TaxTMI 
TaxTMI 
2015 (1) TMI 254
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....- contractor the agreed declared amounts of the deductions, that were permissible under the contract, were limited to Rs. 206.4 cr. as per clause 4 of the 'contract agreement' between the parties. The learned arbitral tribunal, on the interpretation of the clauses of the 'General Conditions of Contract' (hereinafter "GCC") along with the 'contract agreement' has held that the respondent is entitled to deductions in excess of the said amount on the basis of the "actual benefits" accrued to the petitioner on account of exemptions. It is this aforementioned finding of the learned arbitral tribunal which is the crux of the present dispute. BRIEF FACTS: 2. The petitioner is a consortium between, Mitsubishi Corporation, Rotem (formerly known as "Korea Rolling Stock Corporation) and Mitsubishi Electric Corporation. The consortium was formed for the purpose of executing the project of "Design, Manufacture, Supply, Testing and Commissioning of Passenger Rolling Stock Contract RS-1 for Mass Rapid Transport System (MRTS) Phase one" (hereinafter 'the project') for the Delhi Metro Rail Corporation Ltd. (DMRC). 3. Around the month of October 1999, the petitioner was selected as a "pre qualifi....
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....ically excluded by sub clauses (a), (b) and (c) of clause 4 (ii) of the contract agreement. 6. On 1st April 2003, the Government of India, issued three notifications under the Central Excise Act 1944, the Customs Act 1962 and the Customs and Tariff Act 1975 completely exempting payment of customs duty, excise duty and other indirect taxes for all items of equipments- including machinery and rolling stock, procured by or on behalf of DMRC for use in Delhi MRTS projects. 7. On May 6, 2003 the petitioner addressed a letter to the General Consultants for the respondents, expressing their desire to discuss the procedure to adjust the contract price in view of the aforesaid exemption notifications issued by the Ministry of Finance, for customs and excise duties. The discussion was proposed with reference to clause 13.1 of GCC and clause 26 of SCC. 8. On July 18, 2003 the General consultants of the respondent communicated to the petitioner that any customs duty exemption certificate issued for a value in excess of INR 1290 million will be to the benefit of the respondent. The petitioner by its letters dated August 7, 2003 and August 21, 2003 refuted the aforesaid claim that the respond....
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....ce includes all taxes, royalties, duties, fees, cess, octroi, other levies, etc., and any tax to be deducted at source, except: (a) Customs Duty on the first fifteen offshore manufactured trains and mock-up. (b) The Excise Duties, (after availing MODVAT) as well as Sales Tax on the finished 45 trains indigenously manufactured. (c) Customs Duties on the Imported Spares, Jigs, Fixtures, Special Tools and Testing and Diagnostic Equipment etc., and Excise Duties and Sales Tax if any on the indigenously finished Spares, Jigs, Fixtures, Special Tools, and Testing and Diagnostic Equipment sourced in India. xxxxxxxxxx There shall be no liability of the Employer for the Customs Duties, Excise Duties, and Sales Tax on components and equipment installed in the indigenously manufactured Cars, Spares, Jigs, Special Tools and Testing and Diagnostic Equipment." (emphasis supplied) (The above underlined stipulation has been referred to by the Arbitral Tribunal as "Primary Term Y") "The above Fixed Lump Sum Price, in addition to other taxes, also includes the following amounts of Taxes and Duties: Import Tax and Customs Duty on the imported components and equipment installed in indigenousl....
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....to the Employer." (Emphasis supplied) Clause 1.6: "Priority of the Documents: The documents forming the Contract are to be taken as mutually explanatory of one another. If there is an ambiguity or discrepancy in the documents, the Employer's Representative shall issue any necessary clarification or instruction to the Contractor, and the priority of the documents shall be as follows: (a) The Contract Agreement; (b) The Letter of Acceptance; (c) The Outline Design Specifications( Design Criteria) and Outline Construction Specifications; (d) The Employer's Requirements; (e) The Tender; (f) The Special Conditions of Contract (SCC); (g) The General Conditions of Contract (GCC); (h) The Schedules; (i) The Contractor's Proposal; and (j) Any other document forming part of the Contract." SPECIAL CONDITIONS OF CONTRACT: CLAUSE 26: ADDITIONAL CLAUSE: "RECORD OF TAXES, DUTIES ETC: "The Contract shall maintain complete records in respect of payments made for taxes, duties, octroi, and other levies payable to various authorities and advise the Employer complete details of such payment every month. These details will be kept separately for: (a) Customs Duties on 15 offshore manufa....
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....imate and last para of clause 13.1 of the GCC specifically deal with the situation arising from exemption from taxes and duties and adjustment of the lump sum price on account of increase or decrease in taxes and duties resulting from the change in the rates thereof after the latest date of submission of tender, such a situation will fall outside the purview of 'the primary term (x)' of clause 4 of the contract agreement. 'The primary term (x)' of clause 4 of the contract agreement being of a general nature will not apply to the change or variation in the rate of taxes or exemption from taxes and their impact as it is the penultimate and the last para of clause 13.1 of GCC, which expressly, directly and specially deals with such a situation. General provision must give way to the special provision. The area covered by the penultimate and last para of clause 13.1 of the GCC is excluded from the aforesaid 'primary term (x)' of clause 4 of the contract agreement, which applies to a situation created by the variation in the outflow of taxes and duties depending upon increase or decrease in the value of goods imported for the work in question and not on account of va....
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....ted by the Government in respect of the Works, the benefit of the same shall be passed on to the Employer." "The Contractor shall pay the Employer the difference between the declared amounts of Import Tax and Customs Duty and other Indirect Taxes as stated above, and the actual amounts paid to the concerned authorities, should these be less. In the event that the actual amounts are greater than the declared amounts, the Contractor shall be fully responsible for the additional amounts." Nature of the clause Nature of the clause Specifically covers the field relating to variation in the rates of taxes or complete or partial exemption or waiver of taxes General in terms, therefore, deals with the situation not covered by the penultimate and last paras of clause 13.1 of the GCC. Consequently it covers the residuary field relating to the variation in the quantum of taxes due to variation of the value of the imported Equipment etc. 59. In nutshell, the penultimate and last paras of clause 13.1 will apply to the contingencies arising from exemption from taxes and duties or increase or decrease in taxes and duties resulting from the change in the rates of taxes after submissi....
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....rate of duty after the date of the contract. 61. We now need to focus our attention to clause 26 of the SCC, which requires the contractor to maintain complete record in respect of the payments made on account of taxes, duties, octroi and levies to various authorities and apprise the employer of the complete details of such payments per month. It also caters to a situation where the employer obtains waiver of the taxes and duties etc. in full or part thereof. In such an eventuality the contractor is required to remit the refund so obtained to the employer and in the event of the failure of the contractor to remit the refund to the employer the same is liable to be recovered by the employer from the amounts due for payment to the contractor. Thus this clause specifically postulates that the benefit of waiver of taxes and duties will be available to the employer. It also provides the procedure to be followed for the purpose of making available the benefit to the employer by the contractor. 62. Clause 13.1 of the GCC and Clause 26 of SCC are part and parcel of the overall agreement between the parties and cannot be wished away. These clauses were not deleted and were allowed to co-e....
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.... of the SCC were not amended and remained unaffected and untouched. Therefore, these clauses are part of the agreement and have to be given effect to. 66. It needs to be emphasized that exemption from the Customs Duty, Excise Duty and other Indirect Taxes was granted on all equipments including machinery and rolling stock procured by or on behalf of the DMRC for use in Delhi MRTS Project. The exemption was meant for the benefit of the respondent. Having regard to clause 13.1 of the GCC and clause 26 of the SCC, the claimant by its letter dated May 6, 2003, to the General Consultants for the respondent, expressed its desire to discuss the procedure for adjusting the contract price in view of the exemption notifications. This shows that at one stage it was the understanding of the claimant that clause 13.1 of the GCC and clause 26 of the SCC were applicable in the context of the exemption of Customs Duty and Excise Duty on all equipments procured by or on behalf of the DMRC for use in Delhi MRTS Project. Since that was the understanding as late as May 6, 2003, it does not stand to reason how the intention of the claimant could be different from it, while entering into contract with ....
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....t is greater than Rs. 1,290 million, we will bear the excess. Meantime, we request the Employer to consider to adopt for RS1 Contract the same conditions applied to other packages already contracted. (vii) Re: Other Indirect Taxes: We accept and confirm the following: (1) we will pay to the Employer the difference between Rs. 774 million and the actual total amount of other indirect taxes to be borne by us under the Contract, should this be less, and (2) in the event that such actual amount is greater than Rs. 774 million, we will bear the excess. We agree and confirm that the questions under your letter GC/RS1/GCC/6323 dated April 25, 2001, and our responses under this letter will be incorporated in the Contract upon mutual agreement. Other questions and responses to be included in the Contract shall be discussed." 69. The fact that the proposal in respect of the reduction of taxes was not made subject to the grant of exemption stands further clarified from the Letter Of Acceptance (LOA) dated May 2, 2001, which makes it incumbent on the part of the claimant to pay the difference between the declared amounts of Import Tax and Customs Duty and other Indirect Taxes and the ac....
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.... very vital clauses or emasculation of their content. These clauses have been deliberately retained in the agreement to cover contingencies that may be created by the exemption notifications, which were in the contemplation of the parties." 15. The submission of the Petitioner is that the award made by the Arbitral Tribunal is patently illegal as the interpretation adopted by the Tribunal is contrary to the express terms of the Contract Agreement viz. Clause 4 of the Contract Agreement, and the said interpretation is such that it cannot be said to be a plausible one, i.e. one of the several possible interpretations of which the said clause is capable. The Petitioner submits that the interpretation adopted by the Tribunal breaches section 28(3) of the Act. 16. Learned senior counsel for the petitioner, Mr. Parag Tripathi, submits that the Tribunal failed to appreciate that the clause 4 of the Contract Agreement superseded clause 13.1 of the GCC with regard to the payment of lump-sum price and fixation of liability towards the customs and excise duties. GCC is a document which was contained in the Notice for Invitation of Tender and was a general provision applicable to all person/....
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....ax liability must be read as subordinate to the general term addressing a similar issue in the GCC. 19. On the other hand, learned counsel for the respondent submits that the Arbitral Tribunal came to a clear finding that clause 4 of the agreement applies when there is no exemption, remission or reduction of customs duty, excise duty or other indirect taxes. In such a situation, the contracted price is limited in a manner that DMRC will pay to the petitioner towards taxes- maximum of INR 2064 million. If the actual taxes are in excess of INR 2064 million, they were to be borne by the petitioner. Clause 4 has no application when there is an exemption, remission or reduction of custom duty etc. and this aspect is covered by clause 13.1 of the GCC and clause 26 of the SCC. The scope of clause 13.1 of GCC and clause 26 of SCC is clear - that whatever benefit accrues on account of such exemption, should be passed onto the DMRC. That obligation is not restricted to INR 2064 million. 20. Respondent submits that the award in question does not suffer from any patent illegality, and the interpretation adopted by the Tribunal qua Clause 4 of the Contract Agreement, Clause 13.1 of GCC read w....
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....he 1940 Act, such a submission of the counsel for the petitioner could not have been accepted. In the 1996 Act, said interpretation given by the arbitrator cannot be assailed by filing a petition under Section 34 of the Arbitration and Conciliation Act, 1996, as none of the clauses empowers the court to deal with the same." 23. The Supreme Court in State of U.P. v. Allied Constructions, (2003) 7 SCC 396 held that: "4. Any award made by an arbitrator can be set aside only if one or the other term specified in Sections 30 and 33 of the Arbitration Act, 1940 is attracted. It is not a case where it can be said that the arbitrator has misconducted the proceedings. It was within his jurisdiction to interpret Clause 47 of the Agreement having regard to the fact-situation obtaining therein. It is submitted that an award made by an arbitrator may be wrong either on law or on fact and error of law on the face of it could not nullify an award. The award is a speaking one. The arbitrator has assigned sufficient and cogent reasons in support thereof. Interpretation of a contract, it is trite, is a matter for arbitrator to determine. Section 30 of the Arbitration Act, 1940 providing for settin....
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.... plausible views - without any patent illegality in the conclusions drawn by the arbitrator, it is beyond the scope of jurisdiction of this court under section 34 of the Act, to interfere with the award. 26. Clause 4 of the contract agreement itself provides that the total cost of the works is "subject to adjustment in accordance with the provisions of GCC". Therefore, the submission of the petitioner with regard to priority of documents, in my view, loses significance. If the intention of the parties was that clause 4 of the Contract Agreement should override Clause 13.1 of the GCC, there was no need to retain Clause 13.1 of the GCC, or provide in clause 4 of the Contract Agreement that the fixed lump sum price is subject to adjustment in accordance with the provisions of the GCC. Clause 4 of the contract agreement itself having stipulated that the total cost of work is subject to adjustment in accordance with the provisions of GCC, the terms of the GCC- including clause 13 thereof, have to be read side by side with clause 4 of the contract agreement itself. There is no question of ignoring clause 13 of the GCC by giving preference to clause 4 of the Contract Agreement. Clause 4 ....
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....ely, the DMRC. Similarly, clause 26 of the SCC, inter alia, provides that "Should the employer obtain a waiver for the above taxes, duties etc. in full or part thereof, the contractor will be advised on the process to be followed to obtain refund of such taxes etc. from the concerned authority. The Contractor shall arrange for the remittance of the refund so obtained to the Employer. In case of failure by the Contractor to remit the refund to the Employer, the same will be recovered by the Employer from the amounts due for payment to the Contractor or as debt due from the Contractor. If the Contractor fails to take the required action to obtain refund, the Employer may take action in accordance with Sub-Clauses 15.1 and 15.2 of General Conditions of Contract." Pertinently, the Petitioner itself invoked clauses 13.1 of the GCC and 26 of the SCC when it sent the communication dated 06.05.2003 to the General Consultant of the Respondent. Therefore, the Tribunal rightly rejected the stand of the Petitioner that clauses 13.1 of the GCC and 26 of the SCC give way to clause 4 of the Contract Agreement. 29. There is another way to look at the situation. The petitioner cannot take advantag....