Contractual dues cannot be withheld indefinitely on anticipated tax liability; interest may follow for wrongful retention.

A party cannot retain admitted contractual dues indefinitely on a mere apprehension of possible tax liability when the agreement does not give a clear right of retention. The Delhi HC noted that the withholding arose after adjustment of the payer's own dues, but the clauses relied on only supported indemnity for transaction-related liabilities and did not authorise indefinite retention of the balance amount. As the record also indicated that the tax dispute stemmed from a typographical error and the amount remained unpaid despite repeated demands, the arbitral tribunal was justified in awarding interest on the withheld sum. The Section 34 challenge therefore failed and the award was upheld.

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Issues: Whether the petition under Section 34 of the Arbitration and Conciliation Act, 1996 was liable to be allowed by setting aside the arbitral award granting interest on the withheld sum of Rs. 1,88,08,233/-.

Analysis: The withheld amount had been retained by the petitioner after adjustment of its own dues, on the plea of apprehended tax liability. The contractual clauses relied upon by the petitioner required the respondent to indemnify it for liabilities arising from the transaction, but they did not confer any right to retain the respondent's admitted dues indefinitely merely on anticipation of a possible tax burden. The record also showed that the tax dispute had arisen from a typographical error in the transaction documents and that the withholding had continued despite repeated demands for release of the balance amount. In these circumstances, the arbitral tribunal was justified in granting interest on the retained sum.

Conclusion: The challenge under Section 34 failed and the arbitral award was upheld in favour of the respondent.

Ratio Decidendi: In the absence of a contractual right to retain admitted dues, a party cannot withhold payment indefinitely on a mere apprehension of liability and may be made liable to pay interest on the withheld amount.

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