Bombay High Court
Hindustan Petroleum Corporation Ltd vs Punj Lloyd Ltd. & Anr on 14 January, 2011
Author: D.Y.Chandrachud
Bench: D.Y. Chandrachud
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O. O.C. J.
ARBITRATION PETITION NO.40 OF 2008
Hindustan Petroleum Corporation Ltd. ...Petitioner.
Versus
Punj Lloyd Ltd. & Anr. ...Respondents.
.......
Mr.Minoo Siodia with Mr.Agrawal Nikhil i/b. M/s.Rustamji & Ginwala
for the Petitioner.
Mr.D.D.Madon, Sr.Advocate with Ms.Firoja Daruwala and Mr.Punazar
Fouzdar i/b. J.Sagar Associates for Respondent No.1.
......
CORAM : DR. D.Y. CHANDRACHUD, J.
January 14, 2011.
ORAL JUDGMENT :
An arbitral award of a sole Arbitrator of 17 September 2007 has been challenged under Section 34 of the Arbitration and Conciliation Act, 1996, in these proceedings.
Facts :
2. On 18 March 2005, a public tender was floated on behalf of ::: Downloaded on - 09/06/2013 16:45:54 ::: vbc 2 arbp40.08-14.1 the Petitioner by Engineers India Limited (EIL), by which bids were invited for the construction and laying of a pipeline for carrying petroleum products from Mundra to Delhi. The construction period was twelve months. On 25 April 2005, a pre-bid meeting was held with bidders. Written clarifications were issued to all the bidders, including the claimant, on as many as seventy five questions that were raised.
3. The Finance Act of 2005 was enacted on 13 May 2005.
Sections 2 to 64 were deemed to have come into force on 1 April 2005. Chapter V of the Finance Act of 2005 dealt with service tax.
Section 88 provides for an amendment of the Finance Act of 1994. In Section 65, clause (25b) was introduced so as to inter alia bring within the purview of service tax, the construction of a pipeline or conduit. On 7 June 2005, a notification was issued by the Union Ministry of Finance in the Department of Revenue under which in exercise of power conferred by clauses (a) and (b) of Section 88 of the Finance Act of 2005, the Central Government appointed 16 June ::: Downloaded on - 09/06/2013 16:45:54 ::: vbc 3 arbp40.08-14.1 2005 as the date on which the provisions of the said clauses of the Act would come into force. The notification was published in the Gazette of India dated 7 June 2005 bearing Part-II, Section 3, sub-section (1).
4. Bids were submitted to the Petitioner by intending bidders including the First Respondent on 7 June 2005. The price bids of all the parties were opened on 7 October 2005. The First Respondent was the lowest bidder. On 23 November 2005, the First Respondent sought to raise an issue pertaining to the liability to service tax in a communication to EIL. On 1 December 2005, the Petitioner in a letter to the First Respondent, called upon the First Respondent to confirm the withdrawal of the request pertaining to service tax, failing which it was stated that action in accordance with the tender conditions will be taken, including forfeiture of earnest money deposit and rejection of the bid. The contract was awarded to the First Respondent. 17 February 2006 was the date of the commencement of the contract, while 16 February 2007 was the date of completion.
The First Respondent sought a reference to arbitration.
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Issue :
5. The challenge in these proceedings is to the award of the Arbitrator in so far as it holds that the liability to service tax constituted a statutory variation which would have to be borne by the Petitioner. Though during the course of the arbitral proceedings, a preliminary issue was sought to be urged before the Arbitrator by the Petitioner, Counsel appearing on behalf of the Petitioner has in these proceedings confined his submissions only to the finding of the Arbitrator on the issue of service tax.
The Award :
6. The arbitral award holds that on the date of the submission of the bid, the provisions relating to the levy of service tax were not applicable and that consequently service tax was not included in the bid submitted by the First Respondent. According to the Arbitrator, clause 8.3 of the Special Conditions of Contract stipulates that statutory variations with respect to taxes and duties, including service ::: Downloaded on - 09/06/2013 16:45:54 ::: vbc 5 arbp40.08-14.1 tax, during the contractual delivery period will be treated as on the account of the Petitioner. Since the price bid had to account for only the applicable taxes and on the day of the submission of the bid, the levy of service tax was not notified, this was not built into the price quoted by the Petitioner. The arbitral award notes that the notification of the Union Government dated 7 June 2005 was made known only on 13 June 2005 to the public. Consequently, service tax was not included as part of the price quoted by the First Respondent and would have to be reimbursed by the Petitioner. These are the findings.
Submissions:
(i) Petitioner:
7. Counsel appearing on behalf of the Petitioner, while assailing the validity of the award submitted that (i) The arbitral award has ex-facie ignored the provisions of clause 7.d.1 under which the contractor accepted full and exclusive liability for the payment of any and all taxes "now or hereafter imposed". Moreover, clause 8.1 ::: Downloaded on - 09/06/2013 16:45:54 ::: vbc 6 arbp40.08-14.1 of the Special Conditions of Contract stipulated that the contract prices shall be deemed to include all taxes, including service tax, until the completion of the contract; (ii) Clause 8.3 of the Special Conditions of Contract provided that statutory variations in taxes and duties such as excise duty, customs duty, sales tax, works contract tax and service tax would be to the account of the Petitioner. However, Clause 8.3 spoke of statutory variations in taxes; (iii) In the present case, there was no variation which had occurred statutorily after the date of the submission of the bid. It was to the knowledge of the First Respondent when he submitted the bid that the Finance Act of 2005 had been passed whereunder a provision was made for the imposition of service tax on construction of pipelines and conduits. Moreover, the notification of the Union Government bringing into force the provision with effect from 16 June 2005 was published in the official gazette on 7 June 2005. The date on which the notification became known is 7 June 2005, on which date, it was published in the official gazette. The finding of the Arbitrator that the notification would take effect only from 13 June 2005 is ex-facie contrary to the law laid ::: Downloaded on - 09/06/2013 16:45:54 ::: vbc 7 arbp40.08-14.1 down by the Supreme Court; (iv) The Arbitrator has plainly ignored the terms of the contract. The award of the Arbitrator, therefore, suffers from a clear perversity and illegality and, therefore, is liable to be quashed on the ground that it is contrary to public policy within the meaning of Section 34(2)(b) of the Arbitration and Conciliation Act, 1996.
(ii) Respondent :
8. On the other hand, it has been urged on behalf of the First Respondent that (i) The Notification of the Union Government dated 7 June 2005 bringing into force the provisions of Section 88 of the Finance Act of 2005 with effect from 16 June 2005 was made known to the public only on 13 June 2005; (ii) On 7 June 2005 when the bid was submitted to the Petitioner, the existence of the notification was hence not known to the Petitioner; (iii) In consequence, the notification bringing into force, the provisions of Section 88 of the Finance Act of 2005 would constitute a statutory variation within the meaning of clause 8.3 of the Special Conditions of Contract entitling ::: Downloaded on - 09/06/2013 16:45:54 ::: vbc 8 arbp40.08-14.1 the First Respondent to reimbursement from the Petitioner; and (iv) The decision of the Arbitrator rests on the interpretation of the terms of the contract and even assuming that the Arbitrator has erred that would constitute an error within jurisdiction which would not be amenable to correction under Section 34 of the Arbitration and Conciliation Act, 1996. Counsel appearing on behalf of the First Respondent has relied upon a decision of the Madras High Court in Union of India vs. Asia Tobaco Co.Ltd.,1 in support of the submission that a notification can only be enforced from the date on which it was made known to the public by making a copy of the gazette available for sale to the public.
Contractual conditions :
9. Clause 14.5 of the Instructions to Bidders provides that all duties and taxes, including service tax and other levies payable by the Contractor shall be included in the Schedule of Rates. However, statutory variations would be to the account of the Petitioner as the owner:
1 1992 (196) ITR 318 ::: Downloaded on - 09/06/2013 16:45:54 ::: vbc 9 arbp40.08-14.1 "All duties and taxes including Custom Duty, Works Contract Tax/Service Tax, Excise Duty, Sales Tax, Education Cess and other levies payable by the Contractor under the Contract, or for any other cause, shall be included in the Schedule of Rates. However, statutory variations in taxes and duties such as excise duty, customs duty, sales tax, work contract tax/service tax/ educational cess and other levies on finished goods during the contractual delivery period only will be on Owner's account.
If there is delay beyond contractual delivery date for reasons attributable to Contractor, any increase in taxes and duties will be borne by the Contractor and any decrease shall be passed on to Owner."
Clause 7.d.1 of the General Conditions of Contract stipulated that the contractor accepted full and exclusive liability towards the payment of all taxes "now or hereafter imposed" :
"Clause 7.d.1 states "The Contractor accepts full and exclusive liability for the payment of any and all taxes, duties, octroi, rates, cess, levies, and statutory payments payable under all or any of the statues etc. now or hereafter imposed, .........."
Clause 8.1 of the Special Conditions of Contract stipulates that the contract price shall be inclusive of all taxes including service tax until the completion of the contract :
::: Downloaded on - 09/06/2013 16:45:54 :::vbc 10 arbp40.08-14.1 "The Contract prices shall be deemed to be inclusive of all taxes including Sales Tax, Excise Duty, Custom Duty, Works Contract Tax/Service Tax, Education Cess and other levies etc. till the completion of the Contract and the Contractor shall not be eligible for any compensation on this account."
Clause 8.3 of the Special Conditions of Contract deals with statutory variations thus:
"Clause 8.3 - Statutory variations in taxes and duties such as Excise Duty, Custom Duty, Sales Tax,Works Contract Tax/Service Tax, Educational Cess and other levies on finished goods during the contractual delivery period only will be on owner's account. If there is delay beyond contractual delivery date for reasons attributable to contractor, any increase in taxes and duties will be borne by the Contractor and any decrease shall be passed on to the owner."
Clause 8.4 provides as follows :
"Clause 8.4 - It is for the bidder to assess and ascertain the rate of above taxes and duties applicable on quoted items. It is clearly understood that Owner will not have any additional liability towards payment of above taxes and duties, which are based on bidder's wrong assessment/interpretation of applicability of the said taxes and duties."::: Downloaded on - 09/06/2013 16:45:54 :::
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The Finance Act of 2005 :
10. Bids were submitted by the Petitioner on 7June 2005. Prior thereto, the Finance Act of 2005 was passed on 13 May 2005. By and as a result of the amendment brought about by the Finance Act of 2005, a provision was made for the levy of service tax on the construction of pipelines or conduits. All that remained was the issuance of a notification by the Union Government notifying the date on which the provisions of clauses (a) and (b) of Section 88 of the Finance Act of 2005 would be brought into force. That notification was issued by the Union Government on 7 June 2005. The notification was published in the official gazette dated 7 June 2005.
No submission has been urged before this Court on behalf of the First Respondent at the hearing that the gazette was ante dated. The contention of the First Respondent is that the gazette publication was made available for circulation to the public on 13 June 2005. In this regard, reliance has been placed on a communication dated 15 January 2007 issued by the publications department of the Government of India. The Arbitrator proceeded on the basis that the ::: Downloaded on - 09/06/2013 16:45:54 ::: vbc 12 arbp40.08-14.1 notification dated 7 June 2005 was not known to the public and hence when the bids were submitted by the First Respondent on 7 June 2005, the Petitioner was oblivious of the fact that a notification bringing into force the service tax provision had been issued. Counsel for the First Respondent has in his submission sought to place reliance on the judgment of a Division Bench of the Madras High Court in Asia Tobacco (supra) in support of the proposition that a notification issued by the Government can be enforced only from a date on which it is made known to the public by making a copy of the gazette available for sale to the public.
11. The proposition of law which is sought to be canvassed by the Respondent is, however, directly contrary to the law laid down by a Bench of three Learned Judges of the Supreme Court in Union of India vs. M/s.Ganesh Das Bhojraj.2 The decision of the Supreme Court was rendered on a reference to a larger Bench in view of a conflict in the ratio of certain decisions of the Supreme Court in Pankaj Jain Agencies vs. Union of India,3 Collector of Central 2 AIR 2000 SC 1102 3 (1994) 5 SCC 198 ::: Downloaded on - 09/06/2013 16:45:55 ::: vbc 13 arbp40.08-14.1 Excise vs. New Tobacco Co.,4 and I.T.C Ltd. Vs. Collector of Central Excise.5 In Collector of Central Excise vs. New Tobacco Co., it had been held by the Supreme Court that if publication is through a Gazette then the mere printing of a notification in the Gazette would not be enough. Unless the Gazette containing the notification is made known to the public, a notification cannot be said to have been duly published. The same view was taken in Garware Nylons vs. Collector of Customs and Central Excise.6 While reconsidering the earlier decisions, the Bench of three Learned Judges in Ganesh Das Bhojraj (supra) held that the decisions in New Tobacco and Garware did not lay down the correct position in law.
The Supreme Court held thus, while settling the position in law:
"..it is established practice that the publication in the official gazette, that is, Gazette of India is ordinary method of bringing a rule or subordinate legislation to the notice of the persons concerned. Individual service of a general notification on every member of the public is not required and the interested person can acquaint himself with the contents of the notification published in the gazette."
4 (1998) 8 SCC 250 5 (1996) 5 SCC 538 6 (1998) 8 SCC 282 ::: Downloaded on - 09/06/2013 16:45:55 ::: vbc 14 arbp40.08-14.1 The law that has been laid down by the Supreme Court is that a notification takes effect when it is published through a customarily recognized official channel, namely, in the official gazette. The notification comes into operation as soon as it is published in the official gazette and no further publication is required.
12. The position in law has been succinctly summarized in Justice G.P. Singh's Principles of Statutory Interpretation:7 "If a question arises as to when was a particular order or rule made or notification issued, the material date is the date of Gazette publication as required by the statute and not the date of publication in a newspaper or the media (ITC Bhadrachalam Paper4boards v. Mandal Revenue Officer, 1996(6) Scale 551, p.559 : (1996) 6 SCC 634). But when can an order or notification be said to be published in the Gazette? Is it the date of printing or the date of the Gazette or the date when the Gazette is made available to the public? This question came to be first considered in Collector of Central excise v. New Tobacco Co. (AIR 1998 SC 668 : (1998) 8 SCC 250) and it was held that unless the Gazette containing the notification is made available to the public, the notification cannot be said to have been duly published. In this case, a Central Excise notification dated 30-11-1982enhancing the rate of duty was printed in the Gazette bearing the same date. But the Gazette was made available for sale to the public on 8-12-1982. Section 38 of the Central Excises and Salt Act, 1944 provides that all 7 12th Edition 2010 page 1034-1035) ::: Downloaded on - 09/06/2013 16:45:55 ::: vbc 15 arbp40.08-14.1 rules and notifications issued under the Act shall be published in the Official Gazette. On the above facts, the Supreme Court held that the notification could be said to have been duly published only on 8-12-1982 and was ineffective before that date for proper publication requires publication "in such a manner that persons can, if they are so interested, acquaint themselves with its contents" (Ibid p.
672). This case was followed in Garware Nylons Ltd. v. the Collector of Customs and Central Excise (AIR 1999 SC 844 :
((1998) 8 SCC 282). The view taken in these cases as to when publication of delegated legislation required to be published in the Gazette is complete and the delegated legislation takes effect was likely to create practical difficulties for proving its publication and coming into force.
It was not enough according to these cases to produce the relevant Gazette, but it was also necessary to prove the date when the Gazette was offered for sale or circulation. And, if this view of the meaning of publication in the Gazette was correct, the same difficulty would have arisen in proving the commencement of an Act which is required to be published in the Gazette for its coming into force. These cases were later overruled by a three judge bench in Union of India v. M/s.Ganesh Das Bhojraj (AIR 2000 SC 1102 : (2000) 3 SCC
495) which related to publication of a notification amending an earlier notification under section 25(1) of the Customs Act, 1962 which requires publication of a notification in the Official Gazette. The relevant notification dated 4-2-1987 appeared in the Gazette of the same date. It was nobody's case that the Gazette was antedated. The question was whether the notification was operative on 5-2-1987 when the goods were imported. On these facts, it was held by the Supreme Court that the notification was operative from 4-2-1987 when it was printed in the Gazette of the same date and that it was not necessary to prove as to when the Gazette was offered for sale or circulation. This decision thus implies that the date ::: Downloaded on - 09/06/2013 16:45:55 ::: vbc 16 arbp40.08-14.1 of the Gazette, provided it is not antedated, would be the date of publication in the Gazette of all notifications appearing in it. LAHOTI J., however, made a reservation that he was not expressing his opinion on the question as to when such a notification would create criminal liability and that the decision needed to be confined in its application to civil liability and could not be made a rule of universal application (Ibid pp1108, 1109, See further text and note 18, p.523)."
13. The date on which the notification of the Union Government bringing into force the provisions of clauses (a) and (b) of Section 88 of the Finance Act of 2005 would take effect is the date on which the notification was published in the official gazette. That date is 7 June 2005. On the date on which the First Respondent submitted a bid to the Petitioner, the provisions of the Finance Act of 2005 under which service tax was liable to be paid on the construction of pipelines and conduits had been enforced. Clause 7.d.
1 of the General Conditions of Contract entailed that the contractor accepted full and exclusive liability for the payment of any and all taxes "now or hereafter imposed". Similarly, Clause 8.1 of the Special Conditions of Contract provided that contract prices shall be deemed ::: Downloaded on - 09/06/2013 16:45:55 ::: vbc 17 arbp40.08-14.1 to be inclusive of all taxes, including service tax till the completion of the contract. Clause 8.3 of the Special Conditions of Contract upon which reliance was sought to be placed by the Arbitrator has absolutely no application. Clause 8.3 speaks of statutory variations in taxes and duties. This was evidently not a case of a statutory variation. The Finance Act of 2005 under which service tax was sought to be imposed on the construction of pipeline and conduit had already been enacted by the Parliament and the notification was published in the official gazette on 7 June 2005 bringing into force those provisions with effect from 16 June 2005. Evidently, the First Respondent had itself to blame for not raising the issue of service tax in the pre-bid meeting or even thereafter until 23 November 2005.
Clause 8.3 which dealt with a statutory variation during the contractual delivery period was evidently not attracted. This was not a case of a statutory variations. The case of the First Respondent that this was a statutory variation and which was accepted by the Arbitrator rested on the foundation that the notification of the Union Government was made known to the public only on 13 June 2005.
::: Downloaded on - 09/06/2013 16:45:55 :::vbc 18 arbp40.08-14.1 Having regard to the well settled position of law laid down by the Supreme Court, the date on which the gazette publication actually became available for circulation to the public is of no relevance whatsoever. In that view of the matter, what is relevant is the date on which the notification bringing into force clauses (a) and (b) of Section 88 of the Finance Act of 2005 was published.
14. For the aforesaid reasons, I am of the view that the Arbitrator had committed a manifest error of law and acted with illegality and perversity in ignoring the position of law which is well settled by the Supreme Court and by misinterpreting the terms of the contract. The Arbitrator has completely ignored the provisions of clause 7.d.1 of the contract under which the contractor accepted full and exclusive liability towards payment of any and all taxes "now or hereafter imposed". The award is hence liable to be set aside under Section 34.
15. For these reasons, the Arbitration Petition would have to be ::: Downloaded on - 09/06/2013 16:45:55 ::: vbc 19 arbp40.08-14.1 allowed and is accordingly allowed. The arbitral award dated 17 September 2007 is set aside. There shall, in the circumstances, be no order as to costs.
Dr.D.Y.Chandrachud, J.
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