Delhi High Court Upholds DMRC’s Refusal to Reimburse Rs.4.46 Crore in DVAT to L&T

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 17.10.2026

Delhi High Court Upholds DMRC’s Refusal to Reimburse Rs.4.46 Crore in DVAT to L&T

The Delhi High Court has dismissed Larsen & Toubro Limited’s challenge to an arbitral award that denied reimbursement of Rs.4.46 crore in Delhi Value Added Tax (DVAT) from Delhi Metro Rail Corporation Ltd. (DMRC), holding that the relevant supplies were connected to inter-State trade and import transactions and therefore fell outside DVAT.

The dispute: tax reimbursement under a metro contract

The case arose from a 2008 DMRC contract awarded to a consortium comprising Larsen & Toubro (L&T) and Furrer + Frey AG. The contract concerned the design, supply, installation, testing and commissioning of a 25 kV rigid overhead contact system and related cabling for sections of Delhi Metro’s Phase-II network.

The contract value was approximately Rs.43.37 crore, along with USD 2.02 million and Swiss Franc 5.49 million. It required the contractor to deliver and install equipment including contact wires, traction cables, sectioning posts, sub-sectioning posts, return conductors and associated systems.

A key contractual clause provided that DMRC would reimburse DVAT or Uttar Pradesh trade tax, where applicable, on indigenous equipment upon proof of actual payment. L&T argued that it had paid DVAT of Rs.4,45,73,743 on the equipment and systems supplied to DMRC in Delhi and was entitled to reimbursement.

Why L&T claimed DVAT reimbursement

L&T procured high-voltage and low-voltage panels, cables and other components from suppliers outside Delhi. Some high-voltage panels were imported from Germany by an Indian supplier, while certain other materials were obtained through inter-State transactions.

According to L&T, these components were not supplied to DMRC as standalone items. Instead, they were transported to project sites, assembled, integrated, installed and commissioned into sectioning and sub-sectioning posts and other bill-of-quantities items. L&T maintained that the completed systems were commercially distinct products supplied to DMRC in Delhi, making the transactions local sales subject to DVAT.

L&T also relied on two aspects of DMRC’s conduct:

• DMRC initially reimbursed one DVAT invoice, though it later recovered the amount from L&T’s running bills.
• DMRC deducted works-contract tax at source from invoices, which L&T argued showed that DMRC had treated the supplies as local transactions.

DMRC’s position: the supplies were exempt from DVAT

DMRC argued that reimbursement was only available where DVAT was legally applicable. It contended that the goods were procured specifically for the metro project through imports and inter-State purchases, meaning that the transactions were exempt from DVAT under Section 7 of the DVAT Act.

DMRC relied on facts showing a close contractual connection between the goods and the project:

• DMRC prescribed technical specifications for the equipment.
• It approved the suppliers, including the foreign supplier of the high-voltage panels.
• It required pre-inspection of goods.
• The goods were custom-made for the metro project.
• DMRC issued customs and excise-duty exemption certificates.
• The invoices and packaging identified DMRC as the consignee or stated that the goods were for the DMRC project.

DMRC maintained that these facts established that the movement of goods into Delhi, whether from another State or from abroad, was occasioned by and integral to the underlying works contract.

Arbitration award: no reimbursement due

The arbitral tribunal rejected L&T’s claim in its entirety and issued a nil award. It concluded that the imported high-voltage panels and the materials procured from outside Delhi were directly connected with the DMRC contract.

The tribunal found that the relevant domestic procurements were inter-State sales subject to Central Sales Tax, while the imported equipment was part of a transaction in the course of import. As these categories are excluded from DVAT under Section 7 of the DVAT Act, DMRC was not required to reimburse the tax paid by L&T.

The tribunal also held that DMRC’s initial reimbursement of one invoice and later recovery of that amount was a rectifiable mistake, not an admission that DVAT was properly payable. Since the principal claim failed, the tribunal rejected L&T’s claims for interest and arbitration costs as well.

High Court’s analysis: contractual tax disputes can be arbitrated

Before addressing the tax issue, the Court considered L&T’s argument that an arbitral tribunal could not decide whether DVAT applied because taxability is a matter for statutory authorities.

The Court rejected that objection. It drew a distinction between disputes that require a binding statutory tax determination and disputes between contracting parties over tax reimbursement or allocation of tax liability. The latter category is contractual and can be resolved through arbitration.

Here, the dispute centred on whether DMRC was contractually obliged to reimburse DVAT under the relevant clause. The Court held that this was an arbitrable issue between the parties.

ABB precedent was decisive

The Court held that the case was squarely governed by the earlier decision in ABB Ltd., which had been affirmed by the Supreme Court. That precedent involved a DMRC works contract for electrical and traction systems and examined whether goods procured from outside Delhi or through import were subject to DVAT.

The governing test is whether the movement of goods is integrally connected with the contract for their supply. An express contractual clause requiring inter-State movement is not necessary. It is enough if the movement is pursuant to, or incidental to, the contract.

Applying this principle, the Court found a direct and continuing link between the procurement of the panels and other equipment and L&T’s obligations to DMRC. The fact that L&T integrated the input materials into sectioning and sub-sectioning posts did not break that connection.

Limited judicial review under Section 34

The Court emphasised that a Section 34 petition is not an appeal against an arbitral award. A court cannot reassess the evidence merely because another interpretation may be possible. Intervention is warranted only on narrow grounds, such as patent illegality going to the root of the matter.

The tribunal had considered the relevant invoices, supplier approvals, customs exemptions, project specifications, consignment details and the parties’ submissions. Its conclusion that the supplies were linked to inter-State trade and import was therefore a plausible view supported by the record.

Outcome and practical significance

The Delhi High Court dismissed L&T’s petition, upheld the nil arbitral award and made no order on costs.

The ruling reinforces two important principles for infrastructure and works-contract disputes:

1. Tax reimbursement clauses depend on legal applicability. A contractual promise to reimburse VAT does not require reimbursement where the transaction is legally exempt from that State tax.
2. The contractual nexus of goods movement is critical. In projects involving customized equipment, approved suppliers, import-duty exemptions and project-specific consignments, the movement of goods may remain an import or inter-State transaction even after installation or integration into a larger system.

The decision also confirms that arbitrators may decide contractual disputes over which party must bear or reimburse tax, provided they are not purporting to replace the statutory tax authorities on matters that require a binding public-law tax determination.

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Source: Delhi High Court

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