Ab Enterprises vs Union Of India
2024 Latest Caselaw 3111 Cal/2

Calcutta High Court

Ab Enterprises vs Union Of India on 7 October, 2024

Author: Sabyasachi Bhattacharyya

Bench: Sabyasachi Bhattacharyya

                     In the High Court at Calcutta
                       Original Civil Jurisdiction
                          Commercial Division

The Hon'ble Justice Sabyasachi Bhattacharyya

                            E.C. No.52 of 2024
                              AB Enterprises
                                    Vs
                              Union of India

                                  With

                       AP-COM No.522 of 2024
           Union of India, represented by General Manager,
                        South Eastern Railway
                                  -Vs-
                             AB Enterprises

     For the decree-holder in
     EC No.52 of 2024
     &
     for the respondent in

AP-COM No.522 of 2024 : Ms. Noelle Banerjee, Adv.

Ms. Rashmi Singhee, Adv.

Mr. Dipanjan Dey, Adv.

Ms. Sucheta Mitra, Adv.

     For the judgment-debtor

     &
     for the petitioner in
     AP-COM No.522 of 2024:        Mr. Mohit Gupta, Adv.
                                   Ms. Sarda Sha, Adv.

     Hearing concluded on     :    01.10.2024

     Judgment on              :    07.10.2024

     Sabyasachi Bhattacharyya, J:-

1. The present challenge under Section 34 of the Arbitration and

Conciliation Act, 1996, bearing AP-COM No. 522 of 2024, has been

preferred by the South Eastern Railway against an award directing the

petitioner/Railway to reimburse Service Tax to the respondent to the

tune of Rs.49,53,763/- along with interest paid by the respondent to

the Tax Authorities.

2. The short background of the case is that the respondent participated

in a tender floated on April 14, 2015 by the petitioner/Railway for

escorting job of coach attendant for bed-roll distribution for various

trains at Santragachi Coaching Depot for a period of one year. The

respondent participated and came out successful. Accordingly, a

Letter of Award (LoA) was issued to the respondent on June 25, 2015

and consequentially an agreement was executed between the parties

on September 26, 2015. The respondent completed the work and

raised invoices and was paid the dues for such work by the petitioner.

3. On November 17, 2017, a show-cause notice was issued by the Tax

Authorities to the respondent claiming Service Tax on the work done

under the contract, along with interest. The respondent ultimately

paid the dues at a discounted rate under the Sabka Vishwas Legacy

Dispute Resolution Scheme, 2019 and made a demand for such

amount from the petitioner. The petitioner having not acceded to such

claim, the matter was referred to arbitration, the respondent claiming

the entire amount of Service Tax and interest paid thereon.

4. The Arbitral Tribunal granted such claim by its award dated November

28, 2023, against which the present challenge has been preferred by

the Railway.

5. Learned counsel for the petitioner/Railway argues that in terms of

Clause 2.2 of the contract, the rates quoted by the tenderer shall

include all incidental charges, inter alia including VAT, Sales Tax,

Excise Duty, Octroi and other taxes and duties, etc.

6. As per the Tax Authorities, the nature of services provided by the

respondent became liable to service tax since July, 2012. However, by

a subsequent Notification dated May 27, 2014, Service Tax was made

inapplicable for work done for the Railways. Such exemption was

again withdrawn by a Notification dated March 1, 2015. The said

Notification was implemented by a further Notification dated May 26,

2015. Thus, as on the date of opening of the bids in the tender-in-

question, Service Tax had been reimposed in respect of works done for

the Railways.

7. It is contended that the Arbitral Tribunal deviated from the contract

between the parties, particularly Clause 2.2 thereof, by directing

Service Tax plus interest to be borne by the petitioner-Railway,

although the rates quoted by the bidders, as per Clause 2.2, were to

include all incidental charges, including taxes and duties. Thus, the

award violated Section 28(3) of the 1996 Act and is accordingly

vitiated by patent illegality, which is a ground of challenge under

Section 34 of the said Act. Learned counsel for the petitioner/Railway

cites State of Chhattisgarh and another v. SAL Udyog (P) Ltd., reported

at (2022) 2 SCC 275 in support of such proposition.

8. The respondent has relied on a purported Estimate which is not a part

of the contract between the parties, nor a part of the tender document.

9. Also, there was no correspondence between the parties at any point of

time to cast liability on the Railway to pay Service Tax in the teeth of

Clause 2.2 of the contract.

10. Thus, it is argued that the impugned award directing the

petitioner/Railway to reimburse Service Tax and interest ought to be

set aside on the ground of patent illegality.

11. Learned counsel for the respondent controverts the said arguments of

the petitioner and contends that the Estimate of Costs issued by the

petitioner/Railway itself was the premise of the price for work reflected

in the tender document. The said Estimate did not include Service

Tax as one of the components of the costs to be incurred for the work.

As such, it is argued that the Service Tax component was not included

in Clause 2.2 of the contract.

12. It is submitted by learned counsel for the respondent that the

respondent raised bills for Service Tax which were accepted without

demur by the petitioner/Railway, although no payment was made on

such account. It is argued that since the scope of work was

manpower supply, the work does not attract VAT, Sales Tax, Excise

Duty or Octroi as mentioned in Clause 2.2, nor does it involve lifting,

descent, insurance, etc., mentioned as incidental charges in the said

Clause. Thus, the general terms included in Clause 2.2 of the

contract have no applicability to the instant case.

13. It is argued that the Arbitral Tribunal took into consideration the

approximate cost of work as mentioned in the tender, the break-up of

which was to be found in the detailed Estimate annexed to the

Affidavit-in-Opposition of the respondent. The said breakup did not

contain Service Tax. The Arbitral Tribunal further found that Service

Tax was nowhere mentioned in the agreement and could not have

been considered by the petitioner while quoting its price. Learned

counsel argues that even the Railway was not aware about the

potential liability of Service Tax and as such, the inclusion of Service

Tax in the price quoted could not have been contemplated in Clause

2.2 of the contract.

14. Since the Arbitral Tribunal proceeded on a logical basis on the

premise of the materials on record and came to a plausible

conclusion, there is no scope of interference under Section 34 of the

1996 Act.

15. Learned counsel for the respondent cites Associate Builders v. Delhi

Development Authority, reported at (2015) 3 SCC 49 and National

Highways Authority of India v. Hindustan Construction Co. Ltd.,

reported at (2024) 6 SCC 809 for the proposition that the

correspondence exchanged between the parties as well as the material

placed before the Arbitral Tribunal are to be considered for the

purpose of construing the contract. In the present case, the Arbitral

Tribunal rightly considered the estimate and other materials before it

while passing the impugned award.

16. Learned counsel appearing for the respondent next cites UHL Power

Co. Ltd. v. State of Himchal Pradesh, reported at (2022) 4 SCC 116,

where the Supreme Court took the view that the interpretation of the

relevant clauses of the agreement by the Tribunal, if possible or

plausible, could not be interfered with merely because another view

could have been taken.

17. In K. Sugumar v. Hindustan Petroleum Corpn. Ltd., reported at (2020)

12 SCC 539, the Supreme Court held that when the parties have

chosen to avail of an alternative mechanism for dispute resolution,

they must be left to reconcile themselves to the wisdom of the decision

of the Arbitrator and the role of the Court should be restricted to the

bare minimum. A Section 34 Court cannot re-appreciate the findings

returned by the Arbitral Tribunal by taking an entirely different view

in respect of the interpretation of the relevant clauses of the

agreement governing the parties.

18. In Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd., reported at

(2019) 20 SCC 1, it was held that if the reasoning provided in the

award is implied, unless the award portrays unpardonable perversity,

the court needs to be cautious in differing from the view taken by the

Tribunal.

19. It is argued that the authorities cannot pick and choose, for which

proposition, learned counsel for the respondent cites Shivappa v. Chief

Engineer and others, reported at 2023 SCC OnLine SC 2027.

20. Thus, it is argued that the tests of Section 34 of the 1996 Act are not

satisfied and the present challenge ought to be dismissed.

21. Upon hearing learned counsel for the parties, the Court arrives at the

following conclusions:

22. The pivot of the arguments is Clause 2.2 of the "Instructions to

Tenderers and Terms & Conditions of Tendering" which finds place in

Part I of the tender document, which comprises the contract between

the parties.

23. Clause 2.2 is set out below:

"2.2 UNIT PRICES:

The Rates quoted by the Tenderer and accepted by the purchaser shall hold good till the completion of the work and no additional individual claim will be admissible on account of fluctuation in market rates etc. The rate quoted by the Tenderer shall include all incidental charges like, freight transport, loading/unloading handling of material, lifting, descent, insurance overage of Bankers charges, Indemnity Bond, VAT, Sale Tax, Excise Duty, Octroi and other taxes and duties etc. Tenderer should carefully read as clearly explained in the explanatory schedule."

24. Certain relevant dates are also to be taken note of while adjudicating

the issues at hand.

25. The tender was floated on April 14, 2015 and the bids were opened on

May 27, 2015. LoA was issued to the respondent on June 25, 2015,

pursuant to which an agreement was entered into between the parties

on September 26, 2015.

26. Insofar as the applicability of Service Tax to work done for the

Railways is concerned, a Notification dated May 27, 2014 made

Service Tax inapplicable to Railway works. Such exemption was,

however, withdrawn by a subsequent Notification dated March 1,

2015 with effect from April 1, 2015, by which the Railways were made

liable to pay 100 per cent of Service Tax. However, the said

Notification was implemented only by a further Notification of May 26,

2015.

27. Thus, Service Tax was again made applicable to work done for the

Railways on May 26, 2015, with effect from April 1, 2015.

28. In respect of the tender-in-question, the bids were opened on May 27,

2015, the day after the implementation of the Notification for Service

Tax was published. The LoA was issued in favour of the respondent a

month thereafter on June 25, 2015 and the agreement was entered

into between the parties in pursuance thereof after three months on

September 26, 2015. Hence, as on the date of issuance of the LoA

and the subsequent agreement, the parties ought to have been aware

of applicability of Service Tax to Railway works.

29. Thus, the respondent was well aware that Service Tax was payable in

respect of the work to be done by it for the Railway under the contract

when the respondent took up the LoA and entered into the agreement,

incorporating the tender clauses and the associated terms and

conditions, with its eyes wide open.

30. Clause 2.2 does not restrict itself only to the taxes and duties

mentioned therein such as VAT, Sales Tax, Excise Duty and Octroi

but also supplements the same with the expression "and other taxes

and duties, etc.", thus, covering all other taxes and duties even apart

from those specifically mentioned in the said clause. Since on the

date of the contract between the parties Service Tax was already

payable for Railway works, the expression "and other taxes and

duties, etc." included Service Tax.

31. Clause 2.2 of the contract is unambiguous on such score. Hence, no

external aid of any other document is required for interpreting the

said clause.

32. An internal Estimate of the petitioner-Railway was relied on by the

Arbitral Tribunal for interpreting Clause 2.2 of the contract. However,

such approach was patently perverse for three reasons.

33. First, the Estimate was dated March 27, 2015, that is, much prior to

the LoA being issued to the respondent. As on the date of the

Estimate, Service Tax was not made applicable to Railway works.

Thus, there cannot arise any question of the Estimate including the

Service Tax component.

34. Secondly, and more importantly, the Estimate was merely a wage

calculation, which is self-evident, and no tax component was

incorporated in it. The Estimate was only for the purpose of

calculation by the Railway Authorities themselves in order to arrive at

a rough estimated cost of the work for the purpose of issuing the

tender. Neither was the Estimate communicated to the respondent,

nor was it incorporated in any manner either in the tender or the

contract itself or referred to any subsequent correspondence between

the parties.

35. The bidders were to raise quotations by taking into account not only

the Estimate of the Railway, which was its own internal document

and restricted to the wages payable for the work, or the cost of work

mentioned in the tender, but also taking into account estimated taxes

and/or duties or other similar liabilities which they would have to

incur in order to do the work. The bidders took a calculated

commercial risk and it was their prerogative to raise their quotations

in such a manner so as to cover probable expenses on account of

taxes and duties and nothing compelled the bidders to restrict the

quotation only to the estimated amount. Since the applicability of

Service Tax was already public knowledge prior to the agreement

being entered into part by the parties, nothing prevented the

respondent from seeking clarification or recusing from the work if it

had any objection to paying Service Taxes.

36. Thirdly, when the Estimate was drawn up on March 27, 2015, it was

never the intention of the Railway Authorities to include any

component of tax therein. It was merely a working basis for

calculating the rough Estimate of the wages payable to the workmen

by the contractors.

37. Hence, the Estimate was not a reflection, nor was it intended to be so,

of the actual prices to be quoted by the bidders. The Estimate was, as

it suggests, merely a calculation of the probable wages payable to the

workmen in terms of the Minimum Wages Act. It was entirely for the

bidders to take into account the probable tax components to arrive at

their respect quotation of rates. Hence, the Estimate was a perverse

basis for interpreting the contract, since it had no connection

whatsoever with the contract nor was it a part of the contract.

38. Taking resort to such external aid where there was no ambiguity

whatsoever in Clause 2.2 is in itself a patent illegality which vitiates

the impugned award.

39. It is an entrenched principle of Indian law that the courts cannot

rewrite a contract between the parties. The said concept is an integral

part of the fundamental policy of Indian law. Violating the same

tantamounts to contravention with the fundamental policy of Indian

law and being in conflict with the most basic notions of justice. Hence,

such contravention affords a ground under Section 34(2)(b)(ii),

including its Explanations.

40. Section 28(3) of the 1996 Act provides that while deciding and making

an award, the Arbitral Tribunal shall, in all cases, take into account

the terms of the contract and trade usages applicable to the

transaction. Since the terms of the contract between the parties in the

present case were unambiguous, contravention of the same by the

Arbitral Tribunal tantamounts to a patent illegality within the

contemplation of Section 34(2-A) of the 1996 Act, as reiterated in the

State of Chhattisgarh (supra).

41. Insofar as the statutory payability of Service Tax is concerned, the

impact and incidence of such tax is segregated by the statute itself,

which impels the renderer of the service at the first instance to make

the payment which may be ultimately realizable from the recipient of

the service. If the impact and incidence of Service Tax were

simultaneous, it might still have been argued by the respondent that

the parties could not retract from a statutory liability by agreement

between themselves. However, the statute merely imposes Service Tax.

The payability, being divided into two components, impact on one

entity an incidence on another, the impact and incidence can be

segregated and one of the components may very well be waived by the

parties. Hence, Clause 2.2, insofar as its applicability to incidence of

Service Tax is concerned, does not tantamount to Estoppel against the

law.

42. Learned counsel for the respondent places reliance on Associate

Builders (supra) and National Highways Authority of India (supra) to

argue that the Arbitral Tribunal could very well have considered

materials on record and correspondence between the parties to

interpret the clauses of the contract. However, a judgment carries a

ratio in the context of its facts and cannot be blindly applied to all and

sundry cases. It is equally well-settled that when the terms of a

contract are unambiguous, no external aid need be resorted to for the

purpose of interpretation of the same. In the present case, the

expression "and other taxes and duties etc." in Clause 2.2, without

any iota of ambiguity and doubt, mandates that the rate quoted by the

tenderer has to include all taxes and duties and the like applicable to

the works under the contract. Therefore, there is no scope of taking

aid of any further document to interpret the same.

43. Also, the Estimate, which was relied on by the Arbitral Tribunal to

interpret the clause, is neither a part of the contract nor an agreement

between the parties but, as discussed above, is an internal document

of the petitioner/Railway for arriving at the estimated bare price of the

work. Furthermore, the estimate deals only with the wages of the

workmen in terms of the Minimum Wages Act and does not constitute

the rates to be quoted by the individual bidders. The estimate merely

provided the minimum rates, since if rates were quoted below the

same, it would imply that the workmen would be deprived of their

legitimate dues under the Minimum Wages Act. It was for the bidders

to take into account such minimum price and add to it their own

estimates of taxes payable, in the light of Clause 2.2 which mandates

that the rates must include all taxes and duties etc. which are

applicable to the work done under the tender. Hence, the reliance by

the Arbitral Tribunal on the Estimate to interpret Clause 2.2 was

patently perverse and illegal, vitiating the impugned award itself.

44. Insofar as the ratio UHL Power Company (supra) is concerned, the

reliance on the Estimate to cast duty on the Railway for payment of

Service Tax is palpably de hors the contract between the parties and

thus is a perverse view which is not "possible or plausible" from any

reasonable perspective.

45. Even going by the tests of interference laid down in K. Sugumar

(supra), the impugned award is vitiated on at least two counts

contemplated in Section 34 - violation of the fundamental policy of

Indian law and basic notions of justice as well as patent illegality,

which are contemplated respectively in sub-sections (2) and (2-A) of

Section 34 of the 1996 Act.

46. There is no question of the authorities picking and choosing, since

Clause 2.2 is universal in its application to all prospective bidders in

the tender. As such, the reliance on Shivappa (supra) by the

respondent is entirely misplaced.

47. Thus, in view of the above discussions, the Arbitral Tribunal acted

with patent illegality and against the fundamental policy of Indian law

and basic notions of justice in awarding reimbursement of Service Tax

along with interest to the respondent by the petitioner/Railway.

48. Accordingly, AP Com No. 522 of 2024 is allowed, thereby setting aside

the impugned award dated November 25, 2023.

49. As a necessary corollary to the award being set aside, nothing remains

to be executed. Thus, E.C. No. 52 of 2024 is hereby dismissed.

50. There will be no order as to costs.

51. Urgent certified server copies, if applied for, be issued to the parties

upon compliance of due formalities.

( Sabyasachi Bhattacharyya, J. )