Arbitral award on service tax reimbursement fails where unambiguous tender terms place tax burden on the contractor.

An arbitral award directing reimbursement of Service Tax and interest to a contractor was found vulnerable to challenge where the tender contract required the quoted rate to include all taxes and duties. Clause 2.2 was treated as unambiguous, and the contractor was taken to have contracted with knowledge of the applicable tax regime. The tribunal's reliance on the Railway's internal estimate was rejected because that estimate was not part of the contract, contained no tax component, and could not override express tender terms. Reading the estimate into the bargain was treated as contrary to the contract and as patent illegality under Section 34, with conflict to Section 28(3) and the fundamental policy of Indian law.

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Issues: Whether the arbitral award directing reimbursement of Service Tax and interest to the contractor was liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996 for patent illegality, including on the ground that Clause 2.2 of the tender contract required the quoted rate to include all taxes and duties and that the Tribunal wrongly relied on the Railway's internal estimate.

Analysis: Clause 2.2 of the tender document formed part of the contract and required the tendered rate to include all incidental charges, including specified taxes and duties and also "other taxes and duties etc." The relevant chronology showed that when the bids were opened, the LoA issued, and the agreement executed, Service Tax had already been re-imposed for Railway works and was payable in respect of the contract. The contractor therefore entered into the arrangement with knowledge of the applicable tax regime. The Tribunal's reliance on the Railway's internal estimate was held to be misplaced because the estimate was only an internal wage calculation, was not part of the contract or tender, did not contain a tax component, and could not override an unambiguous contractual clause. Since the contract itself was clear, no external aid was required for its construction. By reading the estimate into the bargain and shifting Service Tax liability to the Railway, the award was found to be contrary to the contract, in breach of Section 28(3), and vitiated by patent illegality and conflict with the fundamental policy of Indian law.

Conclusion: The award was liable to be interfered with under Section 34 and the direction requiring the Railway to reimburse Service Tax and interest to the contractor could not stand.

Final Conclusion: The challenge to the arbitral award succeeded, the award was set aside, and the execution proceeding ceased to survive.

Ratio Decidendi: Where the contractual clause is unambiguous, an arbitral tribunal cannot rely on an internal document not forming part of the contract to shift a tax burden contrary to the express terms of the bargain; such an award is vulnerable to challenge for patent illegality under Section 34.

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