TaxTMI 
TaxTMI 
2010 (7) TMI 1087
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.... a contract with the first respondent for installing and commissioning of Well-cum-Production Platform Deck and connected system including submarine pipelines on a turn-key basis at its Bombay High (South) Offshore Site for extraction of oil. The appellant had appointed M/s.Mc Dermott International Inc (in short 'MII') as the Sub-Contractor in execution of this work by a back to back contract to the full knowledge of the respondent. The appellant had sought from the respondent the reimbursement of the Income-tax amount which MII was required to pay to the Union of India under newly added Clause 44BB of the Income Tax Act 1961 (concerning the profits and gains in connection with the business of exploration of minerals) and which amount was paid by the appellant to MII. The respondent had declined to reimburse the tax amount. 3. The appellant, therefore, invoked the Arbitration clause in the agreement between the appellant and the respondent. The appellant contended that their liability had arisen due to change of law and that under clause 17.3 of the General Conditions of Contract forming part of the contract between the parties, the respondent was required to reimburse this amount....
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....lant for the income-tax liability of the sub-contractor and that the umpire exceeded his jurisdiction in allowing appellant's claim under Clause 17.3 of the General Conditions. The Division Bench, therefore, dismissed the appeal by its judgment and order dated 19th December, 2001. Being aggrieved by this judgment and order the present appeal has been filed by Special Leave. It may be mentioned at this stage that it was submitted on behalf of the respondent before the single judge that the revised assessment of the sub-contractor was not referable to Clause 44 BB of Income Tax Act, and that the conclusion of the umpire be interfered on that ground also. The submission did not find favour with the learned single judge. The respondent challenged that finding by filing a cross-appeal and submitted that, if the cross-appeal was not maintainable, the respondent be permitted to challenge that finding while defending the judgment. The Division Bench overruled this challenge of the respondent to that finding. The short facts leading to this appeal are as follows: 6. On 22nd July, 1982 the respondent invited tenders for installation and commissioning on turn-key basis of a Platform Complex ....
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.... 1987 the Foreign Tax Division of the Department of Revenue, Ministry of Finance issued a circular in respect of turn-key projects of foreign contractors engaged in the business of exploration of oil and natural gas in India. This circular contained guidelines for computing the tax liability under the above referred to Clause 44BB of the Income Tax Act, 1961 and instructions were given to all Commissioners of Income Tax to assess the tax liability accordingly. In the year 1988 the above referred to MII was served with incometax notices to re-open and revise the assessments already made for the assessment years 1984-85 and 85-86. MII was informed that it was required to pay the tax on the income from the respondent for the work executed by them at Bombay High (South) Offshore Site. MII pointed out that it had already filed tax returns for these two years stating that it had incurred loss, and it was no more liable to pay income-tax. The authorities rejected the objections of MII and a tax liability was imposed to the tune of US$ 1,12,447.84 (Rs. 1,85,23,780/-). MII paid that amount and claimed it from the appellant. The appellant reimbursed the same, and claimed it from the responde....
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....oever." 3.2 - Conditions for Subcontracting: Concerning the works and facilities covered by the Contract having to be executed and commissioned on turnkey basis by the Contractor, the following conditions shall apply as regards subcontracting of any portion of the work entrusted to the Contractor. (i) In case of plant, equipment and allied requirement to be procured, installed and commissioned on the platform structure for the purpose of receiving, processing, pumping, compressing, etc., and also any other facilities to be provided thereon, the Contractor shall, subject to the limitations imposed on him with regard to the makes/manufacturer of certain plant and equipment specifically stipulated to be procured against this Contract, be free to sublet the work to the manufacturers/authorized agents of the respective plant and equipment for procurement of the necessary supplies. In respect of those stipulated items referred to above, the Contractor shall not arrange alternative makes other than those agreed already for procurement without the prior written consent of the Company." 14. Clause 5.10.5 lays down that the Contractor shall protect, indemnify and hold the Company (ONGC)....
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....greed decision, the decision of the umpire shall be final and binding on the parties. 18. Clause 17.3 makes the provision in the event of a Change in Law. This clause reads as follows: "Should there be, after the date of bid closing a change in any legal provision of the Republic of India or any political sub-division thereof or should there be a change in the interpretation of said legal provision by the Supreme Court of India and/or enforcement of any such legal provision by the Republic of India or any political subdivision thereof which affects economically the position of the Contractor; then the Company shall compensate Contractor for all necessary and reasonable extra cost caused by such a change." 19. The last clause relevant for our purpose is clause - 23 which is on Duties and Taxes, and in that Clause the respondent has taken care of the Customs Duties and Income-tax which would be payable by the appellant. It reads as follows: "23.0 - DUTIES AND TAXES: Indian Customs Duties, if any, levied upon fabricated structures, sub-assemblies and equipment and all components which are to be incorporated in the Works under the Contract shall be borne by the Company. The Com....
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....llant to that extent in view of the provision contained in Clause 17.3 of the General Conditions of Contract. The question for decision is whether the umpire exceeded his jurisdiction in making the award or whether there is an error apparent on the face of the award. This necessitates consideration of the question whether the view taken by the umpire on the construction of clause 17.3 was a possible one and in which case whether it was open to the High Court to interfere with the Award. Alternatively, the question is whether the view taken by the umpire was an impossible one and in which case whether there was no error in the High Court interfering with the Award rendered by the umpire. The approach of the Umpire 23. To find an answer to the question we have to see as to what was the approach adopted by the umpire. To decide as to whether the respondent was liable under the above referred clause 17.3, the umpire framed three questions. They are reflected in Para 6.2 of the award which reads as follows:- "6.2 ONGC liability on the true construction of Clause 17.3 effectively depends on the answers to three questions in the circumstances of this case, of which the first can be d....
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....." 26. The umpire has noted this context in Para 2.2.4 of the award. He noted that the bid made it clear that a large part of the contract works were to be fabricated, positioned and installed by MII as the named and approved principal sub-contractor of the appellant for this purpose. In para 2.2.4 he referred to the evidence of the Project Manager of the respondent, the sub-contract between the appellant and MII, and the fact of the terms of the proposed subcontract having been set out in the bid document. The umpire recorded in Para 2.2.4 as follows: "The evidence of Mr. B.L. Goel, ONGC's Project Manager, was that MII had participated in the Bid Clarification meetings between ONGC and SHI, and had been approved by ONGC as Subcontractors of SHI because ONGC were familiar with their work and relied on their expertise. In this connection SHI placed some reliance on the fact that under the heading of MII's "Schedule of Hourly Rates", a number of the terms of the proposed Subcontract between SHI and MII were out set in the Bid, including a provision which made it clear that, in the same way as in the Head Contract between SHI and ONGC, the Subcontract was to be "tax protected", with....
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....ndia vs. M/s D.N Revri & Co. reported in (1976) 4 SCC 147. As held in that judgment, he submitted that the meaning of a contract, and particularly a commercial one, must be gathered by adopting a common sense approach and not by a narrow pedantic and legalistic interpretation. The present case relates to an international commercial contract and as noted earlier the appellant and MII had agreed to subject themselves to the domestic laws of India as well as the International law and conventions. On this background the appellant wanted to safeguard itself in the event of change of law in India to which the respondent had agreed. It was submitted that any narrow interpretation of Clause 17.3 to exclude the reimbursement of the income tax liability of the sub-contractor will defeat the purpose in providing this safeguard under clause 17.3 and will make it otiose. 29. On the other hand Mr. Vivek Tankha, learned Additional Solicitor General appearing for the respondent pressed for the acceptance of the approach of the Division Bench viz. that clause 17.3 must be construed as an indemnity clause and that it must be read strictly and narrowly. As far as this submission is concerned, one ha....
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....n an insurance policy the party which is insured makes a proportionate advance payment to the Insurance Company and gets an assurance to protect itself against the loss or the damage which it might suffer in certain eventuality. Consequently the terms of the insurance policy fixing the responsibility of the Insurance Company are read strictly. Such is not the situation in the present case. Here we are not concerned with a clause in an insurance policy. We are dealing with an International Commercial Contract under which the appellant has reimbursed the tax liability of their sub-contractor which arose out of change in the law after the date of bid closing. This is stated to have affected the position of the appellant economically for which the appellant is seeking equivalent compensation from the respondent as per its construction of clause 17.3. When clause 17.3 provides that the respondent company shall compensate the contractor for all necessary and reasonable extra cost caused by such a change in law, affecting the contractor economically, could the claim for reimbursement made by the appellant from the respondent be held as not covered under this clause? 32. The respondents h....
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....e made and the discharge certificate was issued long back. MII had already filed its returns for the two relevant assessment years 1984- 85 and 1985-86. In 1988 its assessment has been reopened in view of the change in law, for which appellant had made the payment and had sought reimbursement from the respondent. In the circumstances the submission of absence of nexus can not be accepted. 34. In the present matter the Division Bench has observed, that the umpire exceeded his jurisdiction in awarding Appellant's claim under clause 17.3 of the agreement and that he has failed to apply his mind to the pleadings, documents and the evidence as well as particular clause of the contract to declare that the award was perverse. In fact as seen above, the umpire has entertained appellant's claim only after giving a meaningful interpretation to clause 17.3 after considering all the material on record as well as the context. Respondent had contended in their arbitration petition before the High Court that it was not permissible to refer to the precontractual negotiations and the documents arising therein. What the umpire has however done is to look into the context with a view to understand t....
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....ible material has been taken into consideration the finding cannot be said to be perverse. The legal position in this behalf has been recently reiterated in Arulvelu and Another vs. State Represented by the Public Prosecutor and Another (2009) 10 SCC 206. In the present case, the findings and award of the umpire are rendered after considering the material on record and giving due weightage to all the terms of the contract. Calling the same to be perverse is highly unfair to the umpire. The umpire has considered the fact situation and placed a construction on the clauses of the agreement which according to him was the correct one. One may at the highest say that one would have preferred another construction of clause 17.3 but that cannot make the award in any way perverse. Nor can one substitute one's own view in such a situation, in place of the one taken by the umpire, which would amount to sitting in appeal. As held by this Court in Kwality Manufacturing Corporation versus Central Warehousing Corporation reported in (2009) 5 SCC 142, the court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the arbitrator, which is what the H....