Hyder Consulting Ltd. v. The Governor For The State Of Orissa

B.P Das, J.:— This miscellaneous appeal arises out of the judgment dated 09.01.2002 passed by the District Judge, Khurda at Bhubaneswar, allowing the application filed by the present respondent under Section 34 of the Arbitration and Conciliation Act, 1996 (in short ‘the Act’) in MJC No. 232/2000 and setting aside the award dated 26.04.2000 passed by an arbitral tribunal.

2. The brief facts necessary for disposal of the present appeal may be stated thus: The appellant-Hyder Consulting Ltd. having its registered office in London (UK) entered into a contract on 10.01.1995 with the respondent-The Governor of Orissa represented by the Chief Engineer (N.H), Orissa PWD, whereunder the appellant was engaged as technical consultant by the present respondent for rendering consultancy services to the road project, namely, Four Laning of Bhubaneswar-Cuttack Section including the Mahanadi Bridge. Since dispute arose between the parties, in terms of Clause 8 of the contract, which contained arbitration clause for settlement of disputes, the matter was referred to an arbitral tribunal consisting of three arbitrators.

3. The appellant filed its claim statement before the arbitral tribunal raising the following claims:

Claim No. 1 : Amount withheld by the respondent from the rupee portion or consideration payable under the contract.

Claim No. 2 : Claim for full reimbursement of income tax pertaining to expatriate employees of the claimant.

Claim No. 3 : Claim for reimbursement of service tax.

Claim No. 4 : Claim for payment of interest.

The arbitral tribunal on going through the materials on record passed the award on 26.04.2000 The tribunal by majority view awarded Claim Item Nos. 1, 2 and 4 in favour of the claimant-appellant and rejected Claim Item No. 3. The 3rd arbitrator passed a dissenting award in which he decided Claim Item Nos. 1, 2 and 4 against the claimant-appellant but agreed with the majority view expressed on Claim Item No. 3.

4. The respondent filed an application before the District Judge, Khurda at Bhubaneswar, under Section 34(2)(b)(ii) of the Act, registered as MJC No. 232/2000, challenging the aforesaid award of the arbitral tribunal on several grounds. The District Judge after hearing the parties ultimately came to the conclusion that the award passed by the tribunal was hit by clause (b)(i) and (ii) of sub-section (2) of Section 34 of the Act as the dispute was not capable of arbitration before the tax is finally assessed by the taxing authority under the Income-tax Act, 1961 and accordingly by judgment dated 09.01.2002 set aside the award passed by the tribunal. The aforesaid judgment is under challenge in this proceeding.

5. In regard to Claim Item No. 1, learned counsel for the claimant-appellant contended that Clause 1.10 of the contract required the respondent-State to reimburse the consultant/sub-consultant and the personnel, any taxes, duties, fees, levies and other impositions imposed under the applicable law of India, on the consultant and the personnel in respect of any payment whatsoever, made to the consultant, sub-consultant and such personnel of either of them (other than Indian nationals or permanent residents of India) in connection with the carrying out of the services. Learned counsel for the appellant further submitted that as per the contract, the respondent was under obligation to pay the remuneration to the claimant-appellant only and there was no obligation on the respondent to pay to the sub-consultant or the personnel of the claimant. As there was no privity of contract between the respondent and the sub-consultant and the respondent had made deductions from the amounts paid to the present appellant, which, according to the appellant, was contrary to Clause 1.10 of the contract because the appellant was entitled to be paid by the respondent without any deductions towards income tax or towards any other tax. Further, the said clause, according to the appellant, envisaged that the tax liability under the applicable law of India on the claimant and the expatriate personnel would be borne by the respondent. A stand was taken by the State before the tribunal that the respondent had no direct dealing with the personnel, expatriate or Indian, or with the sub-consultant per Diem allowance to personnel deployed through the sub-consultant and, therefore, the respondent had no liability to bear the income tax pertaining to the remuneration to personnel engaged through the sub-consultant, per Diem allowance to personnel deployed through the subconsultant, national and international and telecommunication and office consumables and printing. The further stand taken by the respondent was that the estimate contained in Appendix G, Item 4 had only made provision for foreign currency payment and as such, there was no liability on the respondent to bear income tax on the Indian rupee portion of the remuneration. After considering the rival contentions of the parties and perusing the documents submitted by them, the tribunal came to the conclusion in regard to Claim Item No. 1 that from the contract as well as the admitted position in the pleadings, it was clear that the claimant had the liability for performance of the contract and to receive the entire remuneration and, therefore, the entire payment has to be made by the respondent to the claimant only and none else including the sub-consultant or expatriate/Indian employees. It was further held that the respondent could not assume tax liability with regard to part portion of the remuneration and refuse to bear the tax liability for the remaining portion. Accordingly, Claim Item No. 1 was decided in favour of the claimant-appellant and a sum of Rs. 92,89,077 was awarded in favour of the claimant being the amount withheld by the respondent from the payments pertaining to the remuneration related to personnel engaged through the sub-consultant, per Diem allowance to the personnel deployed through the sub-consultant, national and international, telecommunication expenses and expenses on office consumables and printing from the payments made by the respondent to the claimant up to 31st May, 1999 and the respondent was directed to pay the same within three months from the date of the award. The tribunal further directed the respondent to pay all the amounts withheld by it after filing of the statement of claim from 1st June, 1999 and to stop deducting income tax from rupee portion of the consideration from invoices paid to the claimant in future and bear the withholding tax over and above the rupee portion of the consideration.

6. So far as Claim Item No. 2 is concerned, the said claim is based upon Clause 1.10 of the contract and pertained to reimbursement of the personal income tax of expatriate personnel working/worked in the project whose stay in India had exceeded 183 days rendering their income liable for income tax. In this regard, the submission of the claimant-appellant before the tribunal was that the respondent had not even disputed its liability to pay tax concerning personnel of foreign nationality and in the written statement the respondent indicated that “it is necessary to locate and differentiate the amount of income tax under the V.D.I.S 1997 towards I.T on expatriate personnel relating to the particular work under the respondent” Therefore, according to the claimant-appellant the respondent had clearly admitted its liability. The claimant having paid the tax for the assessment years 1996-1997 and 1997-1998 under V.D.I.S 1997 totalling to Rs. 51 lakhs to avoid the consequences of not filing the returns in time due to disputes about payment and as the payment under V.D.I.S was also a payment of income tax, the claimant was entitled to get the reimbursement of the aforesaid payment. The respondent-State took a stand that no evidence was produced by the claimant as regards the amount of tax paid in respect of expatriate employees under the V.D.I.S 1997 in connection with the present work for which the question of reimbursement by the respondent did not arise. It was further argued that the question of payment of tax was only made at one stage, i.e while payment of tax pertaining to payment made to the consultant. The respondent having already paid the income tax pertaining to payment made to the consultant, which included the payment with respect to the personnel, the State could not be forced to make double payment of tax. All these questions were taken into consideration by the tribunal and the tribunal ultimately awarded Claim Item No. 2 in favour of the claimant-appellant declaring therein that as per the terms of the contract, the respondent was liable to bear the income tax liability on the expatriate personnel and, therefore, reimburse the amount paid as income tax on the income of expatriate personnel. The tribunal further directed the respondent to continue to reimburse to the claimant the amount of the income tax on the expatriate personnel for the future financial years also.

7. So far as Claim Item No. 3 is concerned, which is based on the alleged delayed payment of service tax by the respondent to the claimant, the tribunal partly allowed the claim of the claimant-appellant in terms of Clause 6.6 of the contract agreement.

8. As regards Claim Item No. 4 under which the claimant raised a claim for payment of interest as per Clause 6.6 of the contract, the tribunal accepted the amount claimed by the claimant and allowed the said claim to the tune of Rs. 37,43,908.61 in favour of the claimant.

9. It is worthwhile to mention here that the arbitral tribunal consisted of three arbitrators. But the award, as indicated above, was made by a majority of two arbitrators and the dissenting award was passed separately by the third arbitrator, namely, Shri K.C Nanda.

10. The aforesaid award passed by the arbitral tribunal was challenged by the State before the District Judge, Khurda. Almost similar grounds as taken before the tribunal were raised before the District Judge. The District Judge, after hearing the parties and on interpreting the word ‘reimbursement’ came to the conclusion that as per Clause 1.10 of the contract, which provided for taxes and duties reimbursement, and as reimbursement means to pay back a person an equivalent for what has been spent or lost, held that the appellant was bound to produce evidence of payment of taxes, etc. before making the claim for reimbursement. The best evidence of payment, according to the District Judge, is the assessment order of the income tax authority and deposit made on the basis of the assessment order. Since under the tax laws the assessing authority has explicit jurisdiction to deal with the matter and to decide whether payment made by the claimant-consultant to sub-consultant was assessable to tax as income of the sub-consultant, the question of reimbursement to the claimant does not arise. According to him, the question of reimbursement would arise only after the tax is finally assessed. If the payment to the sub-consultant is deductible expenditure under the law, tax is not to be paid thereon and in that event the question of reimbursement will not arise. If the tax has been deducted at source, the taxing authority will grant refund of the same to the claimant in which event the question of reimbursement will not arise. If, however, the amounts have been deducted from the payments but not deposited with the taxing authority as tax deducted at source, a different situation will arise. Relying upon the observations of the dissenting arbitrator, the District Judge held that the majority view has not taken into consideration the above aspect. Accordingly, the District Judge held that the award is hit by clause (b)(i) and (ii) of sub-section (2) of Section 34 of the Act as the dispute is not capable of arbitration before tax is finally assessed by the taxing authority under the Income-tax Act, 1961 and disallowed the claim. The said order is now under challenge.

11. According to the learned counsel for the appellant, the respondent challenged the arbitral award before the District Judge by way of filing an application under Section 34(2)(b)(ii) of the Act on the ground that the award was against the Public Policy of India. But the District Judge while setting aside the award found that the award is hit by clause (b)(i) and (ii) of sub-section (2) of Section 34 of the Act. According to the learned counsel for the appellant, there was no application by the respondent before the District Judge under Section 34(2)(b)(i) for which the order of the District Judge is an outcome of non-application of judicial mind. More specifically, learned counsel for the appellant submitted that no ground was taken by the respondent in the original application as well as in the subsequent application for amendment that the subject matter of the dispute was not capable of settlement by arbitration under the law for the time being in force as per the provision of Section 34(2)(b)(i) of the Act. In order to substantiate his argument, learned counsel for the appellant referred to the application filed by the respondent in the lower court's record which is admittedly an application under Section 34(2)(b)(ii) of the Act. On perusal of the amendment application as well as the original application, I find, there is no pleading that the subject matter of dispute was not capable of settlement by arbitration under the law for the time being in force.

12. During the course of hearing of this matter on 19.08.2004, learned Advocate General submitted that the dispute could be resolved if the appellant filed an affidavit before this court that the appellant would have no claim over the amount of income tax, if refunded. Dr. Pal, learned counsel for the appellant, agreed to the suggestion of the learned Advocate General, and submitted that the appellant had no objection to file such an affidavit. Accordingly, an affidavit to that effect sworn to by one Jitendra Bhatia was filed making a statement therein, which is extracted hereunder:

“M/s. Hyder Consulting Limited (appellant) state that they shall not lay any claim for refund of income tax arising out of the income tax deposited with the income tax department by the respondent (PWD) and shall have no objection to any claim being made for refund by the respondent (PWD) from the income tax department.”

It was admitted by both the parties in course of argument that in view of the undertaking made in the affidavit filed by the appellant, which is extracted above, nothing survived to be decided on Claim Item No. 1.

13. So far as other claims are concerned, learned Advocate General submitted that the matter might be remanded to the District Judge, Khurda for a fresh adjudication as the same has not been dealt with in the impugned judgment. It is a fact that the tribunal which consisted of three arbitrators by majority view passed the award in favour of the claimant-appellant and against the respondent in respect of Claim Item Nos. 1, 2 and 4. But by the minority view expressed by the third arbitrator the aforesaid three claims were decided against the claimant-appellant and in favour of the respondent but all the three arbitrators were unanimous in their views deciding Claim Item No. 3 against the claimant-appellant, as indicated in the foregoing paragraphs.

14. When the dispute over Claim Item No. 1 no more survives for adjudication in view of the submission made by the learned Advocate General and the affidavit filed by the appellant, the questions that remain to be adjudicated are whether the dispute is not capable of settlement by arbitration and whether the arbitral award is in conflict with the Public Policy of India.

15. In my considered opinion, instead of remanding the matter for a fresh adjudication by the learned District Judge, which would not only multiply the litigation but would also protract the litigation, and would not at all be in the interest of either of the parties, the questions can be examined and decided finally by this court in the present proceeding. I, therefore, proceed to examine the aforesaid questions.

16. The District Judge has come to the conclusion that the subject matter of dispute is not capable of settlement by arbitration at present since under the tax laws the assessing authority has explicit jurisdiction to deal with the matter and to decide whether payment made by the claimant-consultant to the sub-consultant is assessable to tax as income of the sub-consultant and according to him, all these aspects have not been taken care of by the tribunal in its majority view. Merely saying that the subject matter of dispute is not arbitral is not enough. The State has utterly failed to show anything from the record that the subject matter of dispute could not be arbitrated. So far as the observation of the District Judge that the award is against the Public Policy of India, I am constrained to say that the District Judge has not clearly indicated any reason in support of his aforesaid conclusion. The explanation appearing in Section 34(2)(b)(ii) of the Act lays down that for the avoidance of any doubt, it is made clear, an award is in conflict with the Public Policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81 of the Act. There was no pleading to that effect by the respondent either before the arbitral tribunal or before the District Judge nor is there anything brought to the notice of this court to come to the aforesaid conclusion. But in course of argument, learned Advocate General relied upon the decision in Oil and Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705 : 2003 (2) Arb. LR 5 (SC). On going through the said decision, this court is of the opinion that the award could be set aside if it is against the Public Policy of India, that is to say, if it is contrary to—(a) fundamental policy of Indian Law, or (b) the interest of India, or (c) justice or morality, or (d) if it is patently illegal. Though these questions were not raised before the arbitral tribunal but after hearing the parties in detail, I do not find anything to support the conclusion reached by the District Judge that the award is against the Public Policy of India.

17. Law is fairly well settled in this regard in Hindustan Construction Co. Ltd. v. Governor of Orissa, (1995) 3 SCC 8 : 1995 (2) Arb. LR 1 (SC), wherein the Apex Court held as follows (para 10 of Arb. LR):

“….It is well-known that the court while considering the question whether the award should be set aside, does not examine the question as an appellate court. While exercising the said power, the court cannot reappreciate all the materials on the record for the purpose of recording a finding whether in the facts and circumstances of a particular case the award in question could have been made. Such award can be set aside on any of the grounds specified in Section 30 of the Act….”

Relying upon the aforesaid judicial pronouncement, the Apex Court in B.V Radha Krishna v. Sponge Iron India Ltd., (1997) 4 SCC 693 : AIR 1997 SC 1324 : 1997 (1) Arb. LR 412 (SC), held as follows (para 15 of Arb. LR):

“Bearing in mind the principles laid down by this court in the above said cases, if we look into disposal of the matter by the High Court, it would be evident that the High Court has substituted its own view in place of the arbitrator's view as if it was dealing with an appeal. That is exactly what is forbidden by the decision of this court. Therefore, we have no hesitation to set aside the judgment of the High Court on this issue.”

18. From the aforesaid judicial pronouncements, it is clear that in a proceeding to set aside an award, the appellate court cannot sit in appeal over the conclusion of the arbitrator by re-examining and reappraising the evidence considered by the arbitrator and hold that the conclusion reached by the arbitrator is wrong. The power and jurisdiction of the court to set aside an award is specifically laid down in Section 34 of the Act. If none of the conditions laid down in the said section is satisfied, the award cannot be set aside on reappraisal of the evidence. The reason for which the District Judge has set aside the award is clearly not sustainable in law and accordingly the impugned judgment dated 09.01.2002 passed by the District Judge, Khurda in MJC No. 232/2000 is liable to set aside. For the foregoing reasons, the impugned judgment dated 09.01.2002 assed by the District Judge, Khurda in MJC No. 232/2000 is set aside and miscellaneous appeal is accordingly allowed. No costs.