Delhi High Court
Vinod Agarwal And Another & Anr. vs Frost International Ltd & Anr. on 17 September, 2021
IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 17.09.2021
+ O.M.P. (COMM) 207/2021 & I.A. 9037/2021
VINOD AGARWAL & ANR. ..... Petitioners
versus
M/S FROST INTERNATIONAL LTD.
& ANR ..... Respondents
Advocates who appeared in this case:
For the Petitioners : Mr Ashim Vachher, Advocate with
Mr Pawash Piyush, Advocate.
For the Respondents : Mr Anil Aggarwala, Advocate for R-1
Ms Neha Sharma, Advocate for R-2.
CORAM
HON'BLE MR JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J.
1. The petitioners have filed the present petition under Section 34
of the Arbitration and Conciliation Act, 1996 (hereafter the 'A&C Act')
impugning an Arbitral Award dated 27.11.2018 (hereafter the
'impugned award') delivered by an Arbitral Tribunal comprising of a
Sole Arbitrator.
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By:DUSHYANT
RAWAL
2. The controversy in the present petition is limited to examining
whether the impugned award for a sum of ₹82,73,709/- (Rupees Eighty
Two Lacs, Seventy-Three Thousand, Seven Hundred and Nine only)
rendered by the Arbitral Tribunal in favour of respondent no.1, M/s
Frost International Ltd. (hereafter 'Frost') is patently illegal. The
Arbitral Tribunal held that the petitioners were liable to pay the said
amount against their obligation to indemnify Frost for any loss caused
on account of breach of their representations and warranties in terms of
the Share Purchase Agreement dated 07.08.2013 (hereafter the 'SPA').
The Arbitral Tribunal found that contrary to the representations made
by the petitioners, respondent no.2 company, M/s Agros Impex (I) Pvt.
Ltd. (hereafter 'Agros') was liable to pay Income Tax and penalty for
the Assessment Years 2006-07 to 2010-11, which were not disclosed or
recognized in the Books of Accounts of Agros. The Arbitral Tribunal
had also found that Frost had paid the said liability and thus, in terms of
Clause 7.1 of the SPA, the petitioners were liable to make good the loss
suffered by Frost.
3. Mr Vachher, learned counsel appearing for the petitioners,
confined his submissions within a narrow compass. He, readily,
conceded that the findings of the Arbitral Tribunal to the effect that
Agros had incurred liabilities in respect of the taxes and penalty for the
Assessment Years 2006-07 to 2010-11 to the extent of ₹82,73,709/-,
which were not disclosed in the Books of Accounts, could not be
interfered with, in these proceedings. He confined his submissions to
assailing the findings of the Arbitral Tribunal to the effect that Frost had
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By:DUSHYANT
RAWAL
established that it had paid the said liability and/or had incurred a loss
to the aforesaid extent. He submitted that the evidence on record did not
establish that Frost had paid a sum of ₹82,73,709/- towards Income Tax
and penalty. He submitted that this was also contrary to its pleadings as
in the Statement of Claims, Frost had asserted that it had paid a sum of
₹20,39,580/- (Rupees Twenty Lacs, Thirty-Nine Thousand, Five
Hundred and Eighty only) being a major shareholder of Agros.
Although, Frost claimed that Agros had incurred a liability towards
Income Tax to the extent of ₹82,73,709/-, it did not assert that the
aforesaid sum was discharged by Frost or was directly paid by it to the
Income Tax Authorities. He submitted that in any event, there was no
evidence on record to establish that Frost had discharged the aforesaid
liability by making payments to the Income Tax Authorities.
4. Next, he submitted that even if it is accepted that Agros had
incurred a liability towards Income Tax and penalty amounting to
₹82,73,709/- as asserted by Frost, the same could not possibly lead to
the conclusion that Frost had incurred a corresponding loss to that
extent. He stated that the additional tax was a liability of Agros; not of
Frost. Therefore, Frost had not incurred any loss on account of
additional Income Tax assessed as payable by Agros. He submitted that
theoretically, it was possible for Frost to have incurred a loss on account
of diminution in the value of the shares sold by the petitioners to Frost
in terms of the SPA. But, Frost had not founded its claim on the said
assertion. Frost had claimed the amount as a direct loss incurred by it,
which it had failed to establish. He emphasized that in terms of the SPA,
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By:DUSHYANT
RAWAL
the petitioners had sold 33.54% of the issued equity shares of Agros to
Frost and thus, in any event, Frost could not claim that it had incurred a
loss equivalent to the entire additional liability of Agros on account of
Income Tax or penalty.
5. Before proceeding to address the aforesaid controversy, it is
relevant to briefly note the context in which it arises.
6. The petitioners were promoters of Agros. They were also
Directors of the said company and held 100% of its outstanding issued
equity capital. The Government of India formulated a Policy for
installing High Security Registration Plates (hereafter 'HSRP') on
vehicles sold in India. In terms of the said policy, the Government of
India notified the Motor Vehicles (New High Security Registration
Plates) Order, 2001 on 22.08.2001. The said order was subsequently
amended by a notification dated 16.09.2011. It is stated that the
Governments of various States in India issued Notices Inviting Tenders
for manufacturing and affixing HSRP on vehicles. Agros had
participated in one such bidding process but was unsuccessful.
7. Thereafter, on 05.08.2011, a Joint Venture Agreement was
entered into between Agros, the petitioners (who at that material time
held the entire share capital of Agros); Frost; M/s Trinity Engineering
and Mechanical Services Pvt Ltd; and M/s Trinity Engineering Services
LLC. At the material time, it was represented that Agros and the
petitioners had acquired essential tangible and intangible assets
including government approvals, licenses, land and building for
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By:DUSHYANT
RAWAL
carrying on business in the National Capital Territory of Delhi. Agros
had acquired knowledge in regard to the availability and access to
advanced technology and specialized raw material required to meet the
norms as specified by the Government of India under Rule 50 of the
Central Motor Vehicle Rules, 1989. The petitioners represented that
they had incurred huge expenses to acquire the said assets and the same
were of immense value for entering into the business of HSRP. The said
parties were desirous of participating in the said business and the
purpose of the Joint Venture Agreement was to use Agros as a vehicle
for bidding for businesses as a consortium. The said parties also entered
into a Share Subscription Agreement simultaneously. In terms of the
Share Subscription Agreement, Frost and Trinity Engineering &
Mechanical Services Pvt Ltd (Trinity India) agreed to subscribe Class-
B Equity Shares, which would constitute 40% of the total issued equity
capital post issuance of such equity.
8. Frost has pleaded that the petitioners continued to be in effective
control and management of Agros even after their equity holding in
Agros was diluted by fresh issue of shares pursuant to the said Share
Subscription Agreement.
9. Frost claims that the petitioners and it had close relations with Mr
Jagdish Shah, Chairman of Trinity Engineering Services LLC
(incorporated in Dubai). It is averred that the petitioners had sought
financial assistance for bidding as well as for manufacturing of HSRPs,
from him. But, since Trinity Engineering Services LLC (Dubai) could
not provide the necessary financial assistance to participate in the
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By:DUSHYANT
RAWAL
bidding process including for the reason that it was a foreign entity, Mr
Jagdish Shah had introduced the petitioners to Frost.
10. Frost states that it invested ₹2,22,00,000/- (Rupees Two Crores
and Twenty-Two Lacs) in Agros after it was converted into a Joint
Venture Company pursuant to the Joint Venture Agreement and
dilution of the share capital in terms of the Shares Subscription
Agreement dated 05.08.2011.
11. On 18.04.2012, the Government of Uttar Pradesh issued a Notice
Inviting Tenders for manufacturing, supervision, sale and affixation of
HSRPs in the State of Uttar Pradesh. Agros (which at the material time
was a Joint Venture Company) submitted its bid along with a security
deposit of ₹50,00,000/- (Rupees Fifty Lacs) and the requisite
documents. Frost claims that it had paid the aforesaid security deposit
of ₹50,00,000/-. The bids were open on 30.05.2012 and Agros was
declared a successful bidder. It is averred that thereafter, the Transport
Department of the State Government of Uttar Pradesh required Agros
to file its Income Tax Returns for the previous two years (that is, for the
Assessment Years 2009-10 and 2010-11). Frost states that on
31.05.2012, Agros filed the same with the Transport Department, State
of Uttar Pradesh.
12. Frost claims that it had invested substantial funds in Agros
including for setting up the manufacturing unit of HSRP, apart from
furnishing the security deposit and earnest money for the bids submitted
by it. On 07.08.2013, the petitioners entered into the SPA with Frost,
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By:DUSHYANT
RAWAL
Trinity Engineering Services LLC and Trinity Engineering and
Mechanical Services Pvt Ltd, Agros, one Mr Ankush Wadhera and Mr
Saral Verma.
13. The recital of the SPA indicates that subsequent to entering into
the Share Subscription Agreement on 05.08.2011, Agros issued equity
shares, which were subscribed by Frost, Trinity Engineering Services
LLC as well as Mr Ankush Wadhera and Mr Saral Verma. As on the
date of the SPA, the petitioners held 5,32,520 Equity Shares of ₹10/-
each of Agros, which constituted 33.54% of the total equity capital in
the said company. In terms of the SPA, the petitioners agreed to sell the
said shares to Frost for a consideration of ₹10,00,00,000/- (Rupees Ten
Crores only). The petitioner acknowledged the receipt of a sum of
₹6,50,00,000/- (Rupees Six Crores and Fifty Lacs only) as part of the
purchase consideration and agreed to pay the balance consideration of
₹3,50,00,000/- (Rupees Three Crores and Fifty Lacs only) on the
closing date.
14. Disputes arose between the parties, essentially, in connection
with the representations made and warranties held out by the petitioners
under the SPA. The relevant terms of the SPA are set out below:
"Clause 3.3 Financial Statements:
3.3.1 All the financial statements of the Company
have been prepared in accordance with
Applicable Laws and are consistent with the
Company's Books and Records (which, in
turn, are accurate and complete), fairly
presents the Company's financial condition
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By:DUSHYANT
RAWAL
and results of operations, changes in
shareholders' equity and cash flow as of the
times and for the periods referred to therein
and have been prepared in accordance with
Applicable Laws.
*** *** ***
Clause 3.4 Liabilities:
As on the Closing Date, the Company has no
Liabilities outstanding for the period up to
the Cut-off date.
(Emphasis supplied)
*** *** ***
Clause 3.7 Taxes:
3.7.1 The Company has filed all Tax Returns that
are required to be filed under Applicable
Laws for all transactions, activities and
periods ending on or prior to the Cut-off
Date. All such Tax Returns are true, accurate,
correct and complete in all respects. The
Company has paid all Taxes that are due to,
or claimed, assessed or assessed by any
Government authority for the periods
covered by the Tax Returns filed by the
Company.
*** *** ***
Clause 3.7.3 There are no existing circumstances (apart
from the possibility of normal audit
selection) which reasonably may be expected
to result in the assertion of any claim for
Taxes against the Company by any
Government Authority with respect to any
period up to the Cut-off date for which Tax
Returns are required to have been filed or
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By:DUSHYANT
RAWAL
Tax is required to have been paid. The
Company has not received a written ruling
from a Government Authority relating to any
Tax that could have a continuing effect with
respect to any taxable period up to the Cut-
off date for which the Company has not filed
a Tax Return. The Company has not
received any written or oral notices from any
Governmental Authority with respect to
Taxes of the Company in any prior
examination which, by application of the
same or similar principles, could reasonably
be expected to result in a proposed
deficiency for any other taxable transaction,
activity or period. The Company has not
received any written or oral notice of an audit
or review for any transaction, activity or
period not yet closed by the applicable
statute of limitation.
(Emphasis supplied)
*** *** ***
Clause 4.3 No Violation to Result
The execution, delivery and performance by
the Sellers of this Agreement and the
consummation of the Transaction by the
Sellers does not and will not directly or
indirectly (with or without notice or lapse of
time); (i) violate, breach, conflict with,
constitute or default under, (a) any of the
terms of the certificate of incorporation,
constitutional documents of the Company or
any resolution adopted by the board of
directors or shareholders of the Company, or
(b) any note, debt instrument, security
agreement, mortgage or any other financing
document to which the Company is a party
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By:DUSHYANT
RAWAL
or by which it is bound, or (c) any law,
judgment, decree, order, rule, regulation,
permit, license or other legal requirement of
any Government Authority applicable to the
Company, (ii) give any Person the right to
exercise any remedy under any contract or
cancel, terminate or modify any contract;
(iii) give any Governmental Authority the
right to revoke, withdraw, suspend, cancel,
terminate or modify any permit or license
that is held by the Company or that otherwise
relates to the Company's business or to any
of the assets owned or used by the Company,
(iv) result in the creation or imposition of any
Encumbrance in favour of any Person upon
the Sale Shares or any of the properties or
assets of the Company, (v) cause the Buyer
or the Company to become subject to, or
become liable for the payment of, any Tax:
(vi) give any Governmental Authority or
other Person the right to challenge the
Transaction, or (vii) result in a violation
under any Applicable Law.
(Emphasis supplied)
*** *** ***
Clause 4.7 The Sellers hereby represent and warrant to the
Buyer that for the Period between the Cut-off
Date and the Execution Date, they have not
done or caused or allowed to be done any act
or things, which would have a Material
Adverse Effect.
Clause 4.8 The Sellers hereby represent and warrant to the
Buyer that they have complied with the terms
and condition of the JVA and have not
undertaken any action or omitted to do
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By:DUSHYANT
RAWAL
anything, which would constitute an event of
default under which would be in breach of
the JVA.
Clause 4.9 The Sellers hereby represent and warrant to the
Buyer that, except with the prior written
consent of the Buyer, for the period between
Cut-Off date and the Execution Date, the
Seller have not signed any document or done
any act (Whether as a shareholder, director,
employee or agent of the Company) which
has subjected or would subject the Company
to any Liability.
*** *** ***
7. INDEMNITY
7.1 Seller Indemnification
Subject to the other terms and conditions of this Clause
7, each Seller ("Seller Indemnifying Party") shall,
jointly and severally indemnify and defend the
Company and the Buyer and their respective officers,
directors, employees, successors and assigns
(collectively, the "Buyer Indemnified Party") against
and shall hold them harmless from, against and in
respect of all Liability suffered, sustained, incurred or
paid by any Buyer Indemnified Party resulting from,
arising out of or relating to:
(i) the breach of any representation or warranty of a
Seller set forth in this Agreement, Annexures
hereto or any certificate or document delivered by
any Seller in connection with the transactions
contemplated hereby; or
(ii) the breach of any covenant or agreement of such
Seller set forth in this Agreement, Annexure hereto
or any certificate or document delivered by any
Seller in connection with the transaction
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By:DUSHYANT
RAWAL
contemplated hereby; or
(iii) any failure of the Sellers, at the Closing Date, to
transfer good, valid and mareketable title to the
Sale Shares, to the Buyer, free and clear of all
Encumbrances; or
(iv) any failure of the Company to comply with
Applicable Laws, including the Companies Act
and the rules and regulations made thereunder,
prior to the Cut-off Date; or
(v) any business undertaken by the Company other
than the HSRP Business till the Closing Date; or
(vi) any business undertaken by the Company
(including the HSRP Business) prior to the Cut-off
Date; or
(vii) any act, omission, operation, management or
conduct of the Sellers (whether as a shareholder,
director, employee or agent of the Company) in
relation to the Company (including the HSRP
Business) after the Cut-off Date including without
limitation any Liability relating to filing of any
document with the Office of the Transport
Commissioner, Government of Uttar Pradesh,
provided that the indemnity obligation of the
Sellers under this sub-clause (vii) shall be that of
Vinod Agarwal only."
15. Once the shares held by the petitioners in Agros were sold, as per
the terms of the SPA, the petitioners exited as shareholders and demitted
office as Directors from the said company. Frost alleges that the new
management discovered that the Commissioner of Transport,
Government of Uttar Pradesh, had issued a letter dated 20/21.06.2013
to Agros seeking certain clarifications with regard to its Income Tax
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By:DUSHYANT
RAWAL
Returns for the Assessment Year 2010-11. The said letter also indicated
that the Transport Department had received information from the
Director General of Income Tax (Intelligence and Criminal
Investigation), New Delhi, that the Association of Registration Plates
Manufacturers of India had filed a complaint dated 15.12.2012 with the
Income Tax Department alleging that Agros had forged its Income Tax
Returns for the Assessment Years 2010-11.
16. Frost states that after issuance of a Show Cause Notice, the
Commissioner of Transport, State of Uttar Pradesh, passed orders
blacklisting Agros and debarring it from participating in any bids for a
specified period. Further, Frost states that subsequent to acquiring the
shares held by the petitioners in Agros, in terms of the SPA, the Income
Tax Department re-assessed Agros and imposed substantial Income Tax
liability including penalty for the Assessment Years 2006-07 to 2010-
11. The Arbitral Tribunal found that additional Income Tax liability
pertained to the period during which the petitioners were in full control
of Agros.
17. Disputes between the parties were referred to arbitration under
the aegis of the Delhi International Arbitration Center (DIAC). Before
the Arbitral Tribunal, Frost filed a Statement of Claims, inter alia,
claiming compensation of an amount of ₹ 3,00,00,000/- (Rupees Three
Crores only) from the petitioners on account of loss of its goodwill and
business. The Arbitral Tribunal rejected the contention of Frost on
account of loss of goodwill and its business as there was no material on
record to prove actual loss suffered by it. The Arbitral Tribunal further
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By:DUSHYANT
RAWAL
held that since the Supreme Court had also stayed the tender issued by
the State of Uttar Pradesh and as no fresh tender has been floated, no
actual loss could have been suffered by Frost.
18. In its Statement of Claims, Frost also claimed a sum of
₹82,73,709/- in respect of the undisclosed Income Tax liability for the
Assessment Years 2006-07 to 2010-11.
19. It is necessary to refer to certain paragraphs of the Statement of
Claims, which would indicate the basis on which Frost had founded its
claim for the aforesaid amount of ₹82,73,709/-. The said paragraphs are
extracted below:
"49. That as the Respondent Nos. 1 & 2 failed to provide
the relevant information and documents pertaining
to the business conducted by them for the
Assessment Year 2006-07, the Claimant Company
in respect of the said Assessment Year 2006-07 has
paid the following amount to the Income Tax
Department:
Sl. Particulars Amount Paid Date of
No. Payment
1. Tax assessed Rs.15,39,580/- 27/09/2013
under the Income
Tax Return filed
for the A.Y. 2006-
2. Towards Rs.5,00,000/- 25/06/2014
demand of
Rs.23,58,625/-
for re-
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By:DUSHYANT
RAWAL
assessment of
A.Y. 2006-07
Total: Rs.20,39,580/-
50. The Income Tax Department vide its order dated
15/09/2014 imposed penalty upon M/s. Agros Impex
(I) Pvt. Ltd. i.e. Respondent No.3 u/s 271(b) of the
Income Tax Act to the tune of Rs.1,00,000/-.
51. M/s. Agros Impex (I) Pvt. Ltd. i.e. Respondent No.
3 which is now being managed and run by the
Claimant Company received four notices dated
21/1/2014 from the Income Tax Department U/s.
143 (2) of the Income Tax Act with respect to the
Income Tax Returns of M/s. Agros Impex (I) Pvt.
Ltd. for the Assessment Years 2007-08, 2008-09,
2009-10 and 2010-11.
52. That on the receipt of the notices, the Claimant
Company requested both the Respondent Nos. 1 & 2
to provide relevant information and documents
called in by the Income Tax Department and also to
cooperate with it and appear before the Income Tax
Department and set the record straight. The
Respondent Nos. 1 & 2 failed to cooperate and as a
result whereof the Claimant Company was unable to
comply with the notices dated 21/1/2014 issued by
the Income Tax Department. The representative of
the Claimant Company on several occasions
appeared before the Income Tax Department and
presented their case but in the absence of the
required documents, the Claimant Company could
not satisfy the Income Tax Department with respect
to its queries.
53. That Income Tax Department vide its four separate
orders all dated 13/3/2015 passed Assessment
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By:DUSHYANT
RAWAL
Orders for the Assessment Years 2007-08, 2008-09,
2009-10 and 2010-11 assessing the liability of M/s.
Agros Impex (I) Pvt. Ltd. i.e. Respondent No.3
which is as follows:
a) Assessment year-2007-08: Rs.76,69,675/-
b) Assessment Year-2008-09: Rs.55,31,522/-
c) Assessment Year-2009-10: Rs.53,77,821
d) Assessment Year-2010-11 Rs.56,79,223/-
____________
Total: Rs.2,42,58,241/-
____________
54. The Income Tax Department vide all Its four
Assessment Orders dated 13/3/2015 imposed
interest @5% U/s. 234A/B/C/D of the Income Tax
Act and issued penalty notice U/s. 271(1)(c) of the
Income Tax Act upon M/s. Agros Impex (I) Pvt. Ltd.
i.e. Respondent no. 3.
55. M/s. Agros Impex (I) Pvt. Ltd. i.e. Respondent No.
3 (owned, controlled and run by Claimant Company)
being highly aggrieved by the orders dated
15.09.2014 & 13.03.2015 passed by the Income Tax
Department filed appeal against the said orders
before the Commissioner of Income Tax.
56. The Commissioner of Income Tax vide its order
dated 09.07.2015 dismissed the appeal of M/s. Agros
Impex (I) Pvt. Ltd. i.e. Respondent No. 3 and
confirmed the penalty of Rs.1,00,000/- (Rupees One
Lac only) imposed U/s. 271B of the Income Tax Act,
1961 by the Assessing Officer for the Assessment
Year 2006-07.
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By:DUSHYANT
RAWAL
57. The Commissioner of Income Tax vide its four
separate orders all dated 27.07.2015 dismissed the
appeals filed by M/s. Agros Impex (I) Pvt. Ltd. i.e.
Respondent No. 3 challenging the order of the
Assessing Officer dated 13.03.2015 with respect to
the Assessment Year 2007-08, 2008-09, 2009-10,
2010-11. The Commissioner of Income Tax
however vide its order dated 27.07.2015 has reduced
the rate of interest imposed by the Assessing Officer
from 5% to 1.20%.
58. That after the assessments done by the Income Tax
Department and the dismissal of the appeals filed by
M/s. Agros Impex (I) Pvt. Ltd. i.e. Respondent No.
3, the Claimant Company is left with no other option
but to pay the said amount. The Claimant Company
being the major shareholder of Respondent No. 3 has
till date paid Rs.20,39,580/- (Rupees Twenty Lacs
Thirty Nine Thousand Five Hundred Eighty) and
after the passing of the order dated 09/07/2015 and
27/07/2015 by the Commissioner of Income Tax
whereby the interest rate has been reduced, the
Claimant Company is liable to pay further sum of
Rs.61,34,129/- for the Assessment Years 2007-08 to
2010-11. The said liabilities are entirely of the
Respondent Nos. 1 & 2 and they are liable to pay the
same to the Claimant Company. The liability of the
Respondent Nos. 1 & 2 towards the Claimant
Company in respect of the Income Tax for the
Assessment Years from 2006-07 to 2010-11 is as
follows::-
(a) Amount on 27/9/2013 for the Rs.15,39,580/-
Assessment Year 2006-07
(b) Amount paid on 25/6/2014 Rs.5,00,000/-
for the Re-Assessment of the
Assessment Year 2006-07
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By:DUSHYANT
RAWAL
against liability of
Rs.23,58,625/-
(c) Amount paid towards penalty Rs.1,00,000/-
imposed U/s 271B of the
Income Tax Act for the
Assessment Year 2006-07
(d) Income Tax Liability for the Rs.19,40,550/-
Assessment year 2007-08 in
view of the order dated
27.07.2015 passed by the
Commissioner of Income Tax
(e) Income Tax Liability for the Rs.15,13,765/-
Assessment year-2008-09 in
view of the order dated
27.07.2015 passed by the
Commissioner of Income Tax
(f) Income Tax Liability for the Rs.13,58,237/-
Assessment year-2009-10 in
view of the order dated
27.07.2015 passed by the
Commissioner of Income Tax
(g) Income Tax Liability for the Rs.13,21,577/-
Assessment year-2010-11 in
view of the order dated
27.07.2015 passed by the
Commissioner of Income Tax
Total Rs.82,73,709/-
59. That from the facts and circumstances narrated
hereinabove it is crystal clear that the Respondent
Nos.1 & 2 in connivance and conspiracy with each
other have cheated the Chairman Company. The
Respondent. Nos. 1 and 2 have given false
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By:DUSHYANT
RAWAL
representations to the Claimant Company and due to
the false representations and inducement by the
Respondent Nos.1 & 2 the Claimant Company has
suffered huge losses and continues to suffer the
same. That as per the terms and conditions of the
share purchase agreement dated 07.08.2013 entered
between the Claimant Company and the
Respondents, the entire responsibility & liability
with respect to the business of M/s. Agros Impex (I)
Pvt. Ltd. i.e. Respondent No.3 for the years prior to
07.08.2013 is of Respondent Nos.1 & 2. The
Respondent nos.1 & 2 under the Share Purchase
Agreement dated 07.08.2013 have undertaken and
accepted the same and have further indemnified the
Claimant Company with respect to any liability for
the years prior to 07.08.2013. The claimant states
and submits that the Claimants had paid a sum of Rs.
10,00,000,00/- (Rupees Ten Crores) to the
respondents towards the share value only upon their
assurances and representations as contained in the
Share Purchase Agreement. The Respondents Nos. 1
& 2 under the Share Purchase Agreement dated
7/8/2013 had undertaken that any liability of M/s.
Agros Impex (I) Pvt. Ltd. with respect to the date
prior to the cut-off date i.e. 7/8/2013 would. be their
personal liability."
20. A plain reading of paragraph 58 of the Statement of Claims
indicates that Frost had asserted that after dismissal of the appeals filed
by Agros, it was left with no option but to pay the amount of liability
towards Income Tax and penalty, which the petitioner had quantified at
₹82,73,709/-. Frost asserted that till the date of filing of the Statement
of Claims, it had paid ₹20,39,580/- and it was further liable to pay an
amount of ₹61,34,129/- for the Assessment Years 2007-08 to 2010-11.
Admittedly, the income tax liability and penalty were that of Agros and
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By:DUSHYANT
RAWAL
not of Frost. It is not disputed that Frost was not liable to pay any
amount to the Income Tax Department and had incurred no liability on
that count. Frost had made a claim on the basis that it was a majority
shareholder of Agros and was in control and management of the
company.
21. The Arbitral Tribunal examined various clauses of the SPA
(Clauses 3.3, 3.4, 3.7, 4.3 and 7.1) and found that the petitioners had
represented and declared that all Income Tax Returns of Agros were
duly filed and all taxes had been paid. The petitioners had also
represented that the books and records of Agros were maintained in
accordance with law and all statutory compliances were made. The said
representations and warranties did not hold good and, the Arbitral
Tribunal found the petitioners liable to indemnify Frost against the
breach of the representations and warranties set forth in the SPA.
22. The petitioners contested the said claim on several grounds. First,
they disputed the correspondence between the parties and claimed that
their email account had been hacked. The Arbitral Tribunal found that
they have failed to establish the same. Next, the petitioners contended
that they had not extended any indemnity to Frost under the SPA. This
contention was also rejected by the Arbitral Tribunal. This Court finds
no reason to interfere with these findings. Mr Vachher has also not
advanced any contentions to impugn the said findings. As noted at the
outset, he had confined the challenge to the impugned award only on
two fronts: Frost had not suffered any loss as the Income Tax liability
and penalty was imposed on Agros (not on Frost) and there was no
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evidence that Frost had made a payment to the Income Tax Department
as the assessments were made in respect of Agros.
23. A plain reading of the impugned award indicates that the Arbitral
Tribunal had not accepted the aforesaid contentions. It had referred to
Clause 7.1 of the SPA and held as under:
"HH. It is clear from the above provision that the Seller
i.e. the Respondent is liable to indemnify the Buyer
i.e. Frost against the breach of any representation
or warranty set forth in this agreement. The
Claimant has proved the payment made by them
after re-assessment. It is an admitted position that
the Claimant had purchased the entire shareholding
of Respondent No.1 and 2 by virtue of the said
agreement and it is the Claimant who has suffered
loss for the failure of Respondent to pay taxes /
penalty for the AY 2006-07 to 2010-11.
Respondent No.1 and 2 had agreed to indemnify
the Buyer that is the Claimant Company from
making good loss if any of the representations or
warranties set forth in the agreement.
II. Accordingly, I deem it appropriate to award a sum
of Rs.82,73,709/- in favour of the Claimant and
against the Respondent Nos.1 and 2."
24. It is clear from the above that the decision of the Arbitral Tribunal
to enter an award of ₹82,73,709/- in favour of Frost and against the
petitioners is premised on its finding that the petitioners had breached
their representations and warranties set forth in the SPA and Frost had
proved the payments made by them after re-assessment. The Arbitral
Tribunal also proceeded on the basis that since Frost had purchased the
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entire shareholding of the petitioners and taken over the management of
Agros, by virtue of the SPA, it had suffered a loss on account of failure
on the part of the petitioners to pay taxes and penalty for the Assessment
Year 2006-07 to 2010-11.
25. Undeniably, the additional liability to pay income tax and penalty
in question was that of Agros as Agros was the assessee and not Frost.
26. It is also important to note that in terms of Clause 7.1 of the SPA,
the petitioners had not only indemnified Frost but also Agros, as they
were collectively referred to as "Buyer Indemnified Party".
27. The contention that Frost had not incurred any loss as the liability
on Income Tax/penalty was that of Agros is, plainly, unmerited. Frost
is a substantial shareholder of Agros. Thus, any additional liability on
Agros would result in a direct loss to Frost as undisputedly, it would
adversely affect the value of shares held by it in Agros.
28. Mr Vachher had contended that Frost had not structured its claim
in the aforesaid manner and, therefore, no award on the said basis could
be made in its favour. This Court is unable to accept the said contention
as a careful reading of the Statement of Claims indicates that Frost had
asserted that it had suffered a loss as well as incurred a liability on
account of being a majority shareholder of Agros. It also asserted that it
had directly paid part of the demand raised, that is, ₹20,39,580/- and,
was liable to pay the balance.
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29. The Arbitral Tribunal has also accepted the above claim. This is
clearly discernable from the Arbitral Tribunal's finding that "it is an
admitted position that the Claimant [Frost] had purchased the entire
shareholding of Respondent no.1 and 2 [the Petitioner] by virtue of the
SPA and "it is the Claimant [Frost] who has suffered loss for the failure
of Respondent to pay taxes / penalty for the AY 2006-07 to 2010-11".
30. Thus, in view of the Arbitral Tribunal's finding - which is not
contested by Mr Vachher - that since the petitioners were in breach of
their representations and warranties as set forth in the SPA, the
petitioners would be liable to indemnify Agros against any loss on
account of the additional liability that was not recognized or disclosed
by the petitioners.
31. In the circumstances, the decision of the Arbitral Tribunal that the
petitioners would be liable to make good the amount of income tax and
penalty imposed pursuant to the re-assessment of Agros, cannot be
faulted.
32. The only narrow area of dispute that remains to be addressed is
whether the entire amount equivalent to the liability in question could
be awarded in favour of Frost.
33. Undisputedly, Frost had not incurred any direct liability on
account of Income Tax/penalty, as the liability was that of Agros. Frost
is the majority shareholder of Agros and does not hold the entire share
capital of Agros. As noted above, Frost had made a claim on its behalf
as a separate entity and not on behalf of Agros. Frost had not instituted
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the arbitral proceedings as a derivative action for the benefit of all
shareholders.
34. Thus, any diminution in the disclosed net worth of Agros on
account of any undisclosed liability would adversely affect the value of
shares held by Frost; but, obviously, only to the proportionate extent of
its shareholding in Agros.
35. Having stated the above, it is relevant to note that Frost had
founded its claim not only on account of being the majority shareholder
of Agros but also on the ground that it had paid the liability in question.
In the Statement of Claims, it had stated that it had paid a sum of
₹20,39,580/- and, in addition, there was a further liability to pay the
balance amount of ₹61,34,129/- for the Assessment Years 2007-08 to
2010-11. At the time when the Statement of Claims was filed, the said
liability towards the Income Tax Department had not been discharged.
However, it cannot be disputed that the liability was discharged
thereafter. The concerned official from the Income Tax Department was
examined and there is sufficient evidence to establish that the entire
liability of ₹82,73,709/- was paid. A part of the said liability was paid
directly by Frost while the remaining balance was paid from the bank
accounts of Agros.
36. There is sufficient material on record to establish that Agros was
funded by Frost. Frost had also claimed that since it was in control and
management of Agros, it was required to take the necessary steps for
discharge of the liability in question. It had also asserted that it had
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funded Agros to the extent of ₹2,22,00,000/- (Rupees Two Crores,
Twenty-Two Lacs only).
37. Frost has filed an affidavit that it had thereafter, increased its
funding in Agros. However, since the said affidavit was not placed
before the Arbitral Tribunal, the same cannot be considered. However,
to the extent of ₹2,22,00,000/-, there is no doubt that there was material
before the Arbitral Tribunal to arrive at the conclusion that Frost had
funded Agros. The Tribunal had returned the specific finding that "the
claimant [Frost] has proved the payment made by them after re-
assessment".
38. In the given facts, the manner in which Frost had funded the
discharge of the liability assessed on Agros - whether by making direct
payments to the Income Tax Department or by funding Agros to pay the
same, is not material.
39. In terms of Clause 7.1 of the SPA, the petitioners had agreed to
indemnify and defend the "buyer indemnified party" [Agros and Frost]
against all liability that may be suffered, sustained, incurred or paid by
any buyer indemnified party. Thus, in terms of Clause 7.1 of the SPA,
the petitioners were required to hold the respondents harmless against
any payment of any liability that was not disclosed in the books of
Agros. Since it is established that the liability had been paid by the
respondents, the petitioners were required to indemnify the respondents
in respect of the same.
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40. The Arbitral Tribunal's view that Frost had established that the
liability in question had been paid by it, warrants no interference in these
proceedings. The Supreme Court in a recent decision in Delhi Airport
Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd.: 2021
SCC OnLine SC 695 has authoritatively held that the approach of the
courts to evaluate and reappreciate evidence to determine whether an
arbitral award is vitiated on the ground of patent illegality is
impermissible.
41. In the present case, there is ample material on record to establish
that Agros was being funded by Frost; Frost was in management and
control of Agros; and the liability of ₹82,73,709/- was not disclosed in
the accounts of Agros; Frost had paid the consideration of ₹10 crores
for purchasing the shares of Agros as held by the petitioners on the basis
of the representation that all liabilities were disclosed and accounted
for in the books of Agros; and undisclosed liability towards the income
tax and penalty quantified at ₹82,73,709/- was discharged. Any further
inquiry as to how and in what manner Frost had provided funds for
discharge of the said liability is neither necessary nor warranted in these
proceedings.
42. In Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd.:
(2019) 20 SCC 1, the Supreme Court had observed as under:
24. There is no dispute that Section 34 of the
Arbitration Act limits a challenge to an award only on
the grounds provided therein or as interpreted by
various courts. We need to be cognizant of the fact
that arbitral awards should not be interfered with in a
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casual and cavalier manner, unless the court comes to
a conclusion that the perversity of the award goes to
the root of the matter without there being a possibility
of alternative interpretation which may sustain the
arbitral award. Section 34 is different in its approach
and cannot be equated with a normal appellate
jurisdiction. The mandate under Section 34 is to
respect the finality of the arbitral award and the party
autonomy to get their dispute adjudicated by an
alternative forum as provided under the law. If the
courts were to interfere with the arbitral award in the
usual course on factual aspects, then the commercial
wisdom behind opting for alternate dispute resolution
would stand frustrated.
[underlined for emphasis]
43. In the given circumstances, this Court is unable to accept that the
impugned award is liable to be set aside as being vitiated by patent
illegality on the face of the award or that it is in conflict with the public
policy of India.
44. The petition is, accordingly, dismissed. The pending application
is also disposed of.
VIBHU BAKHRU, J
SEPTEMBER 17, 2021
nn/RK
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