TaxTMI 
TaxTMI 
TaxTMI 
2018 (10) TMI 2060
X X X X Extracts X X X X
X X X X Extracts X X X X
....ration of information technology systems to roll out, support and expand the GSM Network in India. The said agreement is hereafter referred to as 'the Agreement'. 3. By the impugned award, the Arbitral Tribunal has awarded an aggregate sum of Rs.135,25,39,824/- alongwith interest at the rate of 12% per annum (except the amounts awarded against the claim of late payment fees, taxes on hardware, return of spares and not to use IBM‟s software till the payment of Termination Charges) in favour of IBM. The Arbitral Tribunal has also awarded an aggregate sum of Rs.33,35,98,591/- alongwith interest at the rate of 12% per annum (except the amount of Rs.48,70,79,281/- awarded against the claim of refund of Annual Service Charges, Rs.30,87,19,267/- towards interest on counter claims and refund of hardware price) in favour of VTL. 4. The principal controversy involved in the present case relates to the award of Rs.135,25,39,824/- on account of Annual Service Charges, Project Service Charges and other charges in favour of IBM. According to VTL, IBM had defaulted in rendering services under the Agreement and, therefore, the said award is erroneous and opposed to the public policy of Ind....
X X X X Extracts X X X X
X X X X Extracts X X X X
....81.40/- as late payment fees, from the due dates up to date of Statement of Claim and further during the pendency of the arbitration proceeding? 5. Whether VTL is liable to pay IBM Rs. 64,50,446/- by way of taxes on the hardware portion of the IBM assets that were transferred to VTL in accordance with the order dated 29.05.2013 passed by the Delhi High Court? 6. Whether VTL is liable to return the spare parts belonging to IBM and its sub-contractors, as listed in Schedule V of Statement of Claim? 7. Whether VTL cannot use the Software listed in the Asset Register till payment of termination charges to IBM? Claims of VTL 8. Whether IBM is liable to refund Rs. 48,70,79,281/- to VTL towards excess payment of Annual Service Charges? 9. Whether IBM is liable to refund Rs. 15,23,96,186/- to VTL towards excess payment of Project Service Charges? 10. Whether IBM is liable to refund Rs. 22,20,504/- to VTL towards excess payment of Increased Resource Usage Charges? 11. Whether IBM is liable to refund Rs. 13,70,99,396 to VTL towards "other claims and credits" enumerated in Schedule A to the Counter Claim? 12. Whether IBM is liable to pay Rs. 30,87,19,267/- to VTL, b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he contract. Thus, the Arbitral Tribunal accepted the claim of IBM of Rs.95,23,18,835/- being unpaid ASC from February, 2012 and rejected the counter claim of VTL for refund of Rs.48,70,79,208/- paid towards ASC. Re: Issue Nos. 2 & 9, Claim of Rs.8,47,27,529/- towards Project Service Charges by IBM and counter claim of Rs.15,23,96,186/- towards refund of excess payment of Project Service Charges by VTL. 12. Clause 2.2(a) of Annexure 11 to the Agreement describes Project Service Charges (PSC) to be paid by VTL to IBM. These charges are milestone linked charges associated with the deliverables to be executed by the service provider (IBM). The milestone linked payments contemplates PSC to be paid in five stages on achieving the stipulated milestone: (i) Project Kick off (Stage 1); readiness of Infrastructure (in short 'Infra-Ready' - Stage 2); User Acceptance Test (in short 'UAT' - Stage 3); Built to operate (in short 'B2O' - Stage 4); and ninety days after Built to Operate (in short 'B2O+90' - Stage 5). 13. It was contended that IBM did not take up all the 44 projects (hereafter 'the Projects') for which PSC was payable, nor did IBM completed all the Projects that were taken up. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....,27,529/- was claimed by IBM towards twelve PSC invoices. The same were considered and dealt with by the Arbitral Tribunal in the manner as indicated below:- i. Claim towards invoices for Rs.37,13,073/- and Rs.35,08,296/- out of Rs.82,43,022/- both dated 28.02.2011. The first invoice (for Rs.37,13,073/-) relates to the second and third milestone (Infra-Ready and UAT) billings of the project 'RA&FMS Drop1 till Feb 2011' and the second invoice relates to first, second and third milestone (Kick Off, Infra-Ready and UAT) of the said project. The items of first and second invoice relates to Infra-Ready and UAT of the same project. The Arbitral Tribunal was of the view that IBM had done double billing for the same work even though the amounts claimed are different. The Arbitral Tribunal was also of the view that IBM did not complete the subsequent stages/milestones after UAT. Thus, the Arbitral Tribunal observed that any payment made to IBM towards initial stages (stages 1 to 3) of the project on-account payment had to be refunded to VTL and, therefore, rejected the claims made by IBM. ii. Claim towards invoice for Rs.18,51,879/- dated 27.04.2011. This is an invoice relating to a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aid claims. vii. Claim towards invoice for Rs.2,17,76,555/- dated 26.12.2011 This invoice relates to 'Milestone billing YR2 Data Center'. The Arbitral tribunal was of the view that IBM is not entitled to the payment towards claim of Rs.2,17,76,555/- for milestone billing YR2 Data Center and rejected the said claim. viii. Claim towards invoice for Rs.10,84,251/- This invoice relates to 'network service management billing'. An invoice for an amount of Rs.1,95,53,736/- was raised by IBM and IBM claimed an amount of Rs.10,84,251/- as due under the PSC invoice. The Arbitral Tribunal was of the view that IBM is not entitled to the payment of the said claim and rejected the said claim. ix. Claim towards invoices for Rs.4,41,379/- and Rs.3,93,72,175/- These two claims were also rejected by the Arbitral tribunal. 16. In view of the above, the Arbitral Tribunal held that IBM is entitled to only Rs.3,16,50,817/- towards the unpaid PSC invoices (12 in number) as against the claim of Rs.8,47,27,529/- and the claims under other PSC invoices are rejected. The Arbitral Tribunal also held that VTL is entitled to refund of Rs.5,82,47,804/- and its claim for Rs.3,41,04,244/- was rejected....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dues. VTL agreed to pay Rs.13.5 crores towards the depreciated value of the hardware provided by IBM. Thus, having paid the amount towards depreciated value of the hardware and having retained them, VTL could not seek refund of the sum of Rs.13.5 crores paid towards depreciated value of the IBM's hardware. Therefore, the Arbitral Tribunal rejected the aforesaid claim for refund of Rs.13.5 crores. Re: Issue No. 16, Whether IBM should provide to VTL, Media Passwords and other details enumerated in Schedule E to the Statement of Defence? 21. The Arbitral Tribunal observed that VTL has paid for the hardware, therefore, it is entitled to use the embedded software. Thus, the Arbitral Tribunal accepted the aforesaid claim of VTL and directed IBM to furnish the information, media, passwords and other details with respect to the hardware to VTL within one month. Re: Issue No. 6, Whether VTL is liable to return the spare parts as listed in Schedule V of the Statement of Claim to IBM and its subcontractors? 22. IBM alleged that it and its sub-contractors had maintained a stock of valuable spare parts required for performance of its obligations under the Agreement in the premises of VTL.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bunal had grossly erred in awarding the Annual Services Charges (ASC) to the extent of Rs.95,28,18,835/- in favour of IBM even though it was admitted that IBM had defaulted in providing part of the services as required under the Agreement. He submitted that although, the Arbitral Tribunal had held in paragraph no. 113 of the impugned award that "it is not possible to bifurcate the consideration for different types of services rendered by IBM"; in paragraph no. 96, the Arbitral Tribunal held "that the parties had agreed upon a consideration structure with a fixed component (that is, the ASC as a periodical unconditional payment) and a variable component (comprising of PSC, IRUC and other charges) which were linked to achieving milestones or performance of obligations". He submitted that although, the Arbitral Tribunal had held that Annexure 11 to the Agreement only provided a methodology of payment of consideration to IBM, yet the Arbitral Tribunal had proceeded to hold that there was an absolute obligation to pay ASC. Thus, the findings of the Arbitral Tribunal were inconsistent. 28. Second, he contended that the payment of Termination Charges of Rs.36,80,70,172 in favour of IBM w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....L and the said charges were payable irrespective of the reason for premature termination of the Agreement. He submitted that this was part of the consideration as agreed under the Agreement. Reasons and Discussions 32. At the outset, it is necessary to observe that the scope of judicial review under Section 34 of the A&C Act is restricted and it is settled law that this Court is not called upon to examine and re-appreciate the evidence and material considered by the Arbitral Tribunal. An arbitral award can only be set aside on the grounds as set out in Section 34 of the A&C Act. In the present case, VTL has sought to assail the impugned award on the ground as set out in Section 34(2)(b)(ii) of the A&C Act; that is, that the impugned award is contrary to the public policy. Explanation 1 to Section 34(2)(b)(ii) of the A&C Act expressly clarifies that an award would be in conflict with the public policy of India, only if, (i) the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erations. Further VTL had never disputed its liability to pay the ASC till the decision rendered by the Supreme Court in 2G Spectrum case (W.P.(C) 423/2010 captioned "Centre for Public Interest Litigation & Ors v. Union of India & Ors") dated 02.02.2012. VTL had, thereafter, set up a case that there was deficiency in the services and it was entitled to a pro rata reduction in the ASC. This contention was rejected by the Arbitral Tribunal. The Arbitral Tribunal held that "it was not possible to bifurcate the consideration for different types of services rendered by IBM even by holding an inquiry". 39. Before the Arbitral Tribunal, VTL had contended that ASCs were in the nature of an advance and for the continuous obligations to be discharged by IBM. It was asserted that since IBM had rendered only part of the services, VTL was entitled to a pro rata reduction in the ASCs and, therefore, was entitled to refund of the ASCs already paid. The aforesaid submission was countered by IBM. IBM contended that there was no linear co-relation between the projects to be delivered and the ASCs. IBM contended that the Agreement was entered into in the commercial background where VTL was a new ent....
X X X X Extracts X X X X
X X X X Extracts X X X X
....exure 10 to the Services Agreement) shows that 10,000 man days were initially allocated towards the services for VTL during contract years one & two and another 10,000 man days were also available to VTL to be allocated after initial allocation was exhausted. The fact that large number of employees were required to be deployed by IBM for the work of VTL emerges from the terms of the contract. Therefore, there is considerable force in the submission of IBM that it was not being compensated separately for deploying software, hardware and human resources to support the VTL telecom operations and that ASC was intended to be paid as a fixed change spread over the contract period to meet IBM's expenditure for providing IT infrastructure and human resources, appears to be logical. 94. It is also seen that in addition to supplying IT infrastructure, skilled personnel resources and delivery of projects, IBM had to provide the following services which had nothing to do with the delivery of projects: (i)transition services; (ii) IT infrastructure management; (iii) maintenance for the in-scope hardware and software; (iv) maintenance and management of VTL-supplied IT equipment; (v) operation....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enalties by way of "Service Level Credits" for any delay or deficiency in performance of its obligations or any delay in achieving any of the milestones for specified projects. The object was to guarantee the service provider, a minimum payment for the investments made and resources deployed by it; and the interests of the client (VTL) were protected to ensure that the service provider (IBM) did not walk away with the entire consideration without performing its obligations. A balance was sought to be achieved by providing a minimum payment every quarter and providing for other payments only on achievement of certain levels. 97. A combined reading of the provisions of the Services Agreement shows that IBM was required to invest huge amount for the IT infrastructure for providing the licenses, by investing on hardware, software and firmware, and also deploy a large number of skilled personnel to develop IT solutions, and provide IT related services, apart from maintaining such IT services on a continuing basis during the subsistence of the Agreement. The contract recognises that IBM is entitled to a fixed consideration by way of ASC, to compensate the service provider for the reso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional payment) and a variable component (comprising of PSC, IRUC and other charges) which were linked to achieving milestones or performance of obligations". There is no inconsistency in the conclusion of the Arbitral Tribunal that ASCs were required to be paid in respect of the services and the consideration as provided under the contract could not be bifurcated in the manner as claimed by VTL. 44. The contention that the Arbitral Tribunal had grossly erred in holding that VTL could not seek both remedies: (i) Rs.508 crores as damages for financial losses incurred by it due to purchase on the part of IBM; and (ii) rejection of the consideration payable to IBM proportionately with reference to the projects delivery. Mr Sibal had contended that a claim for damages and a pro rata reduction in the consideration commensurate with the shortfall in performance are not mutually exclusive. 45. The above mentioned observations must be understood in the context of the facts and issues being considered by the Arbitral Tribunal. Undisputedly, the above observations are not of universal application. In a given case, it may be possible for a party to seek damages for non-performance of the con....