Kanhai Engineering (Towers) Pvt. ... vs Telecommunications Consultants ...
2007 Latest Caselaw 1028 Del

JUDGMENT

Vipin Sanghi, J.

1. The present execution petition arisen from an arbitration award dated 06.07.2001 passed by the sole arbitrator Shri A.K. Duggal in arbitration between M/s. Kanhai Engineering (Towers) Pvt. Ltd. (hereinafter referred to as 'the decree holder') and M/s. Telecommunications Consultants India Pvt. Ltd. (hereinafter referred to as 'the judgment debtor'). The learned arbitrator, inter alia, awarded the decree holder interest as per Clause 5.1.1 of the agreement between the parties. The objections filed under Section 34 of the Arbitration and Conciliation Act, 1996 in OMP No. 302/2001 came to be dismissed and the award was upheld vide order dated 09.03.2006 by this court. The award was modified to the extent that interest was granted under the provisions of "The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993" (hereinafter referred to as 'the Act').

2. The decree holder, while computing the amount due, calculated the same by adding compound interest with monthly rests at a fixed rate of 23% and arrived at a sum of Rs. 45,67,163.00 (Rupees Forty five lakhs sixty seven thousand one hundred sixty three only). After deducting the amount tendered by the judgment debtor, the claim of the decree holder is Rs. 30,90,571.00 (Rupees Thirty lakhs ninety thousand five hundred seventy one only) calculated as mentioned hereinabove.

3. On the other hand, the judgment debtor calculated its liability under the decree by assuming the same principal liability, the same time frame for the computation of interest, and computed its liability with compound interest compounded monthly, but the rate of interest has been arrived on the basis of the floating rate of interest based on the lending rates of the banks from time to time. The judgment debtor has also added 5 per cent points to the floor rate of interest under Section 4 of the Act.

4. The only question that arises for determination is with regard to the correct manner of arriving at the rate at which interest is to be applied in computing the overdue interest. The decree holder claims that interest is to be paid at a fixed compounded rate, with monthly rests, while the judgment debtor seeks to pay interest at a floating rate, with monthly rests.

5. Having heard arguments of both the counsel for the parties, I am of the view that the rate of interest adopted by the judgment debtor is correct, for the reasons to follow.

6. The Act is a legislation intended for the benefit of small scale industries and ancillary undertakings. It seeks to prevent delay in flow of institutional credit due to such small scale industries and ancillary undertakings. The main purpose of the Act as stated in the objects and reasons is to provide for and regulate the payment of interest on delayed payments to Small Scale Industries and Ancillary Undertakings. Sections 4 and 5 of the Act being relevant are reproduced hereinbelow:

4. Date from which and rate at which interest is payable--Where any buyer fails to make payment of the amount to the supplier, as required under Section 3, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay interest to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at such rate which is five per cent points above the floor rate for comparable lending.

Explanation--For the purposes of this section, "floor rate for comparable lending" means the highest of the minimum lending rates charged by scheduled banks (not being co-operative banks) on credit limits in accordance with the directions given or issued to banking companies generally by the Reserve Bank of India under the Banking Regulation Act, 1949.

5. Liability of buyer to pay compound interest--Notwithstanding anything contained in any agreement between a supplier and a buyer or in any law for the time being in force, the buyer shall be liable to pay compound interest (with monthly rests) at the rate mentioned in Section 4 on the amount due to the supplier.

7. Small scale industries and ancillary undertakings, by the very nature, are those industries which work on smaller capital and infrastructure. Invariably such industries would be more sensitive to any blockade of their working capital. It is also not uncommon that such industries and undertakings are dependent upon interest bearing loans and facilities that are provided by banks and financial institutions. The Act, firstly seeks to create a disincentive for a debtor or lender of/and to such industries and undertakings to withhold their dues by prescribing a higher rate of interest on the dues of the small scale industries and ancillary undertakings, than would normally be payable to other creditors. Secondly, it seeks to insulate the small scale industries and ancillary undertakings against the erosion of their capital on account of the said industries/undertakings having to pay a higher rate of interest on the loans and facilities taken by them from banks and financial institutions, than they may be entitled to recover under the law from their debtors.

8. It is settled law that whenever there are two possible interpretations of a statute, the one that subserves the objective of an enactment and leads to the advancement of the object and purpose of the legislation is to be accepted. In the instant case, the adoption of the fluctuating rate of interest would provide the desired cover to the small scale industry /ancillary undertaking, and not the fixed rate of interest as claimed by the decree holder. In case the fluctuating rate of interest is adopted, the small scale industries would remain protected if there is an upward revision in the highest minimum lending rate charged by scheduled banks on credit limits. In the event of the rates of lending by banks being lowered, they would still continue to remain protected since they would continue to earn interest at a rate that is 5% above the highest minimum lending rate charged by scheduled banks on credit limits. On the other hand, if a fixed rate of interest is adopted, relatable to the highest of the minimum lending rates charged by scheduled banks on credit limits that has been fixed by Reserve Bank of India at the time when the amount becomes due and payable to the small scale industries, an upward revision in the rates of lending would adversely affect the small scale industry, since the rate of interest to which it would be entitled would get pegged down, while it may have to pay interest at a higher rate on its own borrowings from banks and financial institutions, who normally charge interest on their lending at fluctuating rates on directions issued by Reserve Bank of India.

9. I also find support from the use of the words 'rates charged by scheduled banks' and the words 'in accordance with the directions given or issued to banking companies generally by Reserve Bank of India', used in the explanation to Section 4 of the Act, which defines 'floor rate for comparable lending'. These expressions show that what is contemplated by the legislature is not just and single highest minimum lending rate, but different highest minimum lending rates, which could only be at different times, i.e. from time to time. Directions are issued by the Reserve Bank of India, under the Banking Regulations Act, 1949, from time to time under Section 21 thereof. Section 21(2)(e) specifically empowers the Reserve Bank of India to issue binding directions to banking companies, thereby prescribing the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given. The rates fixed by the Reserve Bank of India are dependent on factors such as money supply, inflation, price index, etc. etc. and it keeps fluctuating from time to time.

10. The judgment --Assam Small Scale Industries Development Corporation Ltd. v. J.D. Pharmaceuticals relied upon by the decree holder is of little assistance, since the issue raised in the present case was neither raised before, nor considered by the Hon'ble Supreme Court in that case. A perusal of the said judgment, particularly paragraph 14, thereof would show that the Hon'ble Supreme Court granted compound interest (r) 23.5% per annum, however, without going into the issue that has now arisen before me. Similar is the position with regard to the decision of the Patna High Court in First Appeal No. 461/2000.

11. The decision of the Hon'ble Supreme Court in Central Bank of India v. Ravindra , in my view, supports the reasoning adopted by me. Interest once capitalized sheds its colour of interest and becomes a part of the principal liability. Consequently, when interest is compounded every month, interest would be added for one month to the amount which was the principal at the beginning of the month, and for the next month, the whole amount would be treated as the principal, which would then earn interest at the applicable rate. Consequently, at the beginning of every month, the principal amount would be determined, on which the rate of interest, which is arrived at by adding 5% to the floating rate for comparable lending, would be applied for one month. This exercise would be repeated every month. When the principal amount is not a constant, and changes each month, and each month the exercise of calculation of interest has to be undertaken afresh, there is no difficulty in applying the rate of interest computed with reference to the floor rate for comparable lending.

12. There could be no quarrel with the proposition that the amendments to the Act, which came in the year 1998, would not apply to the present case. This is so held in --Krishi Utpadan Mandi Samiti v. Kanhaiya Lal and Ors., as has been rightly pointed out by the counsel for the decree holder. However, it appears that the judgment debtor has not sought to reduce the 5% additional interest as contemplated by Section 4 of the Act, on the basis of the amendment while making their computation of payment due to the decree holder. The judgment debtor has also proceeded to compute and pay its liability on the basis of the unamended law.

13. For the aforesaid reasons, I hold that the computation of interest as resorted to by the judgment debtor is correct and I accept the same. Since the judgment debtor has already paid to the decree holder the amount computed by it as per its calculation amounting to Rs. 18,69,812, the decree stands satisfied and the execution petition is, therefore, disposed of as satisfied.