Oil And Natural Gas Corporation Limited vs Sumitomo Heavy Industries Ltd. on 29 November, 1999

[Cites 21, Cited by 0]

Bombay High Court

Oil And Natural Gas Corporation Limited vs Sumitomo Heavy Industries Ltd. on 29 November, 1999

Equivalent citations: 2000(2)BOMCR501

1. This petition has been filed under the provisions of the Arbitration Act 1940 for setting aside the award dated 22nd June, 1995 made by the learned umpire Sir Michael Kerr. The respondent Sumitomo Heavy Industries Ltd. is a company established under the Laws of Japan. The petitioner is a statutory Corporation established under the Oil and Natural Gas Commission Act, 1959. By a contract dated 7th September, 1983, the respondent agreed to install and commission on a turnkey basis SH Phase II of a platform at the site of the petitioner known as "Bombay High South" for their site about 100 miles North-West of Bombay. Under this contract certain disputes arose between the parties and the respondent claimed certain sums from the petitioner, for which the petitioner denied the liabilities. Clause 17.2 of the agreement between the parties is the arbitration clause. That Clause reads as under :-

"If any dispute, difference or question shall at any time hereafter arise between the parties hereto or their respective representatives of assigns in respect of the construction of these presents or concerning anything herein contained or arising out of these presents or as to the rights, liabilities or duties of the said parties hereunder which cannot be mutually resolved by the parties, the same shall be referred to arbitration, the proceedings of which shall be held at London, U.K. Within 30 days of the receipt of the notice of intention of appointing arbitrators each party shall appoint an arbitrator of its own choice and inform the other party. Before entering upon the arbitration, the two arbitrators shall appoint an umpire. In case the parties fail to appoint its arbitrator within 30 days from the receipt of a notice from the other party in this behalf or if any dispute in selection of umpire, the President of International Chamber of Commerce, Paris, shall appoint the arbitrator and/or the umpire as the case may be.

The decision of the arbitrators and failing to an agreed decision by them, the decision of the umpire shall be final and binding on the parties.

The arbitration proceedings shall be held in accordance with the provision of International Chamber of Commerce and the rules made thereunder as amended from time to time. The arbitration proceedings shall be conducted in English language."

2. On or about 11th March, 1991 Mr. Robert A. MacCrindle QC was appointed as arbitrator on behalf of the respondent. On or about 11th May, 1991 M/s. Desai & Diwanji, Advocates and Solicitors of the petitioner appointed Mr. Justice D.M. Chandrashekhar (Retired) as arbitrator on behalf of the petitioner. Two Arbitrators appointed retired Hon'ble Judge of the English Court Sir Michael Kerr as umpire. At the conclusion of the hearing before the arbitrators on 4th/28th July, 1994 Mr. Justice Chandrashekhar issued a statement of reasons rejecting the claim made by the respondent. On or about 18th July, 1994 Mr. R.A. Macrindle issued reasons stating why he wished to make an award in favour of the respondent. Thereafter, two arbitrators issued a joint notice of disagreement. It is, thereafter, that the umpire entered upon the reference. After conclusion of the hearing before the umpire, the award was made, which is the subject matter of challenge in this petition.

3. After contract was awarded in favour of the respondent, a part of the work for which the contract was given was given to the sub-contractor namely McDermott International Inc. by the respondent. The work in relation to which the sub-contract was given was for offshore installation and fabrication/transportation of two tripods. Clause 3 of the agreement between the petitioner and the respondent made a provision for subcontracting of a particular work to the subcontractor with the previous consent in writing of the petitioner.

4. So far as the income-tax liability of the respondent in India in relation to the work awarded to it by the petitioner is concerned, returns for the assessment year 1984-85 and 1985-86 were filed on behalf of the respondent by the petitioner itself. Income-tax was levied on the respondent for these two years. The petitioner paid the amount of income-tax levied on the respondent in relation to the work awarded to it. There is no dispute between the parties regarding payment by the petitioner of income-tax levied on the respondent. The only dispute between the parties is on the question whether the petitioner is also liable to reimburse the amount paid by the respondent towards income-tax liability to its subcontractor.

5. So far as the liability of the subcontractor is concerned, for the assessment years 1984-85 and 1985-86 the Subcontractor filed returns before the Income-tax Authorities in India and claimed that it had incurred losses and hence was not liable to pay any income-tax for those years, and therefore, no income-tax was assessed against the subcontractor for the above referred period. However, in the year 1988, the authorities under the Income-tax Act served notices on the subcontractor and reopened the assessment for the above referred three years. Pursuant to the notices issued for reopening of the assessment, orders were passed by the Authorities under the Income-tax Act in relation to the income-tax liability of the Subcontractor and income-tax was imposed. In October, 1989 the subcontractor called upon the respondent to reimburse the amount paid by it towards income-tax assessed on it for the assessment years 1984-85 and 1985-86 on the basis of the amount received by the Subcontractor from the respondent. After some correspondence between the respondent and its Subcontractor, they amicably settled the dispute and under that settlement the respondent paid the amount of US $ 1,112,447.84 to the subcontractor. In the dispute which was referred to the arbitrators, the respondent made following claims:

1. reimbursement by the petitioner of the sum of US $ 1,112,447.84 paid by it to the Subcontractor by way of reimbursement of the Income-tax liability of the Subcontractor;

2. interest on the aforesaid amount at 1.25% per month from the date of payment by the respondent to the Subcontractor;

3. a declaration that the petitioner is liable to reimburse the respondent any further sum or sums that the respondent may have to pay to the Subcontractor towards the Income-tax liability of the Subcontractor in respect of the subcontractor.

6. This claim was resisted by the petitioner on various grounds. The umpire, however, found in favour of the respondent and made an award. Operative part of the award reads as under :-

"I, the undersigned umpire, the Rt. Hon, Sir Michael Kerr, hereby AWARD and DECLARE as follows :

(1) The respondents ONGC must pay to the claimants SHI on demand the sum of Japanese Yen 129,764,463 together with interest at an annual rate of 4.50% from 15th May, 1991 to the date of this award.

(2) It is hereby declared that in the event that the claimants become liable to pay and do pay, further sums to MII her after due to any assessment to income tax on MII under the present subcontract pursuant to section 44BB of the Income Tax Act, 1961, then the respondents must indemnify the claimants against any such payment on demand; and, conversely, the claimants must pay to the respondents the amount of any further refund which may hereafter be received beyond that referred to in paragraph 4.17 above.

(3) The respondents must pay to the claimants all the claimants, costs of this arbitration, to be taxed in default of agreement, on demand.

(4) Finally, the respondents must pay my fees and expenses, and the fees and expenses of Mr. MacCrindle QC and Mr. Chandrashekhar, the original Tribunal as well as the other costs of this arbitration, such as the hire of rooms, the provision of transcripts, etc. In the event that the claimants have already paid any sums on account of such fees, expenses or costs, then all such sums must be refunded by the respondents to the claimants on demand."

7. It is this award of the umpire, which is under challenge in the present petition.

8. Shri Banerji, the learned Counsel appearing for the petitioner challenged the award on following grounds :

(i) that the income-tax liability of the Subcontractor is not payable by the petitioner under Clause 17.3 of the agreement between the parties, as the subject of income-tax is covered by Clause 23 and therefore Clause 17.3 has no application;

(ii) even assuming that Clause 17.3 is attracted, the change of law, which is relied on namely enactment of section 44-BB in the Income-tax Act cannot make the respondent entitled to reimbursement of the amount of income-tax paid on account of Subcontractor, because the assessment of the Subcontractor has not been made under section 44-BB of the Act, as the provisions of section 44-BB are not applicable to the case of Subcontractor;

(3) It is further submitted on behalf of the petitioner that Clause 17.3 does not make the respondent entitled to reimbursement, because even if it is assumed that section 44-BB of the Income-tax Act applies to the case of the Subcontractor, the liability of the Subcontractor for payment of income-tax under section 44-BB is not the reason for reimbursement of that amount by the respondent to the Subcontractor, but the reason for the liability of the respondent to reimburse the Subcontractor is the contract subsequently entered into between the Subcontract and the respondent. In short, change of law is not the direct cause of the liability;

(4) The last submission is that the award is liable to be set aside on the ground of reasonable apprehension of bias of the umpire;

9. The learned Counsel appearing for the petitioner elaborating the above submissions made by him submits that it is only Clause 23 of the agreement between the parties, which deals with the liability of the petitioner for payment of income-tax and it makes the petitioner liable to pay income-tax levied or imposed on the respondent. According to the learned Counsel, the petitioner, therefore would be liable to pay the income-tax liability of the respondent, even if it is incurred as a result of change of law. According to the learned Counsel, therefore, the entire subject of the liability of the petitioner to pay income-tax to the respondent is covered by Clause 23 and therefore, Clause 17.3 which deals with the liability of the petitioner to reimburse the respondent for any liability that may be incurred by the respondent as a result of the change of law would not be attracted.

10. He further submits that change of law relied on by the respondent for application of Clause 17.3 is section 44-BB of the Income-tax Act, which was introduced in Statute-Book in 1987 with retrospective effect from 1-4-1983. The learned Counsel submits that section 44-BB does not apply to the assessment of the Subcontractor. The learned Counsel submits, relying on the provisions of section 44-BB, that section 44-BB does not apply to turnkey contract. The learned Counsel further submits that perusal of the assessment order assessing the income-tax liability of the Subcontractor pursuant to which the claim of reimbursement has been made shows that the assessment has been made under a circular issued by the Board and it further shows that the assessment was made pursuant to an option exercised by the Subcontractor for that purpose. According to the learned Counsel, the assessment order assessing the income-tax liability of the Subcontractor is not relatable to the provisions of section 44-BB and therefore because of section 44-BB liability cannot be imposed on the petitioner. The learned Counsel relying on the provisions of section 44-BB says that in case where the element of sale is involved, provisions of section 44-BB are not attracted.

11. The learned Counsel further submits that even if it is assumed that the income-tax was required to be paid by the Subcontractor because of enactment of section 44-BB in the Income-tax Act, still in terms of Clause 17.3 of the agreement, the petitioner would not be liable. The learned Counsel submits that under Clause 17.3 of the agreement the petitioner becomes liable to pay any amounts that were required to be paid by the respondent as a result of change in law in India. According to the learned Counsel, therefore, in order to make the petitioner liable for payment of any extra costs to the respondent such extra costs must be shown to have been caused by the change. In the submission of the learned Counsel in the present case, the respondent was not required to pay the amount of income-tax to the Subcontractor, because of the provisions of section 44-BB, but because of a separate agreement entered into by the respondent with its Subcontractor. Therefore direct cause of increase costs of the respondent was not the change in law, but the contract entered into by the respondent with its Subcontractor and therefore, according to the learned Counsel, the petitioner is not liable to reimburse the amount.

12. The last submission that is made by the learned Counsel is that the umpire Sir Michael Kerr, the arbitrator appointed by the respondent Mr. R.A. MaCrindle QC and the Counsel appearing before the arbitrator for the respondent Mr. Cordello belong to the same Chamber, share same clerks and therefore according to the learned Counsel the umpire was under duty to disclose to the petitioner this relationship. In the submission of the learned Counsel, non-disclosure of this relationship by the umpire to the petitioner creates a reasonable apprehension in the mind of the petitioner of bias, and therefore, according to the learned Counsel award of the umpire is in breach of the principle of natural justice and it is therefore liable to be set aside.

13. The learned Counsel appearing for the respondent in reply, firstly, submitted that section 44-BB of the Income-tax Act is clearly applicable to the case of the Subcontractor. He submit that the assessment of the Subcontract was done under the provisions of section 44-BB of the Act. The learned Counsel submits that the assessment of the Subcontractor was not done under the circular, because according to the learned Counsel what is provided by the circular is merely a modality for making the assessment under section 44-BB. The learned Counsel submits that the tax levied on the Subcontractor is 10% as laid down by section 44-BB and no additional tax of 1% as claimed by the petitioner has been levied.

14. The learned Counsel further submits that the liability of the petitioner in this regard was clearly covered by Clause 17.3 of the agreement. He submits that the respondent was economically affected because of the change in law i.e. enactment of section 44-BB in the Income-tax Act. The Subcontractor was liable to pay the amount of tax for which it became liable because of the change in law. In the submission of the learned Counsel that Clause 17.3 of the agreement covers the liability of the petitioner for the income-tax required to be paid by the Subcontractor under section 44-BB of the Act. The increased liability of the respondent was caused by the change in law. The learned Counsel submits that even if it is assumed that the construction put on the provisions of Clause 17.3 by the umpire is erroneous, in the submission of the learned Counsel, as construction of clause in the agreement is a question of law, which was referred to the arbitrators by the parties, the decision of the umpire on that question of law cannot be interfered with by the Court. The learned Counsel further submits that in any case, the construction put on by the umpire on the provisions of Clause 17.3 is a possible construction and therefore this Court cannot interfere with the award made by the umpire. In so far as the aspect of bias is concerned, the learned Counsel submits that though as a matter of fact the umpire, the arbitrator appointed by the respondent and the Counsel appearing for the respondent belonged to the same Chamber and shared the same clerk, they all are functioning independently and there is no unity of interest of any kind between the three and therefore according to the learned Counsel, there can be no apprehension of bias in the present case.

15. The learned Counsel for both the sides have relied on various judgment of this Court, as well as of the Supreme Court in support of their respective submissions. I have propose to refer to those judgments as I considered their respective submissions.

16. Taking first of consideration the point urged by the learned Counsel for the petitioner in relation to applicability of Clause 17.3 of the agreement in the present, Clause 17.3 reads as under :-

"Should there be, after the date of bid closing a change in any legal provision of the Republic of India or of any political subdivision thereof or should there be a change in the interpretation of the 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; than the Company shall compensate Contractor for all necessary and reasonable extra cost caused by such a change."

It becomes clear from the perusal of the above Clause that the change of law which is relied on must affect economically the position of the respondent and the petitioner is liable to compensate the respondent for all necessary and reasonable extra costs caused by such change. It is thus clear that in terms of the provisions of Clause 17.3 there has to be a direct nexus between the change in law and the liability. In paragraph 6.7 of the award of the umpire, the learned umpire has observed thus:

"SHI's obligations under the Subcontract were closely, and indeed inextricably, linked to their obligations under the Contract. The fulfillment by MII of their obligations under the Subcontract formed part and parcel of SHI's responsibility for performance of the Head Contract. The fact that SHI's obligation to make these payments arose under this Subcontract, and not in some other way or under some other contractual obligation, unconnected or only remotely connected with the contract, is an argument in favour of the application of Clause 17.3 and not against."

17. In my opinion, this reasoning shows total non-application of mind by the learned umpire to the terms of Clause 17.3. Clause 17.3 deals with an obligation between the petitioner and the respondent, who are parties to the agreement and it makes the petitioner liable for any extra costs that the respondent has to incur because of any change of law. Therefore, in my opinion, change of law must have direct nexus with incurring of extra costs. In the present case, incurring of extra costs by the respondent was not direct result of change in law. No doubt payment of income-tax by the subcontractor was direct result of change in law. However, that liability was transferred from the subcontractor to the respondent not because of the provisions of the Income-tax Act, which were introduced by amendment, but because of a contract entered into between the respondent and the subcontractor. There is nothing in the agreement between the parties, which made it obligatory on the part of the respondent to take on liability of the subcontractor in this regard. Therefore, it is obvious that the respondent was free not to take on this liability of the subcontractor while entering into the contract with the subcontractor. The liability of payment of income-tax, which is required to be paid as a result of change in law by the subcontractor was a voluntary act on the part of the respondent. Thus, the respondent was required to incur extra costs of payment of income-tax, which the subcontractor was required to pay, because of the term of the agreement between the respondent and its subcontractor and therefore, in my opinion, the umpire was not at all justified in holding that the petitioner is liable for reimbursement of the amount paid by the respondent to its subcontractor, as income-tax.

18. In so far as the submission made by the learned Counsel for the respondent that the question of construction to be put on terms of Clause 17.3 was referred by the parties to the arbitrators, therefore, what is referred to the arbitrators is the question of law and therefore, this Court cannot interfere with the determination of the arbitrators, even if, this Court finds that the determination made by the umpire is erroneous, is concerned, the learned Counsel for the respondent relied on the judgment of the Supreme Court in the case of M/s. Kapoor Nilokheri Co-op. Dairy Farm Society Ltd. v. Union of India, , particularly on the observations of the Supreme Court in paragraph 12 of that judgment. Paragraph 12 reads as under:-

"Mr. Nariman, the Additional Solicitor General, appearing on behalf of the respondents also contended that the appellants having specifically stated that their claims are based on the agreement and on nothing else and all that the arbitrator had to decide was as to the effect of the agreement, the arbitrator had really to decide a question of law, i.e. of interpreting the document, the agreement of 6-5-53 and his decision is not open to challenge. We agree with him: see the decision in Durga Prasad v. Sewkishendas and Ghulam Jilani v. Muhammad Hassan, 1901(29) Ind App 51 (P.C)."

19. The learned Counsel for the respondent also relied, in support of these submissions, on the observations of the Supreme Court in its judgment in the case of M/s. Tarapore & Co. v. Cochin Shipyard Ltd., , and two judgments of this Court in the case of Mazgaon Dock Ltd. v. Mcdermott International, dated 15th July, 1994 and in the case of Setling Wilson Electricals v. Reserve Bank of India, Appeal No. 403 of 1992, dated 9/10th August, 1994.

20. Perusal of the judgment of the Supreme Court in the case of Kapoor Dairy Farm referred to above shows that the Supreme Court has observed that as the question of interpretation to be put on the term in an agreement was referred to the arbitrator, the interpretation put on that term by the arbitrator amounts to deciding the question of law and in support of those observations the Supreme Court has relied on the judgments of Privy Council in the case of Durga Prasad v. Sewkishendas and other in the case of Ghulam Jilani v. Muhammad Hassan, 1901(29) Indian Appeals, 51. Perusal of the judgment of the Supreme Court in the case of Thawardas Pherumal v. Union of India, shows that both the judgments of the Privy Council relied on by the Supreme Court in its judgment in Kapoor Dairy Farm referred to above have been considered by the Supreme Court in paragraph 12 of its judgment in the case of Thawardas referred to above. The Supreme Court observed thus:

"The law about this is, in our opinion, the same in England as here and the principles that govern this class of case have been reviewed at length and set out with clarity by the House of Lords in F.R. Absalom Ltd. v. Great Western (London) Garden Village Society, 1933 A.C. 592 (B) and in 1923 A.C. 395 (A). In 'Durga Prasad v. Sewkishendas, , the Privy Council applied the law expounded in Absalom's case (B), to India; see also Champsey Bhara & Co. v. Jivraj Balloo Spinning and Weaving Co. A.I.R. 1923 P.C. 66 at pp. 68, 69 (D), and Saleh Mahomed Umer Dossal v. Nathoomal Kessamal . The wider language used by Lord Macnaghten in 'Gulam Jilani v. Muhammad Hassan', 29 Ind A.P.P. 51 at p. 60(F), had reference to the revisional powers of the High Court under the Civil Procedure Code and must be confined to the facts of that case where the question of law involved there, namely limitation, was specifically referred.

An arbitrator is not a conciliator and cannot ignore the law or misapply it in order to do what he thinks is just and reasonable. He is a tribunal selected by the parties to decide their disputes according to law and so is bound to follow and apply the law, and if he does not, he can be set right by the courts provided his error appears on the face of the award. The single exception to this is when the parties choose specifically to refer a question of law as a separate and distinct matter."

21. The Supreme Court in its judgment in the case of Thawardas referred to above observed that an arbitrator is under obligation to decide the dispute referred to him according to law, and therefore, he is bound to follow and apply the law and if the arbitrator does not do that, he can be set right by the courts, if an error of law appears on the face of the award. Only exception to this general rule is when the parties choose specifically to refer a question of law as a separate and distinct matter. The Supreme Court has held that there has to be a specific reference, because according to the Supreme Court unless a question is specifically referred, the parties cannot be denied their right to have their dispute decided in accordance with law. The relevant observations are to be found in paragraph 14 of the judgment. Which reads as under :-

"We have next to see whether the arbitrator was specifically asked to construe Clause 6 of the contract or any part of the contract, or whether any question of law was specifically referred. We stress the word "specifically" because parties who make a reference to arbitration have the right to insist that the tribunal of their choice shall decide their dispute according to law, so before the right can be denied to them in any particular matter, the Court must be very sure that both sides wanted the decision of the arbitrator on a point of law rather than that of the courts and that they wanted his decision on that point to be final."

22. The judgment of the Supreme Court in the case of Thawardas has been considered in detail by the Supreme Court in its judgment in the case of M/ s. Tarapore and Co. referred to above. Perusal of paragraph 12 of the judgment shows that in that case the Supreme Court was dealing with a case where the specific question about the jurisdiction of the arbitrator to arbitrate upon the dispute was specifically referred to the arbitrator. The Supreme Court in its judgment has also considered the judgments of the Privy Council, which have been considered by the Supreme Court in its judgment in the case of Thawardas and the Supreme Court has finally found that where a specific question of law touching upon the jurisdiction of the arbitrator was referred to for decision of the arbitrator by the parties, then, an erroneous decision by the arbitrator would not entitle the Court to interfere with that determination. The Supreme Court in its judgment in Tarapore case has also considered the judgment in Kapoor Nilokheri Co-op. Dairy Farm Society Ltd. and has held that where a specific question of interpretation of Clause in an agreement is referred to an arbitrator, then the decision of the arbitrator on that question is final. The learned Single Judge of this Court as also the Division Bench have followed the law laid down by the Supreme Court in the case of M/s. Taropore & Co. It is thus clear from the various judgments of the Supreme Court referred to above that there has to be a specific reference made to the arbitrator for a decision by the arbitrator and construction of clause in the agreement also amounts to a question of law. However, for that purpose, it must be shown that the question of construction to be put on a particular Clause in an agreement was specifically referred to the arbitrator.

23. In so far as the present case is concerned, reference to the arbitrator has been made by the respondent. The statement of claim submitted by the respondent shows that in paragraph 2.1 the respondent stated thus:

"In setting out its case, Sumitomo will refer to copies of certain documents in support, which are attached as appendices. The following provisions of the contract are of particular relevance and are set out below for case of reference. In the Contract, Sumitomo is described as "Contractor" and ONGC as "Company". Sumitomo will refer as necessary to other terms of the Contract."

Paragraph 2.9 of statement of claim shows that the principal claim that was made by the Sumitomo was for an award for reimbursement by the petitioner of such sums (including any interest) as the respondent has paid to the subcontractor or to the Income-tax authority. It is thus clear that the parties had not submitted specifically any Clause in the agreement for interpretation and for award to the arbitrator. The Supreme Court in its judgment in Tarapore referred to above has stated its conclusion in relation to the law on the question. Paragraph 16 of the that judgment reads as under:-

"Complexity of rights and obligations in national and international trade and commerce would certainly generate disputes between the parties and treated as a normal incident of commercial life and till commercial arbitration came to be recognised as a civilised way of resolving such disputes, prolix and time consuming litigation was the only method of resolving such disputes. As an alternative to Court proceedings, arbitration as a method of resolving disputes by domestic tribunal constituted by the choice of parties became acceptable. The basic difference between the Court proceedings and the arbitration is the choice of the tribunal. Ordinarily, all matters in which relief can be claimed from the Court may become subject matter of arbitration. Now if in a law Court incidental questions of law arise in the course of proceedings, the Court has an obligation to decide those questions of law. But when it came to a tribunal not endowed with the judicial power of the State but by conferment by the parties to the dispute or which acquires jurisdiction by a submission of the parties to the dispute to invite the decision by the forum of their choice and to be bound by it a question arose whether a pure question of law if at all can be referred to an arbitrator for his decision and even if he decides, can the decision be questioned on the ground that there is an error apparent on the face of the award in deciding the question. Now as stated a short while ago, a question of law may figure before an arbitrator in two ways. It may arise as an incidental point while deciding the main dispute referred to the arbitrator or in a given case parties may refer a specific question of law to the arbitrator for his decision. There is no more gainsaying the fact that a pure question of law may and can be referred to an arbitrator for his decision. Russel on the Law of Arbitration Twentieth Edition at page 22 states as under:

"A pure question of law may be referred to an arbitrator and where such a question is specifically referred his award will not be set aside merely upon the ground that his decision is wrong."

In Halsbury's Laws of England Vol. 2 para 623 4th Edition the statement of law reads as under :

"If a specific question of law is submitted to the arbitrator for his decision and he decides it, the fact that the decision is erroneous does not make the award bad on its face so as to permit its being set aside; and where the question referred for arbitration is a question of construction, which is, generally speaking, a question of law, the arbitrator's decision cannot be set aside only because the Court would itself have come to a different conclusion."

With the ever widening expansion of international trade and commerce, complex questions of private International Law, effect of local laws on contracts between the parties belonging to different nations are certainly bound to crop up. Arbitration has been considered a civilised way of resolving such disputes avoiding Court proceeding. There is no reason why the parties should be precluded from referring a specific question of law to an arbitrator for his decision and agree to be bound by the same. This approach manifests faith of parties in the capacity of the tribunal of their choice to decide even a pure question of law. If they do so, with eyes wide open, and there is nothing to preclude the parties from doing so, then there is no reason why the Court should try to impose its view of law superseding the view of the tribunal whose decision the parties agreed to abide by. Therefore, on principle it appears distinctly clear that when a specific question of law is referred to an arbitrator for his decision including the one touching upon the jurisdiction of the arbitrator, the decision of the arbitrator would be binding on both the parties and it would not be open to any of the two parties to wriggle out of it by contending that the arbitrator cannot clutch at or confer jurisdiction Upon himself by misconstruing the arbitration agreement."

24. It is clear from reading of paragraph 16 of the judgment of the Supreme Court in Tarapore & Co. case that if a question of law incidentally arises for consideration before an arbitrator and an arbitrator decides that question, the jurisdiction of the Court to look into the correctness or otherwise of the finding recorded by an arbitrator on that question is not ousted. In the present case, for examining the claim of the respondent, it became necessary for the arbitrator to construe various Clauses in the agreement. In my opinion, therefore, in the present case, it cannot be said that the question of interpretation of Clauses in the agreement was specifically referred to the arbitrator and therefore, this Court would be entitled to examine the correctness or otherwise of the decision of the arbitrator on construction of Clause 17.3 of the agreement between the parties.

25. From the various authorities relied on by the learned Counsel appearing for both sides, it appears to be settled law now that the jurisdiction of the Court to interfere with a finding recorded by the arbitrator is restricted to three broad categories of cases where the Court finds (i) there exist a total perversity in the award; (ii) the judgment is based on wrong proposition of law and (iii) where the view taken by the arbitrator is impossible to take.

26. There was some debate on the question, before me, as to whether the jurisdiction of the Court to interfere with a finding recorded by an arbitrator is different in case of a speaking award and non-speaking award. However, having gone through the various judgments of the Supreme Court, I find that both in the case of speaking award as well as non-speaking award, the jurisdiction of the Court to interfere with the finding recorded by an arbitrator is confined to three categories of cases referred to above. In so far as the present case is concerned, I find that the construction put by the learned umpire on the terms of Clause 17.3 of the agreement between the parties clearly ignores the plain language of Clause 17.3. The learned umpire while holding the petitioner liable for the income-tax, which was required to be paid by the subcontractor has ignored the specific terms used in the Clause which shows that the petitioner is liable to pay extra costs which are caused by the change. In my opinion, looking to the plain and clear language of Clause 17.3, the construction put on by the learned umpire was clearly impossible and therefore this Court would be entitled to interfere with the finding recorded by the umpire.

27. Now taking up the question whether revised assessment done in the case of subcontractor was referable to the provisions of section 44-BB or not, it becomes necessary to see the provisions of section 44-BB of the Income-tax Act. It reads as under:-

(1) Notwithstanding anything to the contrary contained in sections 28 to 41 and sections 43 and 43A, in the case of an assessee, being a nonresident, engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession": Provided that this sub-section shall not apply in a case where the provisions of section 42 or section 44D or section 115A or section 293A apply for the purpose of computing profits or gains or any other income referred to in those sections.

(2) The amounts referred to in sub-section (1) shall be the following, namely:-

(a) the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils in India and

(b) the amount received or deemed to be received in India by or on behalf of the assessee on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils outside India.

Explanation---For the purposes of this section-

(i) "plant" includes ships, aircraft, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;

(ii) "mineral oil" includes petroleum and natural gas.

28. Perusal of these provisions shows that in order to attract the provision of section 44-BB, it must be shown that non-resident Indian is engaged in the business of providing services or facilities in connection with or supply of plant and machinery on hire used or to be used in prospecting for or extraction or production of mineral oil. In so far as, the contract between the respondent and the subcontractor is concerned, there is an element of sale. It is not entirely an agreement for providing services or facilities. It is not also an agreement only for supplying plant and machinery on hire. The learned umpire has, however, held that 99.9 percent of the contract constitutes providing of facilities and therefore, according to the umpire, provisions of section 44-BB are attracted. In my opinion, for considering whether provisions of section 44-BB would be attracted in relation to a contract, totality of the contract has to be taken into consideration. If the contract involves any element of sale, then provisions of section 44-BB would not be attracted. Even perusal of the revised assessment of tax done in case of the subcontractor, which has been quoted in paragraph 4.9 of the award of the umpire, shows that it cannot be an assessment under the provisions of section 44-BB of the Act. It is common ground before me that provisions of Clause (b) of subsection (2) of section 44-BB are not attracted in the present case and that the case of the subcontractor would be governed by Clause (a) of sub-section (2). Perusal of that provision shows that for the purpose of that section, the amount paid or payable, whether in or out of India, to the assessee in relation to the work done in India is only relevant. For the purpose of that Clause, therefore, whether the amount has been paid i.e. whether it has been paid in or out of India is not relevant. Perusal of paragraph 4.9 of the award of the umpire, however, shows that the amounts received for the work done in India are mentioned separately and the profit earned on that amount has been taken out separately. Similarly, the amounts received for work done outside India have been taken separately and deemed profit on that amount has been taken separately. It is thus, clear that the assessment done in relation to amounts received for work done outside India is totally irrelevant. In the present case, as stated above, it is common ground that no work of extraction of mineral oils was done outside India. It is further to be seen here that it is clear from the assessment order that the assessment of the subcontractor was done under a circular issued by the department and assessment under the circular was pursuant to an option exercised by the subcontractor. It is clear from the circular that it did not operate by its own force. Though the learned Counsel appearing for the respondent argued before me that no amount of tax as such is charged under the circular and that the entire assessment is done under section 44-BB. The learned umpire has, however, in paragraph 5.5 (6) of his award has observed thus:

"I agree that the Circular is badly phrased, and I have already pointed out that we may not have its final text. The Circular was not independent from section 44-BB but based on its then recent enactment. The description of the target operations in its paragraph 2 is precisely in line with section 44-BB and with contracts such as the subcontract in the present case. The purpose of the Circular was to deal administratively with one aspect which had been left uncovered by section 44-BB. This concerned the allocation of some notional taxable profit to the sale or transfer of property within fiscal India of any facilities whose design, engineering, procurement and fabrication had taken place outside fiscal India. It was decided that the solution to this limited problem lay in a process of allocation which was permitted by section 9(1) and Explanation (a) of the Income-tax Act, 1961. For reasons of uniformity and simplicity it was decided to fix this allocation on the basis of 10% of the 10% prescribed by section 44-BB. The option in paragraph 9 of the Circular was only intended to apply to this element of an additional 1%; not to the 10% prescribed by section 44-BB, which are mandatory."

29. It is thus clear that, according to the umpire, 1% tax was charged under the circular which according to the learned umpire covers an area which is not covered by section 44-BB, In my opinion, therefore, there is some room to assume that the award made by the learned umpire in relation to applicability of section 44-BB of the Act is not entirely right. However, I find that the conclusion that is reached by the learned umpire on this aspect cannot be termed as impossible conclusion and therefore, in my opinion, considering the law laid down by the Supreme Court, which is discussed above, this Court will not be justified in interfering with the conclusion that is reached by the learned umpire on this aspect of the matter.

30. This takes me to the last aspect that was urged by the learned Counsel for the petitioner i.e. the aspect of bias. It is submitted by the learned Counsel for the petitioner that the learned umpire was under a duty to disclose to the petitioner the fact that the learned umpire and the Counsel appearing for the respondent belong to the same chamber and they also share the same clerks. The learned Counsel in support of this submission relies on a judgment of the Supreme Court in the case of Ranjit Thakur v. Union of India, as well as the judgment of R. v. Bow Street Metropolitan Stipendiary Magistrate and others, ex parte Pinochet Ugarte (No. 2) of House of Lords. The learned Counsel appearing for the respondent, however, points out by reference to a judgment of Queen's Bench Division in the case of Laker Airways Inc. v. Fls Aerospace Ltd. and Burnton: Fls Aerospace Ltd. v. Laker Airways Inc., that the Queen's Bench on the basis of the law laid down by the House of Lords, even in the case relied on by the learned Counsel for the petitioner in identical situation held that the Barristers are self employed and merely because the Barristers have the same Chamber, share the same clerks, does not impair their independence and there is no question of any bias in such a case. In view of the fact that the Court in England after considering the system that prevails in England in relation to Barristers and their chambers has held that there is no likelihood of any bias, in case one of the Barristers having the same chamber is an umpire and other Barrister appears before umpire, in my opinion, there is no question of there being any likelihood of bias in the present case also. The submission of the learned Counsel for the petitioner, therefore, in that regard is not well founded.

31. In the result, the present petition succeeds and is allowed. The award made by the umpire is set aside. The petition is thus granted in terms of prayer Clause (a).

Certified copy expedited.

32. Petition allowed.

Unlock Advanced Research with PRISMAI

Bombay High Court