TaxTMI 
TaxTMI 
2026 (7) TMI 1528
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....ited tenders for the work of widening and strengthening of Bilraya-Panwari Road (SH-21) from CH. 75.00 to 98.00 and Nepalpur-Bijwar Road (ODR) from 0.00 to 3.00 Km in District Sitapur from two (2) Lane to Four (4) (length 44.70 kms). The bid submitted by the respondent-contractor was accepted by the department and the parties then entered in a contract on 27.04.2016 for a total contract price of Rs. 155,89,46,798.65/-. 3.As per the contract, the date of commencement of work was 27.04.2016 and it was intended to be completed by 26.04.2018. However, the contractor sought time extension, which was granted and the contractor completed the work within the extended period and the department issued a completion certificate to the respondent on 10.04.2019. 4.The work under the aforesaid contract started in the year 2016 which was under the old tax regime, which comprised of Value Added Tax, State Excise etc. Significantly, from the 01st of July, 2017, a new tax regime was introduced known as the Goods and Service Tax, 2017 (in short 'GST') which repealed the Value Added Tax. 5.This change in the tax regime impacted the price of different items which were scheduled in the c....
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....terest from the March, 2019 till July, 2023 amounting to Rs. 8,26,61,388/-. It also claimed GST on the price adjustment relating to the work executed amounting to Rs. 94,77,038/-plus 15% penalty and 18% interest per annum from March, 2019 till July, 2023 amounting to Rs. 2,32,97,675/-. It also claimed a sum of Rs. 66,500/- which was payable by the appellant-department as their share of remuneration to the DRE. Thus, a total claim of Rs. 11,35,80,273/- was laid before the Sole Arbitrator. 13.The appellant-department contested the claim petition by filing its statement of defence. The primary defence was that the GST became applicable from 01.07.2017 and as the contract was funded by the State, hence, the department was bound by the Government Orders issued by the State Government dated 09.11.2017 and 10.12.2019 relating to the imposition of GST on running contracts i.e. to say which had commenced prior to the enforcement of GST and were being completed after the cut-off date i.e. 01.07.2017. 14.It was also pleaded that under the GST regime, the Contractor is to furnish the monthly returns with the GST Department and the contractor was called upon to furnish detailed statement ....
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.... receive G.S.T. amount from respondent as claimed in the claim petition? 9. Whether the claimant is entitled to get reimbursement of interest and penalty on alleged G.S.T. amount, due to alleged non-payment of G.S.T. amount by respondent in time? 10. Whether the claimant is entitled to get reimbursement of respondent's share of fee paid to Disputes Review Expert? 11. To what relief, if any, is the claimant entitled?" 18.The Sole Arbitrator after allowing the parties to lead evidence and granting detailed hearing made his award dated 27.01.2024. 18.1.In the award, the Sole Arbitrator while dealing with issue no. 1, held that the contract in between the parties was an item rate contract. 18.2.While considering issue nos. 2 and 3 which were taken up together, the Sole Arbitrator held that since the contract contained a specific stipulation that all work would be carried out as per the MoRTH specifications and all chapters of Ministry of Road Transport and Highways and specifications for road and bridge was made part of the agreement and even the State Government by its notification had made the standard building document procurement of civil wor....
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....ee payable to the DRE, which was paid by the respondent, hence, a sum of Rs. 66,500/- was allowed on the aforesaid count. 18.9.With the aforesaid findings, the claim petition was allowed vide award dated 27.01.2024, awarding a total sum of Rs. 11,35,80,273/- with penalty @ 15% and interest @ 18% per annum was also granted. The award provided that the aforesaid payments, except the sum of Rs. 66,500/- (which related to the payment of appellant's share to the DRE), would be subject to the final assessment made by the GST Department. However, as far as the amount of Rs. 66,500/- is concerned, the same would carry interest at the rate of 9% per annum from the date of the award till the date of its actual payment. It further provided that after the final assessment by the GST Department, if any amount payable towards GST or interest or penalty, remains unpaid or is not required to be paid to the GST Department then after adjustment of the amount already deposited by the claimant, the same shall be refunded by the respondent to the appellant within a period of two weeks from the date of final assessment by the GST Department and the information in this regard would be given by the....
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....uthority who determines the quantum of tax and finalizes the assessment. Any finding given by the Sole Arbitrator relating to the quantum of tax is not binding on the Taxing Authority. Thus, the dispute sought to be raised by the respondent relating to quantum of tax, being non-arbitrable, could not have been made the subject matter of arbitration. Accordingly, the award passed by the Sole Arbitrator determining the tax liability and fastening it on the appellant is a patent error which vitiates the award and the Commercial Court too failed to delve into this aspect of the matter and as such the award and the judgment of the Commercial Court is liable to be set aside. 23. (B) The learned Senior Counsel for the appellant next submitted that the circular and the guidelines including the SOP issued by the MoRTH relating to the issue of taxation was not binding on the appellant-department. 23.1.It was urged that the contract between the parties clearly provided that the MoRTH guidelines were applicable only for the purposes of technical specifications. Borrowing technical specifications for the project in question would not mean that any guidelines issued by MoRTH would be applic....
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....hat the Sole Arbitrator has not only quantified the tax liability but it has also held the amount to be payable along with interest and penalty irrespective of the fact whether such liability of penalty and interest had actually been demanded by the Taxing Authorities from the respondent i.e. the assessee who is liable to pay such tax. 24.3.Thus, for all the aforesaid reasons, it was urged that the award and the judgment passed by the Arbitral Tribunal and the Commercial Court respectively being patently erroneous deserve to be set aside and the appeal be allowed. 25.In support of his aforesaid submissions, the learned Senior Counsel for the appellant has relied upon the decision of the Apex Court in Vidya Droliya v. Durga Trading Corporation : (2021) 2 SCC 1 for indicating that tax disputes do not partake the nature of the contractual dispute and are not arbitrable. 26.He has also relied upon a decision of the Calcutta High Court in Usha Martin Ltd. v. Eastern Gases Ltd. : (2022) SCC OnLine Cal. 3342 to buttress his submissions that the Arbitral Tribunal cannot delegate its duty to adjudicate to any third party, as in the instant case, the Sole Arbitrator has made its awa....
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....aid by factoring the change in the tax rates as well as the impact of the GST on such contracts. 31.It was further submitted that the two Government Orders relied upon by the appellant dated 09.11.2017 and 10.12.2019 both indicate that for contracts above Rs. 5 crores, the MoRTH document should be adhered. Once the parties had clearly agreed to incorporate the MoRTH specifications and guidelines then the issue of taxation as explained by the MoRTH in its SOP dated 19.11.2018 also became applicable. It is in this context that the Sole Arbitrator noticed the MoRTH specifications and SOP and applied the same to the dispute as to how the tax was to be determined while making payments in respect of contracts which were entered under the VAT regime and were continued and finished under the GST regime. 32.In the aforesaid backdrop, the learned counsel for the respondent submitted that the award made by the Arbitral Tribunal was bifurcated into three parts:- 32.1.The first part relate to the actual work done. The value of the work done was taken as the base for ascertaining the GST liability amounting to Rs. 3,36,25,034/-. It was submitted that ample evidence was before the Arbitr....
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.... GST on the amount of price adjustment/escalation. 34.The learned counsel for the respondent further submitted that the third part of the award was nothing but a refund of a sum of Rs. 75,90,431/- which was illegally recovered by the Department towards GST, on the premise that an excess amount had been paid to the respondent. 34.1.The appellant applying its own formula initially recovered a sum of Rs. 75,90,431/- on the premise that excess amount had been paid by the Department to the respondent. This deduction was found to be illegal and therefore the same was directed to be refunded. 35.It was also urged that three components, as mentioned above, constitute the major part of the awarded amount. Since the said amount had been illegally recovered and the Department did not pay the GST on the work done as well as on the price escalation/price adjustment, hence, considering Section 50 of the GST Act, 2017, the Sole Arbitrator directed the appellant to pay the interest and penalty, which the respondent would have paid to the GST Department. A minuscule portion of the awarded sum relates to the appellant's share of fee, which they were obligated to pay to the DRE, but was ....
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.... up of the companies, are considered to be non arbitrable. The only exception is where a statute in relation to a regulatory or adjudicatory mechanism either expressly or by clear implication permits arbitration; (iii) All such matters wherein the cause of action and subject matter of dispute affects third party rights which may have an all pervading effect and requires centralized adjudication in contradistinction to cases where mutual adjudication would not be proper and enforceable, are also non-arbitrable; (iv) Where the subject matter of the dispute is expressly or by implication made non arbitrable as per statute. 41. Now to answer specifically, the issue, whether a dispute relating to taxation is arbitrable or not, can be considered under two distinct heads:- (A) Disputes relating to tax which can be resolved within the contract can be resolved through arbitration and (B) Disputes which requires statutory determination through tax laws and such disputes cannot be resolved through arbitration. 41.1 Head-A: Such disputes are covered under Head A, which arise from an agreement over which the Arbitrator has the jurisdiction to interpret ....
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....what the parties agreed but what the law mandates. A question of statutory interpretation and fiscal categorization which may lie in the exclusive domain of the taxing authority including in its appellate hierarchy, including Tribunal constituted under the taxing statute, such disputes would necessarily require the Arbitrator to render a finding on the applicable tax rate, classification of goods or entries in the taxing statute, these are all issues which are in the hands of the taxing authorities and not the Arbitrator. 41.4.The Arbitrator is a creature of contract and its jurisdiction to decide the dispute may be co-extensive with the contract but if it requires any determination relating to tax rates or classification of goods under any particular entry of the taxing statute or the quantum of any tax liability or the adjudication requires referencing to any Executive Tax Notification and Statutory Tax Rates Schedules, then such disputes even though arising out of a contract ceases to be contractual in nature and it metamorphosis into a fiscal regulatory issue. Such issues are governed by the taxing statute which are a complete code in themselves and cannot be subjected to de....
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.... any transaction, under the contact, attracting GST or not. It also did not involve challenge to any statutory tax arrangement nor did it involve determination of any classification or entry or rate of taxation specified by a taxing statute and certainly it did not involve any dispute between the contracting party and the State as a sovereign. 48.Thus, in light of the aforesaid factual background and applying the axiomatic principles as noticed hereinbefore, it would be seen that the issue raised in the instant proceedings are not which falls under the aforesaid considered Head-B rather it falls within the Head-A and thus it cannot be said that the dispute raised by the respondent was not arbitrable. 49.Furthermore, it will also be relevant to notice that the issue of non arbitrability, as sought to be raised in this appeal, by attempting to bring the disputes within the aforesaid discussed Head B, then it ought to have been raised by the department before Arbitral Tribunal in terms of Section 16 of the Act of 1996 which was not done. Even during the entire arbitral proceedings, no such objection was raised nor any such pleadings were delivered by the department raising any s....
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....th edition-2013/PWD detailed Specifications/IRC codes/latest circulars/ Govt. Orders issued from time to time and also as per directions Engineer-in-Charge." 55.The contract also contained stipulation of price adjustment in Clause 47. Clause 25.3 related to arbitration. It will also be relevant to take note of the Govt. Order dated 24.07.2017 issued by the Special Secretary, Govt. of Uttar Pradesh and addressed to Chief Engineer (Development and all departmental heads of the PWD stating that all contracts of the PWD over five crore would follow the standard bidding documents procurement of civil works as published by the Ministry of Road Transport and Highways. 56.The contract further envisaged that the expenditure on the said project was to be met from the budget of the Govt. of Uttar Pradesh. In the bill of quantities (BOQ) in clause 8, it was mentioned that the method of measurement of completed work for payment shall be in accordance with Specification for Road and Bridge Work published by the Ministry of Surface Transport. Moreover, the contract also mentioned matters about the general methodology for construction of major items. Under the said heading, road work which r....
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....ts entered up to 30.06.2017. In the said Government Order, it was clearly stated that all service receivers who have entered into contracts uptill 30.06.2017, whereupon service tax etc. was being charged, now shall be governed by the GST and the difference in the tax rates would be deducted by the service receivers and all notifications relating to GST and its imposition and implementation including issued by the GST Council from time to time, would be compulsorily followed. 62.The other Government Order of the same date bearing No. 1614/23.10.2017-12 (General)/2017 related to the manner in which the GST was to be calculated. A complete formula was provided in terms whereof the Departments were required to make provisions for the GST as mentioned in the said Government order. 63.On the other hand, the SOP dated 19.11.2018, issued by MoRTH refers to implementation of CGST/Standard Operating Procedure. The said SOP in Clause 5 mentioned, the incidence of application of service tax/GST. It further refers to payments for EPC contracts which is mentioned in Clause 6 (i) to (v). The said SOP also gives an illustration regarding the manner in which the GST is to be worked out relati....
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....nformation for each ongoing project, taking into consideration the GST Input Tax Credit available for the project. The project components and rates shown are only indicative and should be modified as per the project actuals and shall be certified by the statutory auditors of the Contractor/Developer/Company. In case, appointment of Statutory Auditor is not mandatory, then it can be certified by a Practicing Chartered Accountant. (iii) After completion of the said exercise, the costs against the subsumed taxes (Excise duty, CST, VAT/ WCT etc.) in the particular contract are to be finalized and to be mutually agreed by IE/AE/ Ministry/concerned Executive Agency/ Contractor. The cost of subsumed taxes factored in the contract value is required to be reduced from the original contract price to arrive at the actual balance cost of the project. (iv) Based on such certification and mutual agreement, the concerned RO/ PD shall either pay or recover the net impact of the GST after accounting for subsumed tax component and input tax (GST) credit. The contractor shall be responsible for correct declaration of GST liability and shall provide the supporting documents, if requi....
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....takes into consideration the issues relating to managing financial variations, escalations and change of scope of work. An illustration appended to the SOP reflects as to how the introduction of GST would impact EPC contracts which were entered prior to the appointed date i.e. 01.07.2017 but went on and were concluded in the GST regime. (viii) In this backdrop, it is reiterated that in absence of any clear material or stipulation on record, it cannot be said that merely by borrowing technical specifications from the MoRTH, the taxing guidelines would also be applicable and would be binding on the contracting parties. 66.Now, the stage is set to examine the records and ascertain as to whether by merely borrowing the MoRTH technical specifications in the contract, the SOP issued by the MoRTH dated 19.11.2018 would also become binding on the appellant-department so as to subsume all rights within relating to tax matters including the GST and whether the Govt. Order would have an overriding impact over the MoRTH SOP, will also have to be seen in context with the discussions which shall take place hereinafter. 67.The instant contract relates to widening of road and road b....
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....e parties but it can have no impact on the Taxing Authority. 72.In light of the above, before the Sole Arbitrator could have returned a categorical finding regarding applicability of MoRTH guideline, it ought to have first noticed as to what was the extent of the MoRTH guidelines which were made applicable and whether there was any clause in the MoRTH guidelines relating to tax which would have an overriding impact on the contract entered between the parties. 73.There is no clause in the entire contract which says that in case of any ambiguity between the contract and the MoRTH guidelines, it would be the MoRTH document which would prevail and that too relating to tax.In absence of any categorical contractual clause or agreement, any finding in this regard holding that the MoRTH Circular/SOP is applicable merely because the contract between the parties states that the technical specifications of the MoRTH would be applicable is not per-se not emerging or flowing from the contract or the material on record. 75.The contract entered between the parties is to be read as it is and in its entirety. In light of the clauses as mentioned above which borrows the MoRTH specifications....
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....he said SOP though applicable for EPC contracts could be borrowed or be made applicable to item rate based contracts. 81.Before a finding could have been recorded by the Sole Arbitrator applying the illustration as given in the SOP relating to EPC contracts to item rate based contract, then at least it should have considered some material evidence or reference to any clause in the contract between the parties which could throw some light or permit borrowing the illustration relating to EPC contract to item rate based contracts, especially when the MoRTH SOP did not extend its applicability to item rate based contracts nor it stated that the illustration was applicable to all types of contract. 82. There is no averment or evidence to suggest that there is no other separate document relating to item rate based contract. There is no positive statement that apart from this SOP relating to EPC contracts, there is no other separate guidelines for item rate based contract nor there is any evidence to indicate that the said illustration applicable for EPC contracts can ipso-facto be followed for item rate based contracts, nor the Sole Arbitrator has given any reason or finding in thi....
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....ion and the right of the contractor to recover the said GST paid to the Tax Authority, from the appellant. 89. It will be apposite to take a pinhole view of the GST Act. The GST regime introduced from 01st July, 2017 is primarily based on self-assessment under the GST laws. There are primarily two types of transactions. One where the transaction crosses two different State borders and in such a situation the transactions would attract the IGST i.e. Integrated Goods and Services Tax. This IGST is a composite and binding tax levied and collected by the Central Government which is later apportioned to the State where the goods are consumed. It is for this purpose that there can never be a CGST, SGST and IGST charged on the same invoice. However, where seller and the buyer are located within the same State then two components of CGST and SGST are charged simultaneously and one tax invoice clearly indicates the separate chargabiity of CGST and the SGST. 90.A party who is liable to pay the GST as per the scheme of the GST Act of 2017 is to furnish his returns periodically as mentioned in the Act on the basis of best self assessment. Once such returns are submitted before the GST Au....
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....te that some amount, which in some of the receipts have been, shown as voluntarily payment by the respondents towards interest or penalty is actually referrable for this particular contract for the period in question nor there is any discussion in this regard by the Sole Arbitrator to arrive at its conclusion in the award on this aspect of the matter. 95.As per the GST Act, the liability to pay tax is on the assessee i.e. the respondent and it was always open for him to deposit the tax in time in case if the same was not done then it is the respondent who is to bear the interest and penalty, if any. The respondent was required to mitigate his losses, inasmuch as, it was always open for the respondent to have paid the taxes in time to avoid imposition of penalty or interest and then could have recovered the same from the appellant (if permissible) and could have also claimed interest/penalty on the said outstanding amount, if it was solely attributable to the negligence or want of due diligence of the appellant. 96.This aspect has not been considered by the Sole Arbitrator who has merely on the premise that the GST has not been paid by the appellant to the respondent, hence, i....
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....een paid, the same would be returned by the respondent to the appellant and in case of any shortfall then the appellant would still be liable to pay the said shortfall. This finding given by the Sole Arbitrator in its award leads to ambiguity and it also does not attach finality to the award. 101.What is significant to notice that this arrangement could have been made only as an interim measure during the pendency of the proceedings especially in terms of the GST Act when the contract itself had concluded in the financial year 2018-19 and the maximum period for concluding an assessment under the GST Act is 3 years. Thus, at the time of making of the award in the year 2024, the assessments would have become final and that would have been the best evidence which could have been placed before the Arbitrator to establish that the respondent was entitled to claim any shortfall of the GST and consequential interest or penalty from the appellant. 102.In light of the aforesaid discussions, following position emerges:- (i) The basic premise of the Sole Arbitrator in his award, is the applicability of the MoRTH SOP dated 19.11.2018. In this regard, as already noticed above, th....
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....n it could be made applicable and binding on the appellant. (vii) Importantly, the Sole Arbitrator and both the contracting parties have not noticed the import of Chapter XX of the GST Act, 2017 which contains the transitional provisions. In this regard inter alia Section 142 (2) which relates to contracts entered prior to the appointed date i.e. 01.07.2017 and wherein post the appointed date there is either upward or downward revision and how will it be catered to has been provided for. Thus, Section 142 (2), 142 (10) and 142 (11) may have some bearing on the controversy, which at least should have been noticed, considered and a finding should have been given whether the said sections were applicable or not. However, there is a stoic silence on this aspect as there is no reference to this aspect in the award. (Viii) The expert evidence said to have been filed by the respondent also does not consider the impact of Sections 142(2), (10) and (11) of the GST Act, 2017 and in absence thereof, a definite finding returned by the Sole Arbitrator that the MoRTH guidelines and SOP would apply is rendered vulnerable as it looses its core integrity of reasoning. 103.The S....
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....natural justice, and Wednesbury [Associated Provincial Picture Houses v. Wednesbury Corpn., [1948] 1 K.B. 223 (CA)] reasonableness. Furthermore, "patent illegality" itself has been held to mean contravention of the substantive law of India, contravention of the 1996 Act, and contravention of the terms of the contract. 12. It is only if one of these conditions is met that the Court may interfere with an arbitral award in terms of Section 34(2) (b)(ii), but such interference does not entail a review of the merits of the dispute, and is limited to situations where the findings of the arbitrator are arbitrary, capricious or perverse, or when the conscience of the Court is shocked, or when the illegality is not trivial but goes to the root of the matter. An arbitral award may not be interfered with if the view taken by the arbitrator is a possible view based on facts. (See Associate Builders v. DDA [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204]. Also see ONGC Ltd. v. Saw Pipes Ltd. [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705]; Hindustan Zinc Ltd. v. Friends Coal Carbonisation [Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445]; and Mc....
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....e with an award as discussed above. 16. It is equally important to observe at this juncture that while interpreting the terms of a contract, the conduct of parties and correspondences exchanged would also be relevant factors and it is within the arbitrator's jurisdiction to consider the same. [See McDermott International Inc. v. Burn Standard Co. Ltd. [McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181]; Pure Helium India (P) Ltd. v. ONGC [Pure Helium India (P) Ltd. v. ONGC, (2003) 8 SCC 593] and D.D. Sharma v. Union of India [D.D. Sharma v. Union of India, (2004) 5 SCC 325 : (2005) 123 Comp Cas 135].]" 65. Similarly, the Apex Court in UHL Power Co. Ltd. v. State of H.P., (2022) 4 SCC 116 : (2022) 2 SCC (Civ) 401 has observed as under: "16. As it is, the jurisdiction conferred on courts under Section 34 of the Arbitration Act is fairly narrow, when it comes to the scope of an appeal under Section 37 of the Arbitration Act, the jurisdiction of an appellate court in examining an order, setting aside or refusing to set aside an award, is all the more circumscribed. In MMTC Ltd. v. Vedanta Ltd. [MMTC Ltd. v. Vedanta Ltd., (2019) 4 S....
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....r." 18. It has also been held time and again by this Court that if there are two plausible interpretations of the terms and conditions of the contract, then no fault can be found, if the learned arbitrator proceeds to accept one interpretation as against the other. In Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd. [Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1], the limitations on the Court while exercising powers under Section 34 of the Arbitration Act has been highlighted thus : (SCC p. 12, para 24) "24. There is no dispute that Section 34 of the Arbitration Act limits a challenge to an award only on the grounds provided therein or as interpreted by various Courts. We need to be cognizant of the fact that arbitral awards should not be interfered with in a casual and cavalier manner, unless the Court comes to a conclusion that the perversity of the award goes to the root of the matter without there being a possibility of alternative interpretation which may sustain the arbitral award. Section 34 is different in its approach and cannot be equated with a normal appellate jurisdiction. The mandate under Section 34 is to respect the finality of the....
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....6) 2 SCC (Civ) 716], SCC para 25 and SAIL v. Gupta Brother Steel Tubes Ltd. [SAIL v. Gupta Brother Steel Tubes Ltd., (2009) 10 SCC 63 : (2009) 4 SCC (Civ) 16], SCC para 29." (emphasis supplied) 20. In Dyna Technologies [Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1], the view taken above has been reiterated in the following words : (SCC p. 12, para 25) "25. Moreover, umpteen number of judgments of this Court have categorically held that the courts should not interfere with an award merely because an alternative view on facts and interpretation of contract exists. The courts need to be cautious and should defer to the view taken by the Arbitral Tribunal even if the reasoning provided in the award is implied unless such award portrays perversity unpardonable under Section 34 of the Arbitration Act." 21. An identical line of reasoning has been adopted in South East Asia Marine Engg. & Constructions Ltd. (Seamec Ltd.) v. Oil India Ltd. [South East Asia Marine Engg. & Constructions Ltd. (Seamec Ltd.) v. Oil India Ltd., (2020) 5 SCC 164 : (2020) 3 SCC (Civ) 1] and it has been held as follows : (SCC p. 172, paras 12-13) "12. It....
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....ourts under Section 34 of the A&C Act has been a subject-matter of perennial parley. The foundation of arbitration is party autonomy. Parties have the freedom to enter into an agreement to settle their disputes/claims by an Arbitral Tribunal, whose decision is binding on the parties. [See Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549, which examines arbitrability and nonarbitrability of subject-matters and claims, which aspect will not be examined in this case.] It is argued that the purpose of arbitration is fast and quick one-stop adjudication as an alternative to court adjudication, and therefore, post award interference by the courts is un-warranted, and an anathema that undermines the fundamental edifice of arbitration, which is consensual and voluntary departure from the right of a party to have its claim or dispute adjudicated by the judiciary. The process is informal, and need not be legalistic [ The expression "judicially", does not equate arbitration with formal/court proceedings, and would include a just and fair decision.]. Per contra, it is argued that party autonomy should not be treated as an absolute defence, as a party despite agreei....
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.... to clause (b) of Section 34(2) of the A&C Act suIn cases where the error cannot be corrected within the aforesaid guardrails and if it would require a review on merits or re-adjudication, the court must refrain from modifying the award and where permissible in law, remand the matter to the Arbitral Tribunalbstituted vide Act 3 of 2016 read as under: "Explanation 1.- For the avoidance of any doubt, it is clarified that an award is 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 or justice. Explanation 2.-For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute. "Sub-section (2-A) of Section 34 of the A&C Act inserted vide Act 3 of 2016 reads as under: "34. (2-A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the court, if the court ....
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....al dispute, in which case the award can be set aside if the award is based upon erroneous legal position; (b) this proposition will also hold good in case of a reasoned award, which on the face of it is erroneous on the legal proposition of law and/or its application; and (c) where a specific question of law is submitted to an arbitrator, erroneous decision on the point of law does not make the award bad, unless the court is satisfied that arbitrator had proceeded illegally. In Saw Pipes case [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705], the Court set aside the award on the ground that the award had not taken into consideration the terms of the contract before arriving at the conclusion as to whether the party claiming the damages is entitled to the same. Reference was made to the provisions of Sections 73 and 74 of the Contract Act, which relate to liquidated damages, general damages and penalty stipulations. This view had held the field for a long time and was applied in subsequent judgments of this Court in Hindustan Zinc Ltd. v. Friends Coal Carbonisation [Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445], Centrotrade Minerals & ....
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....cannot be said that the arbitrator travelled outside the jurisdiction or the view taken the arbitrator is against the terms of the contract. The Court cannot interfere with the award and substitute its view with the award and interpretation accepted by the arbitrator, the reason being the Court does not sit in appeal over the findings and decision of the arbitrator, while deciding an application under Section 34 of the A&C Act. The arbitrator is legitimately entitled to take a view after considering the material before him/her and interpret the agreement. The judgment should be accepted as final and binding. 43. Subsequently, in ONGC Ltd. v. Western Geco International Ltd. [ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] (for short Western Geco), a three-Judge Bench of this Court observed that the Court, in Saw Pipes [ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705], did not examine what would constitute "fundamental policy of Indian law". The expression "fundamental policy of Indian law" in the opinion of this Court includes all fundamental principles providing as basis for administration of justice and enforcement of law in this coun....
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....o have been drawn or if they have drawn an inference which on the face of it, is untenable resulting in injustice, the adjudication made by an Arbitral Tribunal that enjoys considerable latitude and play at the joints in making awards, may be challenged and set aside. 44. The decision of this Court in Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] elaborately examined the question of public policy in the context of Section 34 of the A&C Act, specifically under the head "fundamental policy of Indian law". It was firstly held that the principle of judicial approach demands a decision to be fair, reasonable and objective. On the obverse side, anything arbitrary and whimsical would not satisfy the said requirement. 45. Referring to the third principle in Western Geco [ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12], it was explained that the decision would be irrational and perverse if (a) it is based on no evidence; (b) if the Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or (c) ignores vital evidence in arriving at its decision. The stan....
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....d given the prevailing mores of the day. Here again interference would be only if something shocks the court's conscience. Further, "patent illegality" refers to three sub-heads : (a) contravention of substantive law of India, which must be restricted and limited such that the illegality must go to the root of the matter and should not be of a trivial nature. Reference in this regard was made to clause (a) to Section 28(1) of the A&C Act, which states that the dispute submitted to arbitration under Part I shall be in accordance with the substantive law for the time being in force. The second sub-head would be when the arbitrator gives no reasons in the award in contravention with Section 31(3) of the A&C Act. The third sub-head deals with contravention of Section 28(3) of the A&C Act which states that the Arbitral Tribunal shall decide all cases in accordance with the terms of the contract and shall take into account the usage of the trade applicable to the transaction. This last sub-head should be understood with a caveat that the arbitrator has the right to construe and interpret the terms of the contract in a reasonable manner. Such interpretation should not be a ground to s....
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....ve law. [ONGC v. Saw Pipes Ltd., (2003) 5 SCC 705, para 54; Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204, para 42.1] 32. Further, an award can be set aside as being opposed to the "fundamental policy of India" if it is perverse, [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12, para 39] i.e. the finding is not based on evidence, or the Arbitral Tribunal takes something irrelevant into account, or ignores vital evidence. [Associate Builders v. DDA, (2015) 3 SCC 49, paras 32-33 : (2015) 2 SCC (Civ) 204, para 31 ] However, an award is not perverse if the finding of fact is a possible view that is based on some reliable evidence. [Kuldeep Singh v. Delhi Police, (1999) 2 SCC 10 : 1999 SCC (L&S) 429, para 10 : as cited in Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204.]" 106.Recently, the Apex Court in Jan De Nul Dredging India (P) Ltd. v. Tuticorin Port Trust : (2026) 3 SCC 186 noticed the scope of the appeal under Section 37 of the Act of 1996 and in paragraphs 35 to 37 held as under:- "35. The gist of the aforesaid decisions is that the jurisdiction of the court under Section 37 of the A....
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....secting it from the offending portion. This specific question was referred to a Constitution Bench of the Supreme Court and in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. : (2025) 7 SCC 1, the Apex Court after considering the provisions of the Act and the law held that the Courts do possess limited powers under the Act of 1996 to modify the award by applying the doctrine of severability in limited circumstances. 108.What would be the limited scope and circumstances was explained in the majority judgment in Gayatri Balasamy (supra). The propositions and guidelines laid down by the Apex Court can be summarized as under:- (i) Only severable awards are amenable to modification; A composite or indivisible arbitral award cannot be modified. Modification is permissible only where the claims, or parts of the award, are legally and pragmatically severable from the valid portion. In such cases, the court may sever the invalid part while preserving the remainder of the award. This constitutes one of the essential guardrails laid down by the Supreme Court for the exercise of the limited power to modify an arbitral award; (ii) The error sought to be correcte....