-voltage panels imported through Germany and low-voltage panels from Kolkata, paid Delhi VAT of Rs 4,45,73,743 on the sectioning and sub-sectioning post items, and sought reimbursement under Clause 24(c)(ii). DMRC's position was that the sales were in the course of import and inter-State trade — outside DVAT under Section 7 of the DVAT Act read with Sections 3 and 5 of the Central Sales Tax Act — so nothing was reimbursable. The tribunal agreed with DMRC and returned a NIL award in March 2014. L&T challenged it under Section 34.
The court's findings
Jurisdiction objection rejected
Whether DVAT applied to these supplies, as between the parties, fell within the arbitrable category; the sovereign-function argument did not oust the tribunal.
Governing authority applied
The tribunal followed the Division Bench's ABB framework; the conditions showing a direct link between the inter-State procurement, the import and the contract were satisfied.
Nexus not severed
Integrating the purchased panels into sectioning posts did not break the integral connection between the movement of goods and the contract.
Section 34 discipline
No re-appreciation of evidence; a plausible view based on the record stands, and mere incorrect application of law is not sufficient for interference.
The Section 34 standard, restated
The judgment collects the familiar limits of a setting-aside court in commercial arbitrations: the award must reflect due application of mind; a plausible view on the material is immune; patent illegality must go to the root of the matter; and the court does not sit in appeal over the tribunal's appreciation of evidence or its construction of the contract, so long as the tribunal has not rewritten the bargain. Each of those phrases appears in the court's reasoning, and together they explain why a decade-old NIL award on a crore-level claim survived.
Drafting and strategy lessons for works contracts
| Issue | Lesson |
|---|---|
| Tax reimbursement clauses | Tie reimbursement to taxes "properly leviable and paid", and prescribe a consultation mechanism before a party pays a disputed levy |
| Procurement structure | Where goods move inter-State or in the course of import against the contract, the taxing consequence follows the movement — document the linkage either way |
| Forum | Raise jurisdictional objections before the tribunal under Section 16; holding them back weakens a later Section 34 attack |
| Refund strategy | If a tax was paid that was not exigible, pursue the statutory refund route promptly — limitation under tax statutes is unforgiving |
Although the dispute concerned the pre-GST DVAT/CST regime, the architecture of the reasoning carries forward: GST-era contracts raise the same questions about which supplies attract which levy, who bears a tax paid under protest, and whether the arbitral tribunal or the tax authority decides. The answer this judgment gives — the tribunal decides the inter-party contractual consequence, the tax code governs refunds — remains the working rule.
This article summarises a Delhi High Court judgment under Section 34 of the Arbitration and Conciliation Act, 1996 for general information. Tax positions under repealed statutes and transitional regimes require specific advice; nothing here is legal or tax advice.
Frequently Asked Questions
Was the tax question arbitrable at all?
L&T argued that determining DVAT liability is a sovereign function reserved to the tax authorities under a complete statutory code. The court rejected the objection for this dispute: what the tribunal decided was whether, as between the contracting parties, the levy applied to these supplies so as to trigger the reimbursement clause — a question arising under the contract, and therefore arbitrable.
What was the contractual clause involved?
Clause 24(c)(ii) of the Special Conditions required DMRC to reimburse DVAT paid on indigenous equipment. DMRC had reimbursed one invoice but recovered it from running bills after concluding that DVAT was not applicable to the transactions, since the goods moved from outside Delhi pursuant to the contract.
Why did the Section 34 challenge fail on merits?
The tribunal had followed the Delhi High Court Division Bench decision in the ABB line of authority on when a movement of goods is integrally connected with a works contract, found the conditions satisfied on the documents, and concluded the exemption under Section 7 of the DVAT Act applied. The court held this was a plausible view showing due application of mind, with no patent illegality going to the root of the award.
Does paying a tax create a right to reimbursement?
No. The judgment underscores that a contractor who pays a tax that was not exigible cannot convert that payment into a contractual claim; the remedy, if any, lies in seeking refund under the tax statute. Contract clauses reimburse taxes properly payable, not taxes mistakenly paid.