STEEL AUTHORITY OF INDIA LIMITED (SAIL) v. M/S PRIMETALS TECHNOLOGIES INDIA PVT. LIMITED

297/2024 ['Section 34 petition'], whereby the arbitral award dated 24.05.2024 rejecting the Respondent's claims was set aside on the ground of patent illegality.

FACTS IN BRIEF

2. In 2006, the Appellant issued an NIT for 'Installation of the Power Supply Facility (Package-II) for 700 TDP ASU-4 in Oxygen Plant No. II'. The Respondent emerged as the successful bidder, pursuant to which a formal contract was executed on 12.10.2007 ['the contract']. Under the contract, the facilities were to be installed and commissioned within 15 months.

2.1 A material term of the contract was Article 2.1, under which the Respondent had quoted a Contract Price of INR 18,45,54,310/- which included CENVAT¹of INR 2,16,42,894/-. The said Article stipulated that Respondent shall pass on minimum amount of INR 2,16,42,894/- to the Appellant as CENVAT credit. According to the Appellant, the promise of minimum CENVAT credit was an important factor in tender evaluation and selection of the successful bidder. The Appellant further relies upon Clause

14.6 of the General Conditions of Contract ['GCC'], which prescribed the procedure for adjustment of the Contract Price, at the instance of the Respondent, in case of variation in taxes and duties ['Excise Duty and Counter Veiling Duty'].

2.2 It is stated that although the contractual period was 15 months, the Commissioning Certificate was issued only on 20.06.2012, with outstanding items remaining to be completed, and liquidated damages were consequently imposed. The Performance Guarantee Certificate ['PGC'] was issued on

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16.07.2013 and the Final Acceptance Certificate ['FAC'] was issued on 12.12.2013. The Appellant therefore states that the contract stood concluded in 2013, after a delay of more than four (4) years.

2.3 Thereafter, the Appellant informed the Respondent, by communication dated 17.05.2014, of its decision to recover the shortfall, if any, in the minimum CENVAT amount and imposition of liquidated damages. The Appellant asserts that the Respondent acknowledged this communication without objection. Thus, when the Respondent subsequently raised its outstanding final invoices in 2018 and 2019, the Appellant adjusted INR 1,07,61,378/- towards the shortfall of the Respondent in passing on the minimum CENVAT credit stipulated in Article 2.1 of the contract and paid the balance amount.

2.4 The Respondent issued a conciliation notice dated 26.05.2021. After conciliation failed, the Respondent sought arbitration on 28.12.2021, claiming INR 1,07,61,378/- towards recovery of the amount adjusted by the Appellant for shortfall of the minimum CENVAT credit, along with interest.

2.5 It is admitted that during the execution of the contract, duty rates were reduced leading to lesser payment of duty by the Respondent to the statutory authorities. Also, consequently in the invoices raised by the Respondent on the Appellant, the duty claimed was lower. The Respondent raised a claim of reimbursement towards duty for INR 1,08,81,516/-, recovered the same from the Appellant and passed on the CENVAT credit for the aforesaid amount of INR 1,08,81,516/-. However, in this process there was a shortfall of the minimum CENVAT credit stipulated in Article 2.1 to the extent of INR 1,07,61,378/-, which is the subject matter of the dispute.

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2.6 The Respondent contended that it is not liable to pay INR 1,07,61,378/- to the Appellant as an assured benefit, and any amount towards shortfall CENVAT credit could have been deducted only if the Respondent had failed to provide the necessary documentation, which is not the case in hand. The Respondent stated that it is not liable to pay INR 1,07,61,378/- as an assured benefit. The Appellant has however submitted that CENVAT credit shortfall of INR 1,07,61,378/- is not dependent on the rate of duty collected by statutory authority but is an independent assured sum payable by the Respondent.

2.7 The learned Arbitrator by its award dated 24.05.2024, rejected the Respondent's claim for recovery after considering, inter alia, Article 2.1 and Clause 14.6 of the GCC. It held that the minimum CENVAT credit stipulated in Article 2.1 was an assured benefit to the Respondent and in case of any shortfall in the said minimum CENVAT credit passed on to the Appellant, even if on account of lowering of duty by the statutory authority, the Respondent was liable to make good the said shortfall by suffering a deduction in a Contract Price.

2.8 Aggrieved by the arbitral award, the Respondent filed a petition under Section 34 of the Act, being OMP(COMM) No.297/2024. By the impugned judgment, the learned Single Judge allowed the petition and set aside the arbitral award, on the finding that there was no clause in the contract which stipulated deduction, from the invoices payable to the Respondent as per the Contract Price, in case of a shortfall in the minimum CENVAT credit passed on to the Appellant, due to actual lowering of duty by the statutory authorities. Learned Single Judge rejected the submission that there was assured benefit promised to the Appellant under Article 2.1 independent of

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the CENVAT credit.

2.9 The present appeal under Section 37 challenges the aforesaid judgment seeking restoration of the arbitral award principally on the ground that the learned Single Judge exceeded the limited scope of interference under Section 34 of the Act.

SUBMISSIONS BY THE APPELLANT

3. The Appellant submitted that the learned Single Judge erred in setting aside the arbitral award dated 24.05.2024, as the learned Arbitrator had adopted a plausible interpretation of the contractual provisions, particularly Article 2.1 and Clause 14.6 of the GCC, and substituted his own interpretation for that of the learned Arbitrator.

3.1. The Appellant submitted that under Article 2.1 of the contract, the Respondent had expressly guaranteed a minimum CENVAT credit of INR 2,16,42,894/- as part of the Contract Price of INR 18,45,54,310/-; the guaranteed minimum amount was admittedly quoted by the Respondent and formed part of the contractual arrangement.

3.2. The Appellant submitted that the contract specifically contemplated variations in taxes and duties and prescribed a detailed mechanism under Clause 14.6 of the GCC for seeking corresponding adjustment in the Contract Price, subject to production of supporting documentary evidence. The Respondent, however, never invoked the said contractual mechanism or produced the requisite evidence to establish that any variation in taxes and duties had caused the alleged shortfall in CENVAT Credit.

3.3. The Appellant submitted that the FAC was issued on 12.07.2014,

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whereafter the contract stood concluded. Despite this, the Respondent did not raise its pending PG/FAC invoices for several years and submitted the relevant bills only in 2018-2019. At the time of making the final payment, the Appellant adjusted the liquidated damages and INR 1,07,61,378/- towards the shortfall in the minimum CENVAT credit and released the balance amount.

3.4. The Appellant submitted that the learned Arbitrator, after considering Clause 14.6, which contemplated adjustment of the Contract Price for variation in taxes upon production of supporting evidence, as well as Article

2.1 concerning the minimum CENVAT credit, correctly dismissed the claims of the Respondent.

3.5. The Appellant submitted that the Arbitrator's view was a possible and plausible interpretation of the contractual provisions and was neither perverse nor such as would shock the conscience of the Court, therefore, there was no permissible ground under the narrow scope of Section 34 for the learned Single Judge to interfere with the arbitral award.

3.6. The Appellant submitted that the learned Single Judge erred in holding that Article 2.1 merely provided for passing on the minimum CENVAT credit without specifying the consequence of a shortfall. According to the Appellant, such interpretation ignores the expression 'minimum' in Article 2.1 and renders Clause 14.6 redundant, whereas the Arbitrator had harmoniously construed the contractual provisions.

3.7. The Appellant submitted that the learned Single Judge incorrectly concluded that the Arbitrator had travelled beyond the contractual provisions, however, it was the learned Single Judge who effectively substituted his own interpretation of Article 2.1 and Clause 14.6 for the plausible interpretation

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adopted by the Arbitrator, which was impermissible within the limited jurisdiction under Section 34 of the Act.

3.8. The Appellant submitted that therefore the impugned order dated 23.02.2026 suffers from a jurisdictional error, as it interferes with a reasoned arbitral award on the basis of a different interpretation of the contract. The Appellant consequently seeks setting aside of the impugned order and restoration of the arbitral award dated 24.05.2024.

SUBMISSIONS BY THE RESPONDENT

4. The Respondent submitted that the contracts involved in FAO (OS) (COMM) 130/2026 and FAO (OS) (COMM) 131/2026 contain mirror-image provisions, particularly Article 2, the Summary Price Schedule, Clause 11.2 of the GCC and Clause 14.5.2 relating to CENVAT Credit. However, the two arbitral tribunals rendered contradictory findings on the same issue, leading the learned Single Judge to uphold one award while setting aside the award challenged in the present petition, i.e., FAO (OS) (COMM) 131/2026.

4.1. The Respondent submitted that the two arbitral tribunals adopted contrary interpretations despite considering substantially identical contractual clauses. In FAO (OS) (COMM) 130/2026, the Arbitrator held that the contract did not entitle the Appellant to deduct the shortfall and that the only contractual consequence was non-reimbursement of the relevant amount. In FAO (OS) (COMM) 131/2026, however, the Arbitrator proceeded on the basis that CENVAT credit was a benefit to be passed on to the Appellant and that any shortfall could therefore be deducted from the amount payable to the Respondent.

4.2. The Respondent submitted that the Appellant's contention that any

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shortfall in CENVAT credit automatically entitled it to deduct the shortfall from the Respondent's dues is contrary to the contractual terms. According to the Respondent, the contractual consequence of a shortfall was only that the corresponding amount would not be reimbursed, thereby reducing the total Contract Price to that extent. There was no contractual provision authorising the Appellant to make a separate deduction from the Respondent's invoices on account of such shortfall.

4.3. The Respondent submitted that, the learned Single Judge correctly found that Clause 14.5.2 dealt with the consequence of failure to furnish documents for claiming CENVAT, namely non-reimbursement, but contained no provision permitting deduction of the shortfall in minimum CENVAT credit from the Respondent's invoices. The learned Single Judge accordingly held that no such term could be read into the contract.

4.4. The Respondent submitted that the learned Single Judge correctly observed that the contract value represented the amount payable for the work executed and was inclusive of taxes and duties, whereas the minimum CENVAT credit was not a sum payable for the work itself but related to reimbursement of duty actually paid. It is submitted that the amount of such duty could vary owing to factors such as changes in tax rates and prices of items.

4.5. The Respondent submitted that there was no contractual basis for deducting the shortfall in minimum CENVAT credit from the invoices. The Arbitrator effectively proceeded on the basis of a term/clause which did not exist in the contract and thereby travelled beyond the contractual provisions, and such an approach amounted to adding a term to the contract, which was impermissible.

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4.6. The Respondent submitted that the learned Single Judge correctly held that an Arbitrator is required to decide the dispute within the four corners of the contract and cannot create or introduce a contractual provision providing for deduction of minimum CENVAT credit shortfall when no such provision exists.

4.7. The Respondent submitted that, since the Arbitrator travelled beyond the contractual terms and founded the award on a non-existent provision permitting deduction of the minimum CENVAT credit shortfall, the award suffered from patent illegality and was rightly set aside by the learned Single Judge.

FINDINGS AND ANALYSIS

5. We have heard the counsels for the parties and perused the record.

6. Before proceeding further, it would be relevant to reproduce Article 2.1 of the Contract and Clauses 11.1, 11.2, 11.2.1, 14.5.2, 14.6.1, 14.6.2 and 14.6.3 of the GCC relied upon by the parties:

The Contract

"2.1 Contract Price (Reference GCC Clause 11 & Appendix-1) The Employer hereby agrees to pay to the Contractor the Contract Price in consideration of the performance by the Contractor of its obligations hereunder. The Contract Price shall be Rs. 18,45,54,310/- (Rupees eighteen crore forty-five lakh fifty-four thousand and three hundred ten only), or such other sums as may be determined in accordance with the terms and conditions of the Contract. A minimum amount of Rs.2,16,42,894/- (Rupees two crore sixteen lakh forty-two thousand and eight hundred ninety-four only) is to be passed on to BSP as CENVAT credit.

GENERAL CONDITIONS OF CONTRACT

11. Contract Price

11.1 The Contract Price shall be as specified in Article 2 (Contract Price

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and Terms of Payment) of the Contract Agreement. The break-up of the Contract Price is given in the Appendix-1 to the Contract Agreement.

11.2. Price Basis

11.2.1 The Contract Price shall be for the entire scope of the Facilities including spares, oils, grease, lubricants, flushing liquor, chemicals for pickling etc. required till commissioning of the Facilities, imported surplus material and scrap in any form generated in side the plant premises. The contract price shall be inclusive of all taxes and duties and comprise inter-alia of Basic price, excise duty, sales tax, VAT including sales tax/VAT on works contract / Works Contract Tax), octroi, Turn Over Tax (TOT), Entry Tax, Service Tax, Education Cess and any other duties, taxes and levies, as may be applicable and prevailing on the base date of the contract and insurance. The payment of duties, taxes, levies, etc. will be reimbursed (on actual) against documentary evidence to be produced by the contractor, subject to a ceiling indicated in the price schedule of the contract. In no case the reimbursement towards duties and taxes etc., shall exceed the amount indicated in Appendix-1 towards duties, taxes, levies, etc. except as indicated in Sub-Clause 14.6.1, hereof.

14.5 CENVAT Credit

14.5.2 The Contractor shall submit the necessary documents required by the Employer to avail the CENVAT Credit. In case the Contractor fails to submit the required document for claiming the CENVAT Credit by the Employer in respect of certain plant & equipment, the amount of Excise Duty on such indigenous plant & equipment and Counter Veiling Duty on such imported plant & equipment, shall not be paid by the Employer to the Contractor.

14.6 Variations in Taxes & Duties

14.6.1 For the purpose of the Contract, it is agreed that the 'Contract Price' specified in Article 2 ("Contract Price" & "Terms of Payment") of the Contract Agreement is based on the taxes, duties, levies and charges prevailing on Base date (hereinafter called "Tax" in this Sub-Clause 14.6 hereof). If any rate of tax is increased or decreased, a new tax is introduced, an existing tax is abolished, or any change in interpretation or application of any tax occurs in the course of the performance of Contract, which was or will be assessed on the Contractor, Sub- Contractors or their employees in connection with performance of the Contract, an adjustment of the Contract Price shall be made as per Sub- Clauses 14.6.2 & 14.6.3, hereof, by addition to the Contract Price or deduction therefrom, as the case may be.

14.6.2 The adjustment in the Contract Price towards variation in the taxes shall be made by the Employer on production of the documentary

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evidences by the Contractor. 14.6.3 The Contract Price shall be adjusted towards variations in taxes in respect of only finished equipment supplied by the Contractor to the Employer. No adjustment in the Contract price shall be made for variations in the taxes on raw materials, parts, component/ intermediate components, assemblies/sub-assemblies, etc."

[Emphasis Supplied]

I. Findings in the impugned Arbitral Award

7. The impugned arbitral award was in favour of the Appellant and against the Respondent. The said award was impugned by the Respondent in the Section 34 petition and has been set aside by the learned Single Judge by the impugned judgment.

7.1. The challenge in Section 34 petition was to the rejection of Respondent's Claim for recovery of INR 1,07,61,378/- from the Appellant. The said Claim was covered by the decision rendered under Issue Nos. 3 and 4 in the arbitral award. Issue No. 3 was whether the Appellant's deduction of the INR 1,07,61,378/- on account of shortfall of minimum CENVAT credit was bad in law, and Issue No. 4 was that whether the Respondent was entitled to the reimbursement of such deduction.

7.2. With respect to the issue of minimum CENVAT credit, the learned Arbitrator noted that the contract contemplated three possible situations: (i) actual CENVAT credit equalling the guaranteed amount; (ii) actual credit being less than the guaranteed amount; and (iii) actual credit exceeding the guaranteed amount. It held that where the actual credit [passed on] was less than the guaranteed credit, the Claimant was required to make good the shortfall; where it exceeded the guaranteed amount, the excess benefit was to be shared equally between the parties.

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7.3. The learned Arbitrator rejected the Respondent's contention that since the shortfall in CENVAT credit had resulted from variation in taxes, the reduction was liable to be adjusted from the [Gross] Contract Price under Clause 14.6 of the GCC.

7.4. The learned Arbitrator held that the contractual provisions expressly contemplated variations in taxes during the execution of the contract and, also, separately provided for obligation to pass on minimum CENVAT credit. He held that since the rates of duty during performance of the contract were lowered by the Government than those prevailing on the base date, the resulting shortfall in passing on minimum CENVAT credit to the Appellant, had to be borne by the Respondent herein in terms of the contractual arrangement. He further held that the quantum of minimum CENVAT credit was a benefit 'assured' to the Appellant under Article 2.1 of the contract and was a fundamental component of the contractual arrangement, as the Respondent had expressly guaranteed passing on the specified minimum CENVAT credit while submitting its bid. He held therefore Respondent herein could not subsequently avoid the contractual liability by characterising the recovery of the shortfall, by the Appellant, as unjust enrichment.

7.5. The learned Arbitrator acknowledged that the arbitral tribunal is a creature of contract and therefore, is bound by the terms of the contract agreement. He held that neither party could selectively rely upon favourable contractual provisions while disregarding others, and that the arbitral tribunal could not rewrite or travel beyond the contractual bargain. He therefore concluded that the Appellant had rightly deducted the shortfall from the invoices of the Respondent. Accordingly, while deciding Issue Nos. 3 and 4, the learned Arbitrator upheld the Appellant's deduction of INR 1,07,61,378/-

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from the Respondent's invoices on account of the shortfall in passing on the minimum CENVAT credit recorded in Article 2.1 of the contract. He rejected the Respondent's claim for a declaration that the deduction was bad in law and for reimbursement of the said amount.

II. Findings in the Impugned Judgment

8. Learned Single Judge by the impugned judgment has set aside the arbitral award on the finding of patent illegality by holding that the determination of the learned Arbitrator as regards the entitlement of the Appellant to make the deduction of INR 1,07,61,378/- from the invoices of the Respondent, is beyond the terms of the contract.

8.1. Learned Single Judge held that Article 2.1 of the contract required the Respondent to ensure passing on of the stipulated minimum CENVAT credit to the Appellant, however, the contract contained no provision permitting deduction of the amount to any 'shortfall' in minimum CENVAT credit from the Respondent's invoices.

8.2. Learned Single Judge at paragraph 18 of the impugned judgment has observed that the learned Arbitrator has wrongly upheld the deduction of INR 1,07,61,378/- by the Appellant from the Respondent's invoices even though there was no clause in the contract which permitted such a recovery and/or deduction. He held that, therefore the award was beyond the terms and conditions of the contract and is thus vitiated on the ground of patent illegality. He also held that Clause 14.6.2 has to be read with Clause 14.6.3 of the GCC and the said clauses are inapplicable in the facts of this case.

8.3. Learned Single Judge held that the impugned arbitral award suffered from patent illegality, as the learned Arbitrator had failed to act within the

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contractual framework, and by allowing deductions had in effect added terms to the contract. The relevant paras of the judgment read as under:

"13. The contention of the learned counsel for the respondents that Article 2.1 of the contract shall override the terms of the GCC is of no avail. Article 2.1 provides for MGCC to be passed on but it does not deal with the consequences in case of a shortfall.

14. The contract value is an amount payable to the petitioner for the work executed and is inclusive of taxes and duties. The MGCC is not a sum due for the work done but is a reimbursement of the duty paid which may vary consequent to several factors including variation in the rate of taxes and change in the price of items.

15. The matter needs to be considered from another angle. The gross contract value was Rs.18,45,54,310/-. After giving credit of Rs.2,16,42,894/- towards MGCC, the work would cost the respondents Rs.16,29,11,416/- (Net Contract Value). The position remained unchanged despite the shortfall in MGCC. The reimbursement of duty paid was Rs.1,08,81,516/- for which the respondents shall get CENVAT credit. By not reimbursing the shortfall in MGCC the respondents retained the balance amount of Rs.1,07,61,378/- and the net cost of the contract remained Rs.16,29,11,4161/-. In other words, for getting an MGCC of Rs.2,16,47,894/- the respondents had to pay Rs.18,45,54,310/- but upon reimbursement of excise duty of Rs.1,08,81,516/-, the respondents paid a sum of Rs.17,37,92,932/- i.e., Rs.1,07,61,378/- less than the gross contract value. Consequently, the net contract price payable for the work done remained unaffected by the shortfall in MGCC as it was not reimbursed and the amount remained with the respondents.

16. Whether variation in the rate of tax resulted in shortfall in MGCC and if contract price could be adjusted as per clause 14.6.1 for variation in rate of taxes on raw materials, components etc., need not be dilated upon. The arbitrator rightly held that the shortfall in MGCC shall not be reimbursed but there cannot be deduction for such shortfall thereby rendering the reasons for shortfall to be inconsequential. For this very reason, non-compliance of clause 14.6.2 shall not be fatal to the claim of the petitioner.

17. The arbitrator rightly took into account that the MGCC formed the basis of the tender valuation but failed to consider that despite the shortfall in MGCC, the net value of the contract remained unchanged.

18. The arbitrator travelled beyond the terms of the contract to reject the claim. To justify the conclusion arrived at, reference was made to a non- existing clause in the contract that 50% benefit of CENVAT would go to

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the petitioner. At the cost of repetition there is no clause for deducting the shortfall in MGCC from the invoices. It is a trite law that an arbitrator has to decide the dispute within the four corners of the terms and conditions of the contract. The venture of the arbitrator beyond the terms and conditions vitiates the award by patent illegality. …….

19. The law is well settled that the parties are bound by the terms of the contract and the arbitrator cannot go into the fairness of the terms and conditions. In the case in hand in absence of a clause providing for deduction on account of shortfall in MGCC, the arbitrator proceeded on the basis that the petitioner had to make good the shortfall in MGCC but failed to point out the clause for providing such deduction.

20. The arbitrator erred in holding that the tax component formed part of the contract price and not the MGCC, whereas MGCC was the credit of excise duty paid which was part of the contract price.

21. The arbitrator relying upon clauses 11.2.1 and 14.5.2 of GCC and Article 2.1 of the contract rightly concluded that the petitioner had to ensure MGCC. However, while referring to clause 14.6.2 the arbitrator overlooked that no clause in the contract provides for deduction of shortfall in MGCC. On the contrary, under clause 14.5.2 in case of failure of the petitioner to submit documents enabling the respondents to avail CENVAT credit, the duty paid to that extent was not to be reimbursed. Moreover, clause 14.6.2 cannot be pressed into service in isolation and is to be read along with clauses 14.6.1 and 14.6.3. Clause 14.6.3 states that the adjustment in contract price would be made only for variation in taxes in respect of finished equipment supplied by the petitioner and not for variation in taxes on raw material, parts, component, intermediate components, assemblies, subassemblies etc., and is not applicable in facts of the present case.

22. The arbitrator while holding that the net outgoing would be the contract price reduced by MGCC, failed to consider that the net outflow of the respondents was not affected by any shortfall in MGCC. There was no basis to hold that the shortfall in MGCC could be deducted from the invoices and this tantamounts to adding terms to the contract between the parties which is not permissible in law."

[Emphasis Supplied]

III. Scope of Interference on the grounds of patent illegality

9. Prior to analysing the rival contentions of the parties, it would be apposite to refer to the scope of interference by this Court under Section 37 of

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the Act, particularly where the arbitral award has been set aside by the learned Single Judge under Section 34 on the ground of patent illegality.

10. In Ramesh Kumar Jain v. Bharat Aluminium Company Limited², the Supreme Court has held that Section 37 of the Act provides for a limited appellate remedy against an order either setting aside or refusing to set aside an arbitral award passed by the Court under Section 34 of the Act. It held that interference in an arbitral award by the Appellate Court in exercise of jurisdiction under Section 37 of the Act cannot travel beyond the restrictions laid down in Section 34 of the Act.

11. Thus, while the scope of review of an arbitral award under Section 37 of the Act remains narrow and co-extensive with Section 34 of the Act, it certainly extends to examine whether the Court which passed the order under Section 34 of the Act interfering in the award has correctly applied the test of patent illegality to the award or not; and where the impugned award, on a proper application of that test, indeed suffers from an illegality going to its root, then no interference under Section 37 of the Act would be made out in the order passed by the Court under Section 34 of the Act.

12. In the facts of this case, the learned Single Judge has set aside the arbitral award under Section 34 on the ground of patent illegality. In such a case, the Appellate Court under Section 37 is required to examine whether the finding of patent illegality in the impugned judgment of the learned Single Judge is sustainable within the statutory parameters of Section 34(2A) of the Act.

IV. The impugned arbitral award suffers from patent illegality

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13. In Ramesh Kumar Jain v. BALCO (supra) the Supreme Court, in paragraphs 33 and 34, clarified that the patent illegality must be one which goes to the root of the award; illustrations include ignoring a binding precedent or a clear prohibition contained in the contract, or a finding based on no evidence. The Supreme Court further explained that patent illegality may arise where the award travels beyond the contract or the submission to arbitration, contravenes substantive law or the Arbitration Act, is contrary to the terms of the contract, or is so irrational or unreasoned as to disclose an error apparent on the face of the award.

"33. In 2015, by way of the Arbitration and Conciliation (Amendment) Act a new sub-section (2A) to section 34 of A&C Act was inserted which in addition to statutorily recognizing the 'patent illegality' ground for setting aside a domestic arbitral award made it an independent and distinct ground from 'public policy' under section 34. The proviso to the newly inserted clause further provided that an award "shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence". The legislative intent behind insertion of this proviso was to avoid excessive intervention to arbitral award by the courts under the ground of 'patent illegality'. However, the Amendment clarified that "an erroneous application of the law" or "re-appreciation of evidence" does not fall under patent illegality. Hence, the courts are not to treat every factual error or every divergent interpretation as an illegality. The illegality must be of a kind that strikes at the heart of the award's validity. For instance, if an arbitrator ignores a binding precedent or a clear prohibition in the contract, that may be patent illegality. Likewise, a finding based on no evidence at all can be said to be perverse and thus patently illegal. But where there is some evidence and a reasonably plausible inference has been drawn by the arbitrators, the courts should ordinarily refrain themselves from supplanting the views arrived by the arbitrator as that would be the true import of the legislative intent inherent in the Amendment Act.

34. Thereafter, this court elucidated the meaning of the expression 'patent illegality' in Ssangyong Engg. & Construction Co. Ltd. v. NHAI²² while taking into consideration the amendment act of 2015 and held it as a glaring, evident illegality that goes to the root of the award. This includes : (a) an award deciding matters outside the scope of the arbitration (beyond the contract or submission); (b) an award contradicting the substantive law of India or the Arbitration Act itself; (c) an award against the terms of the contract; and (d) an award so

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unreasoned or irrational that it manifests an error on its face."

[Emphasis supplied]

14. Mr. Jayant Mehta, learned senior counsel for the Appellant has contended that the phrase 'minimum' as it appears in Article 2.1 has to be given due effect to and the learned Arbitrator rightly held that the shortfall of INR 1,07,61,378/- in passing on the minimum CENVAT Credit was recoverable by the Appellant from the invoices raised by the Respondent. He states on instructions that the shortfall of INR 1,07,61,378/- occurred due to lowering of rate of duty by the Government during the execution of the contract and not due to any act or omission of the Respondent. He states that however, under Clause 14.6 of the GCC, in case of variation in taxes and duties, Respondent had to approach the Appellant with documentary proof of the variation so that the [Gross] Contract Price could be adjusted. He states however the Respondent did not approach the Appellant and therefore the [Gross] Contract Price mentioned in Article 2.1 and Summary Price Schedule remained unchanged.

15. We are unable to accept the submission of the Appellant.

16. It is a matter of record that the Gross Contract Price was INR 18,45,54,310/-, which included CENVAT credit of INR 2,16,42,894/-. The Respondent had agreed to pass on the said CENVAT credit to the Appellant by furnishing all requisite documents so as to enable the Appellant to avail the CENVAT credit. Thus, the Net Contract Price after deducting the CENVAT credit payable to the Respondent was INR 16,29,11,416/-.

17. The promise of the Respondent recorded in Article 2.1 is that it shall pass on minimum CENVAT credit of INR 2,16,42,894/- to the Appellant.

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This figure of INR 2,16,42,894/- is duly reflected in the Summary Price Schedule and is reflective of the value of duty which the parties estimated would be payable to the Government, at the time of the formation of the contract. The parties contemplated that Respondent during the execution of the contract would be liable to pay duty amount of INR 2,16,42,894/- to the Government and seek reimbursement of the duty amount from the Appellant, and the Respondent undertook to pass on the CENVAT credit equal to INR 2,16,42,894/- to the Appellant.

18. However, since the rate of the duty was lowered, the duty levied on the goods manufactured by the Respondent and invoiced to the Appellant was reduced resulting in a levy of a lower amount INR 1,08,81,516/- only. So, the Respondent raised invoices claiming reimbursement of duty from the Appellant for the lowered sum of INR 1,08,81,516/- only. There is no dispute that Respondent as per clause 14.5.2 of the GCC provided all necessary documents, including proof of deposit of duty to the Appellant for claiming CENVAT credit of INR 1,08,81,516/- from the government and therefore Appellant reimbursed the said duty amount to the Respondent.

19. The effect of lowering of the rate of duty was that Appellant instead of paying and/or reimbursing the initially estimated INR 2,16,42,894/- in the [Gross] Contract Price towards the duty to the Respondent, reimbursed lower amount of INR 1,08,81,516/- to the Respondent.

The Appellant, therefore, in fact, at the outset, saved INR 1,07,61,378/- from the [Gross] Contract Price due to the lowering of the rates of duty. In other words, the Appellant was never out of pocket for the sum of INR 1,07,61,378/- which otherwise was part of the [Gross] Contract Price stipulated in Article 2.1 of the contract and Summary Price Schedule. There

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was therefore no 'shortfall' in the CENVAT credit, which was actually recoverable by the Appellant and this notion of 'shortfall' is itself misconceived. To sum it up, under the contract the Appellant reimbursed duty equal to INR 1,08,81,516/- to the Respondent and duly received CENVAT credit equal to INR 1,08,81,516/-.

20. Learned Single Judge has, at paragraph 15 of the impugned judgment, correctly illustrated the fact that, due to the lowering of the rate of duty, the CENVAT amount which formed part of the Gross Contract Price in the Summary Price Schedule stood correspondingly reduced and the Appellant, having not incurred the liability of CENVAT to the extent of INR 1,07,61,378/- had their monetary interest protected, and were unaffected by the reduction of the passing on of the CENVAT credit. In fact, during arguments learned senior counsel for the Appellant has been unable to rebut the aforesaid finding of the learned Single Judge.

We find no error in the findings recorded by the learned Single Judge at paragraph 15, as these are evident on a bare reading of the Summary Price Schedule, which is an admitted document forming part of the contract.

21. As noted above, Mr. Jayant Mehta learned senior counsel during arguments has only relied upon Article 2.1 of the contract and Clause 14.6 of the GCC to justify the deduction and recovery from the invoices. We find no merit in this submission of the Appellant as neither Article

2.1 nor Clause 14.6 of GCC entitles the Appellant to recover alleged shortfall of the minimum CENVAT credit from the invoices. This cannot even be implied intention of this contract as the promise of minimum CENVAT credit in Article 2.1 is not a 'cash discount' offered by the Respondent. We are of the opinion that the view canvassed by the Appellant is not even a plausible

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interpretation of Article 2.1 of the contract.

22. Additionally, the submission of the Appellant gives a myopic emphasis to the word 'minimum' in Article 2.1 but fails to give any meaning to the words 'CENVAT credit' in the clause. Whereas the said Article 2.1 has to be read with Clause 14.5.2 which contemplates that if the Respondent fails to furnish requisite documents to the Appellant so as to enable the Appellant to claim CENVAT credit, then the Appellant has the right to deny reimbursement of duty. Thus, upon reading of Article 2.1 of the Contract and Clause 14.5.2 of the GCC, we find that the intent of the parties was that Respondent undertook to pass on to the Appellant CENVAT credit of INR 2,16,42,894/-. However, this was on the understanding that in the first place Respondent expected to deposit, with the Government, duty amount equal to INR 2,16,42,894/- and recover the said amount from the Appellant by providing all requisite documents and proof so as to enable the Appellant the claim to CENVAT credit. However, due to the lowering of the rate of the duty the Respondent deposited and recovered from the Appellant a lower sum of INR 1,08,81,516/- only towards duty, and it duly passed on CENVAT credit equal to the said amount INR 1,08,81,516/- to the Appellant.

23. We therefore concur with the findings of the learned Single Judge that the learned Arbitrator wrongly held that Appellant was entitled to make deductions from the invoices for recovery of the alleged shortfall in the minimum CENVAT credit recorded in Article 2.1 of the contract, though the contract did not stipulate any such recovery. We therefore find that the learned Single Judge rightly set aside the award on the ground of patent illegality.

V. Inconsistent views of arbitral tribunals on interpretation of the same

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contractual stipulation cannot be simultaneously upheld by the Court in its jurisdiction under Section 34 and Section 37 of the Act

24. We note that between the same parties in different contracts, the identical issue of alleged 'shortfall' in passing on of the minimum CENVAT credit and its recovery by the Appellant by making deduction from the invoices led to disputes and was referred for adjudication to different arbitral tribunals. The clauses of the contract and the GCC are identical. In the other case³, the arbitral tribunal held in favour of the Respondent and rejected the claim of the Appellant for deduction relying on the same Article 2.1, and the arbitral award has been upheld by the Court under Section 34 of the Act in OMP(COMM) No. 451 of 2023⁴and also by us in the appeal⁵filed by the Appellant herein under Section 37 of the Act. We have in fact concluded in this appeal and the other appeal that the view canvassed by the Appellant is not even a plausible interpretation of Article 2.1 of the contract.

25. In this regard, we find it apposite to rely on the dicta in the judgment of

National Highway Authority of India v Progressive- MVR (JV)⁶by the Supreme Court wherein it was held that, because conflicting arbitral awards had interpreted the same clause of the contract differently, the ordinary rule of non-interference with a plausible arbitral view under Section 34 of the Act, could not be mechanically applied. The relevant paragraph reads as follows:

"40. Once we interpret the formula in the manner indicated above, the necessary consequences would be to hold that the Arbitral Tribunal(s) did not decide the cases with the correct application of the formula and further that the claim for price adjustment in respect of bitumen laid by the contractors was not correct. Therefore, it can be held that the Award(s) are contrary to the contractual terms. At the same time, this outcome poses a dilemma inasmuch as in these cases, the Arbitral Tribunal has taken a

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particular view and when this was a plausible view, keeping in mind the parameters of judicial review of the Court in exercise of powers under Section 34 of the Act, normally the Court would not interfere with such Awards. However, as already indicated above, such a situation has arisen because of conflicting Awards given by the Arbitral Tribunals themselves, which has provoked this Court to take a final view in the matter, necessitated by the aforesaid reason. If one takes into consideration the theory that one applies the principle mechanically i.e. that a plausible view is not to be interfered with, then it may lead to very anomalous situation. In such an eventuality, view taken by a particular Arbitral Tribunal in favour of the Contractor would be upheld as plausible view. Likewise, the Court will have to uphold the view taken by a particular Arbitral Tribunal in favour of NHAI as well, as a plausible view. Therefore, the purpose is to avoid such a situation which cannot be permitted as it would result in upholding both kinds of arbitral awards interpreting the same clause, whether they go in favour of the employer or they go in favour of the contractor. When the exercise is done keeping in view these considerations and outcome thereof is not determined, interest of justice would also demand that this result has to be applied to the pending cases, which have not attained finality. Therefore, in these peculiar circumstances, we hold that the principle of issue estoppel will apply only in those cases where matters have attained finality and no judicial proceedings are pending. In all those cases, including the present one, where awards are challenged on this particular aspect, this judgment will govern the outcome."

[Emphasis Supplied]

26. In our considered opinion, the view expressed by the Supreme Court in the aforesaid judgment is relevant to the facts of this case. Since we have upheld the view of the arbitral tribunal that Article 2.1 of the contract does not entitle the Respondent to recover monies from the invoices on account of 'shortfall' in CENVAT credit in the arbitral proceedings forming subject matter of FAO(OS)(COMM) 130/2026, it would be appropriate that we

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diametrically different interpretation of identical Article 2.1 of the contract, having contrary results, which is opposed to all judicial canons.

28. Separately, we have already observed that the interpretation given by the learned Arbitrator in the impugned arbitral award to Article 2.1 is implausible.

29. We therefore find no merit in this appeal. The impugned judgement is upheld.

30. Pending applications, if any, are disposed of.

MANMEET PRITAM SINGH ARORA, J.

C.HARI SHANKAR, J.

SEPTEMBER 14, 2026/dsn/AM

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