Delhi High Court
Union Of India Through Pwd (Gnctd) vs Continental Engineering ... on 22 March, 2022
IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 22.03.2022
+ O.M.P. (COMM) 432/2020 & IA No.4684/2020
UNION OF INDIA
THROUGH PWD (GNCTD) ....Petitioner
Versus
M/S CONTINENTAL
ENGINEERING CORPORATION ....Respondent
Advocates who appeared in this case:
For the Petitioner : Ms. Kritika Gupta, Advocates.
For the Respondent : Mr. Anil Kher, Sr. Adv. with Mr. Kunal
Kher & Mr. Sandeep Thukral, Advocates.
CORAM
HON'BLE MR JUSTICE VIBHU BAKHRU
JUDGMENT
VIBHU BAKHRU, J
1. The petitioner has filed the present petition under Section 34 of
the Arbitration and Conciliation Act, 1996 (hereinafter 'the A&C Act')
impugning an arbitral award dated 10.12.2019 (hereinafter 'the
impugned award') delivered by the Arbitral Tribunal comprising of a
Sole Arbitrator.
2. The impugned award was rendered in the context of the disputes
that have arisen between the parties in connection with an agreement
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dated 14.05.2013 (hereinafter 'the Agreement'). The dispute before the
Arbitral Tribunal related to the respondent's claim for reimbursement
of Service Tax and Environmental Compensation Cess (Claim no. 1 and
Claim no. 2). The Arbitral Tribunal partly accepted the claim for
reimbursement of Service Tax in respect of certain services availed by
the respondent (hereinafter 'CEC') and entered an award for a sum of
₹1,38,58,095/- in respect of Claim no. 1. The Arbitral Tribunal also
accepted CEC's claim for reimbursement of Environmental
Compensation Cess (hereinafter 'ECC') and awarded a sum of
₹3,14,06,709/-, in its favour. In addition, the Arbitral Tribunal awarded
interest at the rate of 10% per annum on the aforesaid awarded amounts.
The Arbitral Tribunal also awarded costs for arbitral proceedings
quantified at ₹15,00,000/-.
3. At the outset, it is material to note that the petitioner has accepted
the impugned award in respect of CEC's claim for reimbursement of
ECC (Claim no. 2) and has confined its challenge to the award relating
to reimbursement of Service Tax (Claim no. 1) and interest (Claim no.3)
4. The controversy in the present case arises in the following
context:
5. On 06.03.2013, the petitioner issued an electronic Notice Inviting
Tender (NIT) for the works regarding "Comprehensive Development of
Corridor (Outer Ring Road) between Mukarba Chowk to Wazirabad
Chowk, SH: C/o Flyovers, Loops, Bridges across supplementary drain,
FOBs, Footpath, Cycle track, Widening of Road on embankment, Rain
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Water Harvesting scheme, Electrical works and other allied works"
(hereinafter 'the Project'), on the terms and conditions stipulated
therein.
6. Pursuant to the said NIT, CEC submitted its bid for executing the
Project works on 22.03.2013. CEC's bid was accepted by the petitioner
and by a Letter of Acceptance dated 29.04.2013 (hereinafter 'the LoA'),
the contract for implementation of the Project was awarded to CEC for
an amount of ₹442,95,68,517/-.
7. The petitioner called upon CEC to furnish a Performance
Guarantee in accordance with Clause 1 of the General Conditions of
Contract for the CPWD works (hereinafter 'the GCC') for an amount
equivalent to ₹22,14,78,426/-, within fifteen days after receipt of the
LoA. In terms of the LoA, CEC was required to complete the Project
within a period of twenty-four months to be reckoned from twenty-two
days after the issuance of the LoA. Thus, the stipulated date of
commencement of the Project was 21.05.2013 and the stipulated date
of completion of the Project was 20.05.2015.
8. On 13.05.2013, CEC furnished the Performance Security as
required. Thereafter, on 14.05.2013, the petitioner issued the Letter of
Commencement of Work to CEC. Thereafter, in terms of Clause 9 of
the Conditions of Contract, the parties entered into the formal
agreement (the Agreement).
9. During the course of executing the Project, CEC submitted
various requests for Extension of Time for completion of the Project
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and the petitioner, from time to time, granted such extensions. The last
extension of time till 31.08.2018 was granted by the petitioner by a
letter dated 30.06.2018. However, CEC could complete the Project
works only by 27.08.2018, that is, after a delay of three years and three
months.
10. Thereafter, on 27.09.2018, the petitioner issued a Final
Completion Certificate.
11. The dispute between the parties arose in respect of CEC's claim
regarding reimbursement of Service Tax from the petitioner for the
period between October, 2013 to June, 2017 and reimbursement of
ECC.
12. By a communication dated 23.10.2013 addressed to the
petitioner, CEC claimed that in terms of Clause 37 of the GCC, it was
entitled for reimbursement of Service Tax. CEC also requested the
petitioner to inform it regarding the proper guidelines and process flow
for obtaining reimbursement of Service Tax. The petitioner responded
by a letter dated 04.01.2014 informing CEC that if the contractor (CEC)
has already paid the Service Tax to the concerned Service Tax
Department on demand, then the Service Tax is deemed to be
reimbursed to the contractor and therefore, no Service Tax is payable to
the contractor in the instant case. Thereafter, CEC sent a letter dated
12.03.2014, claiming a sum of ₹3,97,244/- on account of
reimbursement of Service Tax and requested the petitioner to process
its bill for release of payment at the earliest.
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13. Further, by a letter dated 01.06.2015, CEC also requested the
petitioner to refund a sum of ₹15,05,524/- deposited as Service Tax
from the period October, 2013 till March, 2015, in accordance with
Clause 37(i) of the GCC and Clause 14 of the Instructions to Bidders.
The petitioner responded by a letter dated 27.07.2015 rejecting CEC's
claim by relying on a circular [Circular no. 147/16/2011 dated
21.10.2011] issued by Department of Revenue, Ministry of Finance,
Government of India. The petitioner claimed that the services provided
by the sub-contractors for the infrastructure project were also exempted
from Service Tax.
14. Thereafter, by a letter dated 13.08.2015, CEC, once again, sought
reimbursement of a sum of ₹15,05,524/- deposited as Service Tax till
March, 2015. Further, CEC also submitted an independent opinion
obtained from a firm of Chartered Accountants - R.R. Lingsur and
Associates.
15. The Chartered Accountants appointed by CEC negated the
petitioner's stand in respect of the aforesaid Circular dated 21.10.2011
issued by the Department of Revenue, Ministry of Finance,
Government of India and opined that in the instant case, the tax paid on
the services by the sub-contractors are classifiable under Goods
Transport Agency (GTA) Services not under Work Contract Service
(WCS) and therefore, such services were not exempt from payment of
Service Tax under Section 65 (105) of the Finance Act, 1994. It was
further opined that CEC was right in depositing the Service Tax on such
services even though the same were in relation to exempt infrastructure
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projects. Consequently, CEC was entitled to reimbursement of the
Service Tax paid by it as it had duly complied with the conditions
stipulated under Clause 37(i) of the GCC.
16. By several communications thereafter, CEC requested the
petitioner to reimburse the Service Tax paid by it and the petitioner
rejected CEC's claim of reimbursement of Service Tax by relying on
the Circulars issued by the Government of India and held the claim to
be untenable.
17. On 04.01.2016, CEC had informed the petitioner regarding the
applicability of the ECC pursuant to the notification issued by the
Government of NCT of Delhi and the petitioner's liability to reimburse
such additional charges in terms of Clause 38 of the GCC. Thereafter,
by several communications, CEC had reminded the petitioner to
reimburse the said charges. However, the petitioner declined to
reimburse the amounts claimed as reimbursement of ECC.
18. Thereafter, by a letter dated 22.05.2017, CEC requested that the
matter be placed before the Engineer-in-Chief of the petitioner in order
to resolve the disputes amicably. However, the Engineer-in-Chief failed
to respond to the aforesaid letter of CEC.
19. Aggrieved by the lack of response from the Engineer in Chief,
CEC, by a letter dated 27.06.2017, referred the dispute to the
Superintending Engineer in terms of Clause 25 of the GCC. By a letter
dated 01.08.2017, the Superintending Engineer rejected the claims of
CEC on the ground that Clause 37(i) of the GCC and Clause 14 of
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Instructions to Bidders provide for reimbursement of Service Tax levied
on the services provided by the main contractor and it had nothing to do
with the levy of Service Tax on the input services received by the main
contractor - that is, CEC - from its various sub-contractors/service
providers.
20. Thereafter, CEC, by a letter dated 10.08.2017, filed an appeal as
contemplated under Clause 25 of the GCC, with the Principal Chief
Engineer (Projects) for pursuing its claim. In terms of Clause 25 of the
GCC, the Chief Engineer was under an obligation to communicate its
decision within a period of thirty days, however, no such decision was
rendered by the Chief Engineer within the stipulated period. By a letter
dated 14.09.2017, CEC, once again, requested the Chief Engineer to
expedite the process and communicate its decision. But, the Chief
Engineer failed to do so.
21. Dissatisfied with the decision of the aforesaid authorities, CEC
by a letter dated 31.10.2017, preferred an appeal before the Disputes
Redressal Committee (hereinafter 'DRC'). However, the DRC failed to
take a decision in respect of the aforementioned claim within the period
stipulated under the Agreement.
22. In view of the disputes between the parties, CEC, by a letter dated
27.04.2018, invoked the agreement to refer the disputes to arbitration in
terms of Clause 25 of the GCC, and requested the petitioner to appoint
an arbitrator for adjudication of the disputes.
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23. In the meanwhile, the Minutes of the Meeting of the DRC, which
was held on 23.03.2018, were communicated to CEC. This indicated
that the DRC had rejected all the claims preferred by CEC.
24. On 10.05.2018, the Project Chief Engineer appointed Shri K.K.
Peshin (Retd.) ADG, CPWD as the sole arbitrator. However, by a letter
dated 17.05.2018, Shri K.K. Peshin communicated his inability to
accept his appointment on the ground that he had been engaged as an
arbitrator by the petitioner in five other cases.
25. Thereafter, CEC approached this Court by way of a petition
under Section 11 of the A&C Act for the appointment of an arbitrator
and by an order dated 16.11.2018, this Court appointed a former Judge
of this Court as the Sole Arbitrator.
26. CEC filed its Statement of Claims before the Arbitral Tribunal.
The claims made by CEC are tabulated below:
Claim no.1 Reimbursement of Service Tax ₹5,02,47,953/-
Claim no.2 Reimbursement of Environmental ₹3,14,06,709/-
Compensation Charge
Claim no.3 Interest on Claim No. 1 and Claim ₹1,57,44,558/-
No. 2 above @ 10% from the date of
submission to PWD till date of
submission of the Statement of
Claim by the Respondent i.e.
10.01.2019
Claim no.4 Costs of arbitration including GST As per actuals
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27. The petitioner filed its Statement of Defence, however, it did not
raise any counter claims.
The Impugned Award
28. By the impugned award, the learned Arbitrator partly allowed
Claim No. 1 regarding reimbursement of Service Tax paid by CEC. The
Arbitral Tribunal held that under Clause 37(i) of the GCC and Clause
14 of Instruction to Bidders, CEC was required to satisfy three
conditions to claim reimbursement from the petitioner; first, that it had
paid Service Tax to the concerned department; second, that the
Department had raised demand for payment of the Service Tax from
CEC and; third, that the payment made by CEC was to the complete
satisfaction of the Engineer-In-Charge. The Arbitral Tribunal found that
the petitioner had not raised any dispute with regard to the payment of
₹5,02,47,953 by CEC. Out of the said amount, an amount of
₹1,38,58,095/- was directly deposited with the Department of Service
Tax and the remaining balance, that is, ₹3,63,89,858/-, was deposited
with the Department through CEC's sub-contractors and vendors. The
Arbitral Tribunal found that CEC had duly satisfied the above three
conditions in respect of the sum of ₹1,38,58,095/- paid by it to the
Department of Service Tax and therefore, awarded reimbursement of
the aforesaid amount in respect of Claim No.1. However, the claim for
the remaining amount of ₹3,63,89,858/- was rejected.
29. The Arbitral Tribunal also allowed Claim nos. 2 and 3 of CEC
and held that that the burden to pay the ECC arose pursuant to a
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Notification dated 20.10.2015 issued by the Department of
Environment, Government of NCT of Delhi in compliance with an
order dated 09.10.2015 passed by the Supreme Court in I.A. no 345 and
365 of 2015 in W.P. (Civil) 13029 of 1985 captioned as MC Mehta v
Union of India and Ors. The Arbitral Tribunal further referred to Clause
38 of the GCC, which specifically dealt with the statutory liability of
the petitioner, in terms of any taxes/levies/cess imposed by any statute
after the last stipulated date for the receipt of tender. The Arbitral
Tribunal held that the petitioner could not deny the said claim of
reimbursement of ECC, in view of the said clause. Accordingly, the
Arbitral Tribunal allowed Claim no. 2 and awarded a sum of
₹3,14,06,709/-, in favour of CEC.
30. The Arbitral Tribunal allowed CEC's claim for interest and
awarded interest at the rate of 10% per annum on the aforesaid claims.
Additionally, a sum of ₹15,00,000/- was awarded in favour of CEC as
costs of arbitration in respect of Claim no. 4.
31. Aggrieved by the impugned award, the petitioner has filed the
present petition.
Reasons & Conclusions
32. The petitioner has assailed the impugned award, inter alia, on the
ground that it is contrary to the plain terms of the Agreement. It does
not dispute that CEC is entitled to reimbursement of Service Tax in
respect of the Agreement in question. However, it disputes that CEC is
entitled to claim reimbursement of any Service Tax paid in respect of
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other contracts entered into by it for availing services from third party
service providers.
33. The petitioner had also contested CEC's claim for reimbursement
of ECC before the Arbitral Tribunal. However, the petitioner has
accepted the impugned award in this regard. The learned counsel for the
petitioner has confined her challenge to the impugned award only to the
extent the Arbitral Tribunal has partly allowed the respondent's claim
for reimbursement of Service Tax and interest.
34. At this stage, it would be relevant to refer to the relevant clauses
of the Agreement concerning the reimbursement of Service Tax:
Clause 15 of the General Rules and Directions; Clause 37(i) of GCC;
and Clause 14 of the Instructions to Bidders. The said clauses are set
out below:
"Clause 15 of the General Rules and Directions.
Sales-tax and VAT (except service tax), purchase tax,
turnover tax or any other tax applicable In respect of
the Contract be payable by the Contractor and
Government will not entertain any claim whatsoever
in respect of the same. However, in respect of service
tax, same shall be paid by - the contractor to the
concerned department on demand and it will be
reimbursed to him by the Engineer in Charge after
satisfying that it has been actually and genuine1y paid
by the contractor.
Clause 37(i) of GCC:
Sales Tax/ VAT (except Service Tax), Building and
other Construction Workers Welfare Cess or any
other tax or Cess in respect of this contract shall be
payable by the contractor and Government shall not
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entertain any claim whatsoever in this respect.
However, in respect of service tax, same shall be paid
by the contractor to the concerned department on
demand and it will be reimbursed to him by the
Engineer-in-Charge after satisfying that it has been
actually and genuinely paid by the contractor.
Clause 14 of the Instructions to Bidders:
Sales Tax, Excise-Duty as applicable shall be paid by
the contractor himself Whereas Contract Tax, DVAT,
Labour Cess and Income Tax etc. as applicable shall
be deducted by the department from the WA bills.
The contractor shall quote his rates considering all
such Taxes. However regarding the Service Tax, the
same shall be reimbursed by the department on
production of proof of actual payment of Service Tax
in the concerned department made on demand."
35. It is important to note that the Agreement was, essentially, an
Item Rate Contract, whereby CEC had submitted all inclusive rates for
various BOQ items. CEC claimed that during the course of execution
of the works in question, it had paid Service Tax amounting to
₹5,02,47,953/- in respect of various input services and was thus, entitled
to reimbursement of the same.
36. The said amount comprises of two distinct components. The first
component is in respect of certain input services availed by CEC on
which Service Tax was payable under the Reverse Charge Mechanism.
In terms of the Reverse Charge Mechanism, Service Tax on certain
services is chargeable from the service recipient and not the service
provider. CEC claimed that it had paid Service Tax aggregating to
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₹1,38,58,095/- in respect of such input services. The said amount was
paid directly to the Service Tax Authorities in respect of (a) legal
consultancy services; (b) manpower recruitment / supply agency
service; (c) rent a cab scheme operator service; (d) works contract
service; (e) transport of goods by road; and, (f) security detective
agency.
37. The second component comprises of Service Tax included by the
service providers in their invoices for services rendered to CEC. The
said tax is assessed in the hands of the third-party service providers and
deposited by them with the concerned department. CEC claimed a sum
of ₹3,63,89,858/- in respect of such services availed by it. These
services include (a) hiring charges of machinery; (b) annual
maintenance charges; (c) soil investigation; (d) testing charges; (e)
internet charges; (f) security charges; (g) video shoot site charges; (h)
professional charges; and, (i) repair work.
38. In respect of the aforementioned services, the Service Tax was
included in the tax invoices raised by the service providers to CEC.
CEC had made payment of the said invoices and sought reimbursement
of the Service Tax charged by the service provider.
39. The Arbitral Tribunal held that on a conjoint reading of Clause
37(i) of the GCC and Clause no. 14 of the Instructions to Bidders, CEC
is entitled to reimbursement of the Service Tax, provided it satisfies the
three conditions viz. (i) CEC had paid the Service Tax to the concerned
department; (ii) that the demand had been raised by the Department for
payment of Service Tax to CEC; and, (iii) that the payment was made
in complete satisfaction of the Engineer-in-Charge. The Arbitral
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Tribunal held that the said three conditions were duly satisfied in
respect of payment of ₹1,38,58,095/- being the Service Tax paid by
CEC as a recipient of certain input services, in respect of which the
Service Tax was payable on a Reverse Charge Mechanism. In respect
of claim for reimbursement of Service Tax in respect of other input
services - where the Service Tax was assessed and levied on the service
provider and not CEC - the Arbitral Tribunal denied the claim on the
ground that no demand was raised by the Service Tax Authorities on
CEC. Concededly, CEC was not an Assessee in respect for such
services as the Service Tax was assessed in the hands of the service
provider that had provided the services to CEC.
40. CEC was registered as a service provider "in respect of
commercial or industrial buildings and civil structure". It is important
to note that there was no Service Tax payable in respect of the works
executed by CEC under the Agreement as such works were specifically
exempted from the levy of Service Tax. By a Notification dated
20.06.2020 issued by the Government of India, Ministry of Finance
(Notification No.25/2012 - Service Tax), inter alia, following services
were exempted from levy of service tax:
"12A. Services provided to the Government, a local
authority or a governmental authority by way of
construction, erection, commissioning, installation,
completion, fitting out, repair, maintenance,
renovation, or alteration of·
(a) a civil structure or any other original works
meant predominantly for use other than for
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commerce, Industry, or any other business or
profession;..."
41. In terms of a Notification dated 01.03.2016, the services
pertaining to construction of flyovers was also exempted from Service
Tax.
42. Concededly, CEC was exempted from payment of any tax in
respect of any service rendered by it for execution of the Agreement in
question. As mentioned above, the Agreement was essentially an Item
Rate Contract and CEC was not assessed to Service Tax in respect of
any of the items executed by it for performance of its obligations under
the Agreement.
43. Undisputedly, CEC's claim is for reimbursement of Service Tax
included in the services availed by it and not the services rendered by
it. The Arbitral Tribunal had proceeded on the basis that since CEC was
assessed to Service Tax, albeit, on a Reverse Charge Mechanism, in
respect of certain services, it was entitled to reimbursement in terms of
Clause 37(i) of GCC read with Clause 14 of the Instructions to Bidders.
44. The said conclusion is, ex facie, erroneous. Clause 37(i) of the
GCC expressly provided that Sales Tax / VAT (except Service Tax),
Building and other Construction Workers Welfare Cess or any other tax
or cess "in respect of this contract" shall be payable by the Contractor.
However, in respect of Service Tax, the same would be paid by the
Contractor to the concerned department on demand and would be
reimbursed to it by the Engineer-in-Charge. There is no ambiguity that
Clause 37(i) of the GCC refers to the Service Tax levied "in respect of
this Contract"; that is, the Agreement entered into by CEC on item rate
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basis. As noticed above, there is no dispute that execution of the
Agreement was exempt from levy of any Service Tax. Accordingly,
there is no question of CEC claiming reimbursement of any Service
Tax.
45. CEC is not claiming reimbursement of Service Tax in respect of
the Agreement executed by it or the works performed by it; CEC claims
the Service Tax levied in respect of the services availed by it from third
party service providers. This is, obviously, the Service Tax chargeable
in respect of contracts between the third-party service providers and
CEC. Clearly, this is outside the scope of Clause 37(i) of GCC.
46. The Arbitral Tribunal has ignored the nature of the Agreement
between the petitioner and CEC. As noticed above, the Agreement was
on item rate basis and not a back to back service procurement contract.
There was no stipulation in the Agreement in question that CEC would
avail services on behalf of the petitioner.
47. In view of the above, there is merit in the petitioner's contention
that the award of reimbursement of Service Tax is contrary to the
express terms of Clause 37(i) of the GCC.
48. Although, it is well settled that matter regarding interpretation of
a contract falls within the jurisdiction of Arbitral Tribunal and the
Courts would not normally interfere with such interpretation. However,
in the present case, this Court is of the view that Arbitral Tribunal's
interpretation of Clause 37(i) of the GCC to the extent it includes
reimbursement of Service Tax levied in connection with contracts /
arrangements between CEC and third parties, is fundamentally flawed
and vitiates the impugned award by patent illegality.
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49. Insofar as CEC's Claim no.2 is concerned (reimbursement of
ECC), CEC had placed a Certificate issued by its Statutory Auditor
certifying that it had a paid sum of ₹3,14,06,709/- for additional
expenses on account of ECC during the period November, 2015 to
August, 2018. The Arbitral Tribunal found that the said amount was
payable by the petitioner, in view of Clause 38 of the GCC. The
petitioner has accepted the award in regard to the claim of
reimbursement of ECC.
50. The learned counsel for the petitioner had contended that the
award of interest is contrary to the terms of the Agreement; however,
the petitioner is unable to show any clause in the Agreement that
proscribes award of interest.
51. In view of the above, the petition is partly allowed. The
impugned award to the extent of a sum of ₹1,38,58,095/- awarded in
favour of CEC in respect of Claim no. 1, is set aside. Consequently, no
interest is also payable on the said amount.
52. The parties to bear their own costs.
53. The pending application is also disposed of.
VIBHU BAKHRU, J
MARCH 22, 2022
'gsr'/v
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Signing Date:23.03.2022
