Union Of India vs M/S S.D.Technical Services Pvt. ...
2009 Latest Caselaw 1582 Del

*          IN THE HIGH COURT OF DELHI AT NEW DELHI


                                                 Date of Reserve: March 26, 2009
                                                     Date of Order: April 22, 2009

+ OMP 347/2008
%                                                                            22.04.2009
    Union of India                                                    ...Petitioner
    Through: Mr. A.S. Dateer, Advocate

      Versus

      M/s S.D. Technical Services Pvt.
      Ltd. & Anr.                                ...Respondents
      Through: Mr. S.M. Chopra, Sr. Adv. with Ms. Amrit Kaur Oberoi,
      Advocates


      JUSTICE SHIV NARAYAN DHINGRA

1.    Whether reporters of local papers may be allowed to see the judgment?

2.    To be referred to the reporter or not?

3.    Whether judgment should be reported in Digest?


      JUDGMENT

1. This petition has been filed under Section 34 of the Arbitration &

Conciliation Act, 1996 whereby the petitioner has filed objections against the

award dated 2nd November 2008 passed by learned Arbitrator after the

matter was remitted back to him.

2. Brief facts relevant for the purpose of deciding this petition are that the

petitioner had procured redial drilling machine from the Respondent against

the Contract No. COMOW/IR/S-2597/A93/G-105/Pt.III dated 29th March 1996.

After the supply of redial drilling machines, a dispute arose between the

parties regarding payment and the matter was referred to the Arbitrator in

view of the arbitration clause in the agreement entered into between the

parties. The learned Arbitrator gave its award in favour of respondent on 5 th

OMP 347/2008 Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 1 Of 11 October 2000. In the award, the learned Arbitrator allowed certain claims of

the respondent contained in Part-I of the contract. Regarding claims in Part-II,

the learned Arbitrator observed as under:-

"(b) Claims in Part-II are for indigenous supply and are basically towards duties and taxes. The Respondent's view is that these are not payable as per Contract Agreement signed by both the parties according to which prices are net package price. Perusal of the Contract agreement shows that the prices agreed upon are inclusive of taxes. The Claimant's plea, however, is that the agreement had been signed by them unconditionally to avoid delay and they have been protesting that the department should consider payment of taxes and duties and the rate quoted by them should be considered as ex- Works price exclusive of taxes. They have also been requesting to get the issue settled through the Arbitrator and arbitrator has been appointed by the Respondent to decide the various issues including this.

It is a fact that the Claimant has been asking for this payment before signing of Contract Agreement and after that also. While arguing as to why they have signed the Contract Agreement in which taxes are not payable separately, they contended that it was signed in good faith thinking that Department will consider the issue on merits.

Contract agreement being the governing document in this case, the payment beyond what is permissible under the Contract Agreement has not been accepted by the Respondent. The Respondent's decision as not to allow payment beyond contract payment cannot, thus, be considered wrong." (emphasis added)

3. After this award was passed, claimant/ respondent made an application

OMP 347/2008 Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 2 Of 11 under Section 33 of the Arbitration & Conciliation Act, 1996 and sought

clarification from the Arbitrator regarding award under Part-II of the Contract.

Relevant portion of the application is as under:

2. Indigenous Part-II of supply:-

(A) Claim 2(a) was for Rs.40,77,814/- which consists of (I) Rs.25,38,424/- being price/ cost of equipment,

(ii) Rs.11,42,241/- Excise Duty and (iii) Rs.3,97,149/- Sales tax. The learned Sole Arbitrator has held that duties and taxes are not payable separately, making thereby original cost of equipment has to be paid, but this is not clarified in the Award, hence it is prayed to be clarified.

(B) Likewise claim 2(b) for Rs.11,47,318/- consist of (I) Rs.9,76,274/- being balance cost of equipment received by the Respondent (ii) Rs.1,26,916/-, Excise Duty and (iii) Rs.44,128/- Sales Tax. As explained above against claim 2(a), clarification for cost of equipment, is also prayed to be given."

4. After this clarification application was made, learned Arbitrator passed

another order dated 24th October 2000 making following observations:

"As brought out on page 3, para 5(b) of the Award already published by me on 5.10.2000, claims in Part-II have been considered mainly to be towards duties and taxes. Thus, the claims under Items 2(a), 2(b) & 29 were considered totally against the duties and taxes and Nil award has been published, as duties and taxes have not been considered payable separately under the contract.

However, if Claims under 2(a), 2(b) & 2(e) include amount other than, due to, taxes and duties, the Claimant and the Respondents should deal it separately as the same has

OMP 347/2008 Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 3 Of 11 not been considered during the arbitration."

5. The Claimant /respondent challenged the award under Section 34 of

the Arbitration & Conciliation Act, 1996 and this Court after considering the

award and the clarification of Arbitrator dated 24.10.2000 observed as

under:-

"From the aforesaid, it is evident that the learned arbitrator has not applied his mind and given a finding in respect of claims Nos. 2(a) and (b) as to whether they include any element of amount due towards supply of equipment or not and whether they are entirely in respect of claim for duties and taxes. Moreover, the learned arbitrator has not applied his mind to the issue whether any part of the said claims is admissible, if it does not pertain to a claim for duties and taxes.

Counsel for the petitioner states that the petitioner does not dispute, the finding of the Arbitrator that the claimant is not entitled to claim any amounts towards duties and taxes separately. He, however, submits that the Arbitrator ought to have determined whether the amounts claimed under the Claim Nos. 2(a) and (2(b) were only towards duties and taxes, or included the amounts due under the contract for supply of equipment, and if so, whether the petitioner was entitled to payment of such amounts.

Once the claims had been referred to the Arbitrator, he was obliged to deal with all of them, since it was not anybodies case that any of the claims were not arbitrable or were excepted matters. The arbitrator admittedly has not examined the aforesaid aspects of claim Nos. 2(a) and 2(b).

In view of the aforesaid, I remit the award to the

OMP 347/2008 Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 4 Of 11 learned Arbitrator with the direction that he should decide whether the claims under claims 2(a) and (b) pertain only to a claim for duties and taxes and if not, whether the amounts claimed under these heads other than the amounts claimed towards duties and taxes are sustainable or not. Since claims 2(e) and (f) are claims for interest on the amounts claimed under claim Nos.

2(a) and (b), in case the learned Arbitrator comes to conclusion that the petitioner is entitled to any amounts under claim Nos. 2(a) and (b), the learned Arbitrator would also consider the issue whether the petitioner- claimant is entitled to any interest, and if so at what rate, and for what period."(emphasis added)

6. After the award was remitted back, the learned Arbitrator in the award

dated 2nd January 2008 had directed a payment of Rs.12,30,831/- to the

respondent. This amount was claimed and received by the petitioner as

MODVAT from the Government / Tax Department. The Arbitrator also allowed

a claim of Rs.20,000/- to respondent as compensation towards packing

charges and an interest @ 18% per annum on these amounts. Regarding

MODVAT learned Arbitrator observed that as per the contract all duties and

taxes were payable by the Claimant. The Claimant was not supposed to pay

over and above the payable taxes, thus the MODVAT refund received by the

petitioner was payable to the claimant. Regarding packing charges of

Rs.20,000/-, the learned Arbitrator observed that the Claimant had given no

details/ proof of having spent the extra amount on special packing required

for or transfer of the goods ordered by the respondent. The Claimant

submitted that collection of proof of packing charges would delay the matter.

In absence of documents, it was not possible to ascertain the amount spent

by the claimant, so a token compensation of Rs.20,000/- was awarded to the

OMP 347/2008 Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 5 Of 11 claimant on this count.

7. The petitioner has assailed the award on the ground that the learned

Arbitrator while awarding MODVAT had travelled beyond the contract. It was

decided by the Arbitrator that all taxes including excise tax, sales tax etc

were payable by the Claimant as the price was inclusive of the taxes. The

MODVAT refund received by the petitioner could not have been passed over

to the claimant because it was received by the petitioner under the MODVAT

Rules and MODVAT refund was payable only to the petitioner since the price

paid by the petitioner to the respondent was inclusive of excise duty. Under

no stretch of imagination the MODVAT benefit was transferrable to the

Claimant/ respondent and the learned Arbitrator who had already decided

that the claim regarding duties and taxes were not sustainable, could not

have awarded the amount of MODVAT refund received by the petitioner to

the respondent. It is further submitted that refund of MODVAT amount was

not even claimed by the claimant in its claim. The Claimant had only claimed

refund of excise and sales tax on the plea that the claimant was forced to

enter into the contract inclusive of excise and sales tax and other governing

duties contrary to the assurance given to the claimant during the

negotiations.

8. The award of Rs.20,000/- as compensation has also been challenged on

the ground that awarding of this amount was totally hypothetical, without any

basis and documents and no compensation could have been awarded. The

claim of packing charges was not sustainable at all as the packing was

included in the contract. There was no evidence led by the claimant in

respect of the packing charges and therefore no award could have been

OMP 347/2008 Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 6 Of 11 made.

9. In response to the objections taken by the petitioner, the respondent

/claimant has stated that the objections were barred by limitation. The award

was made on 2nd January 2008, the objections could have been filed within 90

days i.e. period provided under Section 34. It is submitted that even the

extendable period of 30 days also expired. The application filed on 3rd July

2008, therefore, was beyond the period of limitation.

10. It is not denied that the claimant had moved an application under

Section 33 of the Arbitration & Conciliation Act, 1996 for rectification of the

award dated 2nd January 2008. However, the Claimant took the stand that

communication of the arbitrator dated 19th June 2008 on the rectification

application cannot be the starting point of limitation. The limitation period

has to be counted from the date of the award. Regarding objections on

MODVAT etc, it is submitted that the learned Arbitrator had rightly awarded

the MODVAT amount to the claimant/ respondent. The Claimant was entitled

for the MODVAT amount since the claimant had paid the excise duty on

goods. Any claim received by the petitioner under MODVAT was liable to be

passed over to the claimant/ respondent.

11. Section 34 (iii) of the Arbitration & Conciliation Act, 1996 reads as

under:

" (3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award, or, if a request had been made under

OMP 347/2008 Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 7 Of 11 section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months if may entertain the application within a further period of thirty days, but not thereafter."

12. It is apparent that the limitation for filing the objections starts from the

date on which the request under Section 33 of the Act has been disposed of

by the Arbitral Tribunal. It is an undisputed fact that the request under

Section 33 was disposed of by the Arbitrator in this case on 19th June 2008.

The objections were filed on 3rd July 2008. Hence, the objections are well

within the limitation.

13. Before entering into the contract, there was a long correspondence

between the parties regarding excise duty, sales tax etc. The petitioner had

made it clear that the price quoted by the respondent must be inclusive of all

taxes i.e. excise duty, sales tax on the indigenous portion of supply. It is clear

from the letter dated 12th July 1996 sent by petitioner to respondent which

reads as under:-

"Yours request for allowing Excise Duty/ Sales Tax on the indigenous portion of supply and also to handover certain critical components to you after importing them from M/s. ELHA has been examined by this office. It is to inform you that it is not possible to consider your request. You are, therefore, requested to submit unconditional acceptance of the subject contract within 15 days of the issue of this letter. Please note that if unconditional acceptance is not received within 15 days, the contract shall be cancelled at your risk and cost."

OMP 347/2008 Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 8 Of 11

14. Respondent gave its consent to unconditional acceptance of the

contract and thereby agreed that the price quoted by the respondent shall be

inclusive of all taxes i.e. excise duty, sales tax etc on indigenous portion of

the supply. Thus under the contract price was inclusive of all taxes and it was

the responsibility of the respondent to bear the taxes i.e. excise duty etc on

the supply made by it and the petitioner was to pay the price quoted and

nothing more. It is for this reason that the learned Arbitrator in the award

dated 5th October 2000 has decided that all claims made by the respondent

in respect of the taxes etc were not tenable as respondent with open eyes

agreed that the price was inclusive of the taxes. It is surprising that after

making this observation, the learned Arbitrator directed a sum of Rs.

12,30,831/- to be paid to the respondent. This amount of Rs.12,30,831/- does

not even form part of the claim of the respondent. In its claim, the

respondent had not made a claim of refund of MODVAT. The respondent had

only asked for the excise duty etc paid by it. This claim was rejected. The

refund to the petitioner was under the Modvat Credit and Capital Goods

Procedure as notified by the Union of India (Tax Department). Under this

Scheme if any excise duty is paid on capital goods by a person, the person

can claim credit on duty paid on capital goods used by it in terms of Rule

57(q) to 57 (u). The credit of duty paid on capital goods was permissible only

if it has been paid on or after 1st March 1994. Thus, the benefit of MODVAT

could be availed by the petitioner only because the petitioner had incurred

capital expenditure in acquiring machines since the petitioner was entitled for

credit on excise duty paid on the machines. The capital goods have also been

defined under the Central Excise Rules and included machinery, plants,

equipment, apparatus, appliances etc. MODVAT cannot be claimed by a

OMP 347/2008 Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 9 Of 11 person who manufactures the capital goods and supplies it to others. The

credit of MODVAT is provided to encourage industrialization, modernization of

industry etc. The MODVAT Rules were not applicable to the respondent since

the respondent was manufacturer of the articles and was liable to pay the

excise duty once the articles leave the factory of respondent. If the

respondent outsourced certain articles and the prices paid by the respondent

on those articles were inclusive of excise duty, the respondent independently

could have claimed MODVAT from the authorities but the respondent could

not lay claim on the MODVAT credit as entitled to the petitioner as the price

charged by the respondent from the petitioner was inclusive of excise duty in

terms of the contract.

15. It is settled law that the Arbitrator is bound by the contract entered

into between the parties and cannot create a new contract. Since in this case,

it is an undisputed fact that the respondent had agreed to supply the goods

at a price which was inclusive of excise duty, the learned Arbitrator could not

have travelled beyond the contract and directed the petitioner to pay the

MODVAT benefits, acquired by it, to the respondent. The award passed by the

Arbitrator also shows that the learned Arbitrator had in fact travelled even

beyond the scope of order dated 22nd May 2007 passed by this Court. In that

order, this Court had specifically stated that the Arbitrator has not applied its

mind whether any part of the claim made by the respondent does not pertain

to claim for duties and taxes and was admissible. The respondent in the

application under Section 33 made by it to the Arbitrator had made it clear

that apart from refund of taxes, the respondent had laid a claim against the

petitioner regarding price of the goods. It was not the case of the respondent

that respondent was entitled to amount received under MODVAT by the

OMP 347/2008 Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 10 Of 11 petitioner. It is apparent that the learned Arbitrator mis-conducted himself

and passed the impugned award dated 5th January 2008 contrary to the

contract between the parties. The award passed by learned Arbitrator

regarding payment of Rs.12,30,831/- by the petitioner to the respondent is

not tenable.

16. The Arbitrator has awarded Rs.20,000/- as token compensation. There

is no claim of payment of compensation made by the respondent. The

respondent had laid claim @ 1% of the price of the goods as packing charges.

The Arbitrator has categorically observed that no proof has been given by the

respondent for incurring packing charges. Despite the fact that no proof was

given by the respondent qua incurring of special packing charges, the

learned Arbitrator awarded a lumpsum compensation of Rs.20,000/- without

any basis and evidence. I consider that this part of the award of the Arbitrator

passed merely on the basis of hunch, is totally illegal and is liable to be set

aside.

17. In the result, I allow this petition and the award dated 5th January 2008

passed by the Arbitrator is hereby set aside. In the facts and circumstances of

the case, parties are left to bear their own costs.

April 22, 2009                                          SHIV NARAYAN DHINGRA J.
rd




OMP 347/2008          Union of India v. M/s S.D. Technical Services Pvt.Ltd & Anr.Page 11 Of 11