1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ARBITRATION PETITION NO.76 OF 2007 Maharashtra State Road Development Corporation .. Petitioner Versus IJM Corporation Berhad (IJM) – Satyam Construction Ltd. (SCL) (Joint Venture) .. Respondent. Mr.E.P.Bharucha, Senior Advocate i/b. Amarchand & Mangaldas for petitioners Mr.Ramesh Dhanuka with Vaishashi Chaudhary i/b. Mrs.A.R.Dhanuka for respondents. CORAM : S.C.DHARMADHIKARI, J. Reserved on : 29th August 2009 Pronounced on : 16th December 2009 ORAL JUDGEMENT:- 1] By this petition under section 34 of the Arbitration and Conciliation Act, 1996 (for short “the Act”), the petitioner, Maharashtra State Road Transport Development Corporation, a Government of Maharashtra Undertaking, challenges the Award dated 28th November 2006 made by the Sole Arbitrator. 2 2] The Award directs the petitioners to pay to the respondents a sum of Rs.1,21,83,508 along with interest at the rate of 16% p.a. from 28th October 2002 till the date of Award provided the said amount is paid within 60 days from the date of the Award, failing which the respondents are held to be entitled to interest till the date of payment. A copy of this Award is annexed as Annexure A to the petition. 3] The facts leading to this petition are that, the petitioner invited bids for the construction of Mumbai Pune Expressway section from Kon to Chowk (from 1.6 Kms. To 14.84 Kms. in length) i.e. total stretch of about 13.2 Kms. The work included construction of bridges, cross drainage work, via ducts and other structures. The respondents submitted its bid on 18th December 1997 of approximately Rs.136.82 Crores. The period of completion was specified as 27 months. It is the case of the petitioner that the bid amount included sales tax and other taxes on all materials that may be purchased for the purpose of the contract. The bid was accepted by letter dated 1st January 1998 and the contract came to be awarded. The agreement dated 23rd January 1998 was executed and 3 instructions were given to proceed with the work on the same date, the date of completion being 22nd April 2000. 4] It is then alleged that during the execution of the work, disputes and differences arose between parties on account of payment of works contract on interpretation of clause 8 of the Addendum to the contract. Disputes arose, according to parties, in view of the amendment to the Maharashtra Sales Tax Act on the Transfer of Property and Goods involved in the execution of Works Contract (Re-enacted) Act, 1989 (for short (Works Contract Act, 1989). 5] It is then stated that the respondents claimed reimbursement of their entire liabilities words Works Contract Tax under the amended provisions (without deduction of any amount therefrom) and alleged that their liability to pay the said tax prior to the amendment of 1st May 1998 was NIL. On the other hand it was petitioner’s case that the respondent was only entitled to increase, if any, in works contract tax and that the liability to pay the said tax under the pre-amended provisions is in-tact. It was the case of the petitioner that the respondent failed and neglected 4 and/or refused to substantiate their claim by furnishing particulars and data as stipulated under Clause 8 of the Addendum, including the data, and particulars as to their liability to pay Works Contract Tax under the unamended provisions. In the absence of such particulars, it could not be determined, if there, was any increase at all. The respondent had failed to discharge the burden and hence it was not entitled to reimbursement. 6] It is stated that the works were completed on 22nd April 2000. The Road was opened for traffic from 1st May 2000. All other ancillary work was completed by October 2000 and the Takeover Certificate was issued on 21st October 2000. The total value of the works paid by the petitioner to the respondent was approximately Rs.151 Crores, including the price variations and extra items. 7] However, since the claim for works contract tax reimbursement was rejected, the respondent by letter dated 24th March 2004 purported to refer the dispute to the Engineer under clause 67.1 of the Contract. The Engineer rejected the claim by a letter dated 6th April 2004. Respondent then purported to refer the decision of the Engineer to the Steering 5 Committee under clause 67.2. This they did by their letter dated 24th April 2004. Finally, the matter came to be referred to the Arbitrator. Learned Arbitrator issued notices and passed preliminary orders with regard to filing of pleadings. 8] Respondents filed a statement of claim on 16th February 2006 under four heads, which are as under:- 1. Claim No.1- Reimbursement of Sales Tax on Works Contract recovered wrongly – Rs.1,68,48,311/-; 2. Claim No.2 – Claim for losses actually suffered by virtue of illegal recovery of the amount f Rs.1,00,00,000/-; 3. Claim No.3- Interest @ 18% p.a. till 17th February 2006 being Rs. 2,32,14,663/- ; and 4. Claim No.4 – Costs of arbitration – Rs.27,00,000/-” 9] The petitioner filed the statement of defence on 22nd March 2006 to which a rejoinder was filed on 6th April 2006 by the respondent. No oral evidence was led. Further, additional documents and information were 6 filed by the parties before the learned Arbitrator. 10] The Arbitrator made the impugned Award by holding that all Taxes as on the date of contract were deemed to have been included in the price quoted by the claimants and the claimants – respondent was entitled to get reimbursement of any increase in respect of tax on completed items as may be levied after the signing of the contract. Therefore, the entitlement of 1% tax payable on Rs.1,49,09,61,587 as per the immediate liability option will have to be further reduced by what could have been the tax liability of the respondent under the pre-amended Act based on the purchase data given by it. Relying upon the figures/ data (Exh.C-39), the learned Arbitrator reduced the amount and finally held that the respondent is entitled to reimbursement of Rs.1,21,83,508/-. The Arbitrator awarded interest at 16% on this amount as aforenoted. It is this Award which is impugned before me. 11] Mr.Bharucha, learned Senior Counsel appearing on behalf of the petitioner submitted that the impugned award is vitiated as it is against the specific terms of the Contract. He submits that it was incumbent upon 7 the respondent to have worked out the liability to pay tax. Firstly, as per section 6(1)(A)(a) up to 1st May 1998 and, thereafter, as per Section 6(1) (A). Secondly, as per section 6(1)(A), after amendment of 1st May 1998 and thirdly on the basis of composition as per Section 6(1)(A). In such circumstances, respondent should have, thereafter, paid the lesser of the two amounts under the second and third methods. Lastly, the amount actually paid by the respondent was more than the amount as per the liability at the time of entering into contract i.e. the amount worked out by the first method. Then this excess amount alone would have been on account of the petitioner as per clause 8. Respondents did not determine their tax liability as per this difference. They refused to furnish the data as obliged under clause 8, particularly as to their liability under the preamended provisions. In the absence of such particulars, it could not be determined, if there was any increase of the quantum in the tax paid by the respondent. The respondent completely failed to discharge the burden placed by clause 8 of the Addendum to the Contract and hence their claim was untenable. 12] The learned Arbitrator did not consider any evidence of the items to 8 be deducted from the turnover under clauses (a) to (d) of the old section 6(1)(A). The respondent also did not prove that the goods had not undergone a change of form before use in the present contract, as goods which undergo any change of form or manufacture before use shall not be deducted under clause (a) of the old section 6(1)(A) of the un-amended provision. 13] The learned Arbitrator wrongly discharged the respondent of the above burden by relying upon joint statements which were submitted by the parties “without prejudice” to their rights, and “so as to avoid any mistake in recording the facts correctly”. It is pertinent to note that the without prejudice joint statements did not follow the three steps set out above. 14] Reliance of the learned Arbitrator on the said “without prejudice” statements is an error apparent on the face of the record. The steel used in the contract was cut and bent so as to form cages, into which concrete was poured to form structures of the required size and shape called a “Span”. The “Span” could be regarded either as a new article 9 manufactured from the purchased steel or in any event the steel as purchased had changed its form. In either case the same was not entitled to any deduction under Section 6(1)(A)(a) of the unamended provision or Section 6(1)(A) of the amended provision. Steel being declared goods would be exempted from the turnover and would be not liable to tax only if it was sold or used in the works contract in the same form in which it was purchased without any change in form taking place or without any manufacturing taking place. This provision remained unchanged after the 1st May 1998 amendment. It was thus not necessary for the learned Arbitrator to go into the question of manufacture. In any event, the learned Arbitrator having chosen to go into this question of manufacture, decided the same erroneously. 15] The Arbitrator confused two distinctive criteria that the Statute imposed. Not only manufacture of new goods from the declared goods but also any change of form of the declared goods before their use in the works contract will deprive the declared goods from exemption. The steel which underwent a change of form even if it did not result in manufacture of new marketable goods, could not be deducted from the 10 turnover under both the provisions amended so also unamended. 16] Mr.Bharucha has contended that the confusion between the test of marketability/ manufacture and the test of change of form amounts to complete non application of mind and vitiates the award. He submits that the steel which underwent change form, even if it did not result in manufacture of new marketable goods could not be deducted from the turnover under both amended and unamended provisions. 17] Mr.Bharucha then contended that the respondent had to prove the increase in the work contract tax as a result of amendment of 1st May 1998 and the quantum of the increase. The burden could not be said to have been discharged by producing proof of deduction of tax at source (TDS). This conclusion is wholly erroneous inasmuch as the petitioner was statutorily obliged to deduct TDS at 2% of the value of each bill, irrespective of respondent’s liability of work contract tax under section 6(B) of the Work Contract Act. In these circumstances, payment of TDS has no bearing whatsoever on the respondents burden of proof. The respondent will have to discharge that burden independently and 11 deduction of TDS by the petitioner can in no case be construed as the burden being discharged by the respondent. 18] Mr.Bharucha assailed the Award on the ground that the Arbitrator failed to take into consideration the fact that the claims of the respondent were barred by limitation. Elaborating this submission, Mr.Bharucha submitted that in the statement of claim and the letter dated 24th April 2004, the respondent claimed that an amount of Rs.1,40,39,813 was reimbursed towards Works Contract Tax in January 2000. The further request was made for advance of Rs.25,31,796 in October 2000. The complaint of the respondent was that instead of reimbursing this further amount, the petitioner deducted and/or reversed the earlier reimbursement of works contract on 15th October 2001. Therefore, the right to claim this amounts accrued in October 2000 and in any event from 15th October 2001. The statement of works contract tax with interest has been annexed by the respondent. Assuming without admitting the statements, it is clear that the alleged due date of the last installment is 1st May 2002. However, by letter dated 10th May 2005, the respondent referred the dispute to Arbitration. In such circumstances, the claim was ex-facie time barred. 12 The arbitrator failed to take into account the relevant statutory provisions and erroneously concluded that the claim is within limitation. 19] Mr.Bharucha then raised some ancillary submissions on the issue of jurisdiction of the Arbitrator and the Award of interest at 16%. He submitted that the claim for works contract tax made by the respondent is excepted matter. The arbitration agreement cannot apply to such a claim. Thus, the arbitrator had no jurisdiction to entertain claims of respondent in this regard. The arbitrator was bound to decide the claim only in accordance with the terms of contract. Further, once the claim was quantified by the respondent to Rs.2,37,49,735/- inclusive of everything, then, the Arbitrator was bound by this figure and could not have awarded interest. Further, in any event, the interest could not have been awarded at 6%. The learned Arbitrator failed to assign any reasons while granting 16% interest and hence, the award is vitiated. For all these reasons, the Award deserves to be quashed and set aside. 20] Mr.Bharucha has relied upon the following decisions in support of his abovementioned submissions. 13 (i) (2003) 5 SCC 705 (ONGC Vs.Saw Pipes) (ii)(2006) 4 SCC 445 (Hindustan Zinc Ltd. Vs. Friends Coal Carbonisation) (iii)2003 Sales Tax Cases Vol.132 539 (Commissioner of Sales Tax Vs.Matushree Textile Ltd.) (iv)(2002) 4 SCC 45 (General Manager, Northern Railway Vs. Sarvesh Chopra) (v)A.I.R. 1999 S.C. 3627 (Rajasthan State Mines & Minerals Vs. Eastern Engineering Enterprises) (vi)(1998) Vol.2 Lloyd’s Law Reports 632 (Metalfer Corporation Vs. Pan Ocean Shipping Co.) (vii)A.I.R. 1994 Bombay 48 ( State of Maharashtra & Ors Vs. Saifuddin Mujjaffarali Saifi) (viii)(2005) 6 SCC 678 (Rajendra Construction Co. Vs. Maharashtra Housing & Area Development Authority) (ix)(2006) 9 SCC 383 (Mukund Ltd. Vs. Hindustan Petroleum Corporation) (x)(2006) 13 S.C.C. 779 (Food Corporation of India Vs. A.M.Ahmed & Co. and Anr.) (xi)(2006) 11 SCC 181 (McDermott International Inc. Vs. Burn Standard Co. Ltd. & Ors.) (xii)(1999) 2 SCC 166 (Bharat Bhushan Bansal Vs. U.P. Small Industries Ltd., Kanpur) 21] Mr.Dhanuka learned Counsel appearing for respondent on the other hand supported the Award. He submits that this is a petition under section 34 of the Arbitration and Conciliation Act, 1996. The award of the Arbitrator is rendered as the disputes were referred to him for adjudication. The dispute itself pertain to the reimbursement of works contract tax paid by the claimant/ contractor/ respondent. That claim was squarely covered by the terms and conditions of the contract. Once the 14 claim squarely fell within the purview of the contract and all differences and disputes could have been referred to arbitration as per the Arbitration Agreement thereunder, then, it is erroneous to urge that the Arbitrator had no jurisdiction to entertain and try the claim. Mr.Dhanuka submits that the Arbitrator, therefore, has not assumed jurisdiction erroneously but proceeded to adjudicate the claim arising out of the contract. 22] Thus, the Arbitrator had complete jurisdiction to adjudicate upon the claims. The claims are not time barred as falsely contended. In this behalf, Mr.Dhanuka submitted that the running account bill No.35 was submitted on 13th October 2000. The respondent claimed reimbursement of sales tax on works contract and enclosed copy of the assessment order from sales tax authorities for the period of assessment viz., 1st April 1999 to 31st March 2000, determining the tax liability at Rs.1,09,76,109. On this very date the Consultants forwarded a copy of the assessment order received by them from the respondents so also copy of the R.A. Bill to the petitioners and requested them to look into the matter. 23] Thereafter, the consultants on 5th October 2001 addressed a letter to 15 the petitioners and informed that the reimbursement of works contract tax was recommended by them in R.A.Bill No.40 and the same has been considered in pre- final bill. Petitioners reimbursed to the respondent Rs. 1,40,39,816 in two installments as per clause 8 of the Corrigendum/ Addendum to the contract. Suddenly, there was recovery from the bills of respondents for October 2001 and the respondent proceeded with regard to this recovery on 8th November 2002. Thereafter, on 10th November 2003, respondent requested the petitioners to refer the matter to Steering Committee under clause 67.2 of the Conditions of Contract, which request was reiterated on 24th April 2004. The Consultants rejected the claim on 6th April 2004. That is how on 10th May 2005 the request to appoint an arbitrator has been made. Mr.Dhanuka, therefore, submitted that the recovery was commenced suddenly from the bills of respondents from October 2001. At that stage, there was a request for further reimbursement pending with the petitioner. The matter was taken up with the steering committee in January 2003 and, thereafter, the notice under clause 67.1 was sent to the petitioners on 26th February 2003. There was a meeting held on 21st October 2003 wherein it was pointed out that because of the objection from the CAG (Audit), the petitioners had 16 decided not to reimburse the amount of tax paid by the respondent. In these circumstances, how the claim could be said to be time barred has not been clarified by the petitioners. Therefore, Mr.Dhanuka submits that the claim was within limitation and not barred. In any event, this issue has been considered by the Arbitrator and his reasoning cannot be questioned now as if this Court is sitting in appeal over the decision and the Award of the Arbitrator. Therefore, there is no substance in the complaint that the claims were time barred. Mr.Dhanuka then contended that the respondents have pointed out in great details that the amount was withheld. It was initially reimbursed but recovery commenced and, therefore, the matter went to arbitration. Once it is found that the amounts have been withheld without any basis, then, the Arbitrator was empowered to award interest. Mr.Dhanuka has invited my attention to section 31(7)(a) of the Arbitration Act, 1996. The power under this provision has been rightly exercised. The rate of interest is within the exclusive power of the Arbitrator. The rate of interest is considered from October 2002 till the date of the award, rightly, as the petitioners have illegally deducted the amounts from the bill of respondents. With regard to quantum of interest and the manner in which the same has to be paid, 17 the petitioners cannot make any complaint as it is well within the powers of the Arbitrator. Further, the petitioners themselves had charged interest at 16% p.a. on various advances. Therefore, it is now not permissible for them to dispute the rate determined by the Arbitrator. Thus, on the issue of jurisdiction, the limitation and interest the award is not vitiated and does not deserve to be set aside. 24] As far as the main plank of the submissions of Mr.Bharucha and more particularly with regard to work contract tax liability, Mr.Dhanuka submits that the argument proceeds on a complete misconception. The disputes and differences arose between the parties because of the amendment to the Contracts Act. He submits that as per Section 6(1)(A) (a) and (b) of the said Act, the contractor could claim benefit of resale in respect of purchase of goods used in the execution of works contract and where the transfer of property had taken place in the form in which the goods were purchased in respect of the construction contract. Under the Notification issued by the State Government when cement is mixed with rubble/ sand and concrete is prepared for use in the construction benefit of resale could be claimed. However, from 1st May 1998 the system of 18 levying tax on the balance amount of turnover after deducting value of goods which are purchased from registered dealer and used in the execution of works contract without changing form, was done away with. It was provided that from 1st May 1998, such contractors were made liable to pay tax at 15% on value of goods utilised in the execution of works contract without having any bearing on the source of purchase. The provision was amended to clarify that notwithstanding anything contained in section 6 and sub-section 1 thereof, the dealer who had entered into any contract for execution of work during the period from 1st April 1992 to 30th April 1998 and commenced execution during such period and the execution continued on or after 1st May 1998, he may opt in lieu of tax payable by him under the said Act in lumpsum by way of composition of an amount equivalent to 1% of the contract. 25] Mr.Dhanuka, therefore, contended that mixing of various material used in construction activity were not considered as change of form in the earlier notification. It did not attract, therefore, payment of Works Contract Act. In view of the amendment with effect from 1st May 1998, earlier notification was withdrawn thereby imposing additional incident 19 of tax after award of the contract. Instant contract was treated as on going contract by assessing authorities and accordingly, they assessed the respondent at 1% under the amended provisions of Sales Tax. In view of the demand raised by Sales Tax Authorities for the year 1st April 1998 to 31st March 1999, respondents were required to pay a sum of Rs.48,89,563 and Rs.7,05,033 towards Taxes under the Contracts Act. This amount was paid under two different challans and the copies thereof were annexed by the respondents to their statement of claim. These facts have also been set out by the authorities in their assessment order dated 22nd December 1999. This document was produced and a copy of the assessment order is exhibited as Exh.C-36 by the learned Arbitrator. Thereafter, the assessment for the year 1st April 1999 to 31st March 2000, the petitioners deducted 2% TDS from their various bills totaling to Rs. 1,53,31,319 and deposited the said amount with the Sales Tax Department. These facts are also recorded in the assessment order, a copy of which is exhibited as Exh.C-37. The Sales Tax Department has given credit of the said amount deducted from the bills of the respondent and issued an order for refund of Rs.45,96,937/- which was inclusive of Rs.43,54,210 as excess amount and Rs.2,42,727 as interest. These 20 documents being produced and the sales tax authorities also allowing the refund of the amount deducted over and above 1%, then, the claim made for reimbursement was fully justified. The amount was by way of further increase in taxes under the Contract Act on completed items of work. It cannot be said, therefore, that the claim of the respondent was not tenable. 26] Mr.Dhanuka contended that all these pleas are raised and complete facts set out in the statement of claim and rejoinder. Necessary documents were also produced. In fact, by virtue of the last amended notification, benefits of various exemption available to respondents were taken away thereby resulting in increased tax liability. The matter was covered by clause 8 of the Addendum to the contract. The respondents had approached the consultants/ engineers and requested that the amount of Rs.55,95,596 paid by them to the Sales Tax Authorities due to the amendment be reimbursed/ released. The demand was raised by further letter dated 12th April 1999. On the recommendation of the Engineer, the employer/ petitioner rightly reimbursed the sum of Rs.1,40,39,813 after submission of sales tax assessment till March 2002. After reimbursing 21 the said amount, a false and frivolous objection appears to have been raised and in view thereof, petitioners illegally decided to recover the amount already reimbursed. This decision was recorded in the Minutes of the Meeting held on 21st October 2003.