(Prayer: Original Side Appeal under Clause 15 of the Letters Patent read with Order XXXVI Rule 1 of Original Side Rules against the Order, dated 20.03.2015 made in O.P.No.427 of 2011.)
P. Kalaiyarasan, J.
1. This Original Side Appeal is directed against the order of the learned single Judge, dated 20.03.2015 in O.P.No.427 of 2011, dismissing the O.P, by confirming the Arbitration Award.
2. The brief facts of the case are as follows:
(i) The claimant is a registered partnership firm of Civil Engineers and contractors and as owner of tankers, it is also engaged in the activity of hiring of tankers for transport of effluent water, crude oil etc. Oil Natural Gas Corporation Ltd., called for tender for transportation of crude oil by road by tankers from various locations. The claimant participated in the tender and contract was awarded to it. Both the claimant and ONGC entered into contract on 09.08.2006 for transportation of crude oil for a period of two years from 17.07.2006. In November 2006, ONGC had recovered a sum of Rs.3,62,255/- towards service tax from out of the bills of the claimant company. On 11.12.2006, the claimant company objected to such recovery by addressing a letter stating that they are only transporters of goods and there is also no instruction from the tax authority to pay service tax.
(ii) The claimant had executed an indemnity bond on 22.01.2007 irrevocably agreeing to reimburse service tax amount to ONGC, if ONGC had paid the amount on demand by appropriate authority and ONGC released the amount. In response to a letter from the Superintendent of Central Excise, ONGC addressed the Superintendent informing that as per contract, the rates were inclusive of all taxes including service tax and the payment of service tax will have to be taken with the claimant. ONGC deducted a sum of Rs.29,29,397/- from out of the bills of the claimant towards service tax liability for the contract period.
(iii) The claimant informed ONGC on 30.07.2008 that they are not Goods Transport Agency (GTA) but owner of tankers and sought for refund of the amounts. The contract came to an end in August 2008. The claimant issued notice appointing an Arbitrator. ONGC sent a reply stating that the transportation of crude oil by road through tankers falls in Goods Transport Agency (GTA) services and so amenable to service tax. The claimant sent rejoinder.
3. The Arbitral Tribunal after hearing both sides passed an Award directing ONGC to pay a sum of 29,29,397/- together with interest at the rate of 12% p.a. from the date of award. Challenging the Arbitral Award, ONGC filed the O.P and the learned single Judge, dismissed the O.P. Aggrieved by the order of the learned single Judge, ONGC has preferred this Appeal.
4. The learned counsel appearing for the appellant contends that the power to decide nature of service rendered by the claimant to the ONGC as to whether it is GTA or Charter Hirer and whether any service tax is payable is vested with the statutory authorities and Arbitral Tribunal is not vested with such a power by the contract. The statutory authorities constituted under the Finance Act, 1994 already concluded that the services rendered by the claimant to the appellant / ONGC would amount to GTA and as such amenable to service tax. The Arbitral Tribunal concluded that the services rendered would amount to Charter Hire, which is not only contrary to the decision made by the statutory authorities but also overlooking the Clause 23 of the bid. The Tribunal also failed to appreciate the Indemnity Bond, dated 22.01.2007 executed by the claimant by which the claimant company had unequivocally agreed to pay / indemnify and keep indemnified the appellant, if any claim / demand is made by the Service Tax Department.
5. The learned counsel appearing for the first respondent per contra contends that Arbitral Tribunal, after analysing the terms of the contract between the parties has rightly concluded that the claimant is entitled for the refund of the amount deducted by the ONGC from the bills of the claimant towards service tax and there is absolutely no ground to interfere with the Award passed by the Tribunal by the Court under Section 34 of the Arbitration and Conciliation Act, 1996. It is further contended that the learned single Judge found no reason to interfere with the Award and dismissed the O.P in a well reasoned order and therefore, this appeal is liable to be dismissed.
6. The Arbitral Award can be set aside only on the grounds mentioned under Section 34(2) and 34(3) of the Arbitration and Conciliation Act, 1996 and not otherwise. The learned counsel appearing for the appellant vehemently contends that the Arbitral Tribunal has taken the role of the statutory authority and it also decided contrary to the terms of the contract and therefore, the Award is to be set aside. Thus, the argument is focussed on the principle of patent illegality. Under patent illegality, there are three grounds (i) Contravention of the Substantive Law of India [Section 28(1) (a)]; (ii) Contravention of the Arbitration Act [Section 31 (3)] and (iii) Beyond the terms of the contract [Section 28(3)].
7. In Associate Builders v. DDA, reported in (2015) 3 SCC 49, the Hon'ble Supreme Court has held thus:
"42. In the 1996 Act, this principle is substituted by the 'patent illegality' principle which, in turn, contains three sub heads -
42.1. (a) A contravention of the substantive law of India would result in the death knell of an arbitral award. This must be understood in the sense that such illegality must go to the root of the matter and cannot be of a trivial nature. This again is a really a contravention of Section 28(1) (a) of the Act, which reads as under:
"28. Rules applicable to substance of dispute.-(1) Where the place of arbitration is situated in India,-
(a) in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India;"
42.2. (b) A contravention of the Arbitration Act itself would be regarded as a patent illegality- for example if an arbitrator gives no reasons for an award in contravention of Section 31 (3) of the Act, such award will be liable to be set aside.
42.3. (c) Equally, the third sub-head of patent illegality is really a contravention of Section 28 (3) of the Arbitration Act, which reads as under:
"28. Rules applicable to substance of dispute.- (3) In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction."
This last contravention must be understood with a caveat. An arbitral tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground. Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair minded or reasonable person could do.
43. In McDermott International Inc. v. Burn Standard Co., Ltd., (2006) 11 SCC 181, (2006) 11 SCC 181, this Court held as under:
"112. It is trite that the terms of the contract can be express or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a contract. The construction of the contract agreement is within the jurisdiction of the arbitrators having regard to the wide nature, scope and ambit of the arbitration agreement and they cannot be said to have misdirected themselves in passing the award by taking into consideration the conduct of the parties. It is also trite that correspondences exchanged by the parties are required to be taken into consideration for the purpose of construction of a contract. Interpretation of a contract is a matter for the arbitrator to determine, even if it gives rise to determination of a question of law. (See Pure Helium India (P) Ltd. v. ONGC [(2003) 8 SCC 593] and D.D.Sharma v. Union of India [(2004) 5 SCC 325]).
113. Once, thus, it is held that the arbitrator had the jurisdiction, no further question shall be raised and the court will not exercise its jurisdiction unless it is found that there exists any bar on the face of the award."
8. Bearing the above decision and the provisions of law as to the principle of patent illegality in mind, the contentions of the learned counsel appearing for the appellant is to be analysed. In this case, the dispute between the claimant and the appellant / ONGC is whether the claimant is liable to pay service tax, as per the terms of the contract.
9. The claimant entered into contract with ONGC for transportation of crude oil by road by tankers from various locations to designated production sites of the ONGC. The contract was for two years from 17.07.2006. Till 28.06.2007, the date on which the Superintendent of Central Excise issued a letter calling for details of payment of service tax from ONGC, there was no demand of service tax from the authorities. Prior to that date, when ONGC recovered certain amount from the claimant, the same was refunded by getting an indemnity bond from the claimant. Subsequent to the demand by the statutory authority, ONGC deducted Rs.29,29,397/- towards service tax from the claimant during the contract period.
10. The following Clauses in the contract and the definitions in the Statutes are relevant to decide the dispute between the parties.
"(i) Clause 21 of the Contract reads thus :
21. Tax Liability:
Corporate Tax : Any tax assessed on the income of the contractor shall be the responsibility of and payable by the contractor. The Corporation will, however, deduct another income-tax at source in accordance with Indian Income Tax Rules as amended from time to time prior to the release of payments. A certificate to this effect will be given to the contractor by the concerned Finance in the first month of the following financial year.
Service Tax / Sales Tax applicable if any, on chartered hired payments received by the contractor under this contract will be to the account of ONGC.
Service tax if any applicable and / or levied on charter hire payment against this contract / agreement will be reimbursed by ONGC a actual against documentary evidence.
(ii) The Finance Act 1994, Section 65(23) and 65(50b) provides the following definitions :
65(23) "Cargo handling service" means loading, unloading, packing or unpacking of cargo and includes -
(a) cargo handling services provided for freight in special containers or for non-containerised freight, services provided by a container freight terminal or any other freight terminal, for all modes of transport and cargo handling service incidental to freight; and
(b) service of packing together with transportation of cargo or goods, with or without one or more of other services like loading, unloading, unpacking,
but does not include, handling of export cargo or passenger baggage or mere transportation of goods.
65(50b) "goods transport agency" means any [person who] provides service in relation to transport of goods by road and issue consignment note, by whatever name called."
11. Clause 21 of the Contract provides that service tax / sales tax applicable if any, on chartered hired payments received by the contractor under this contract will be to the account of ONGC. It also further provides that service tax if any applicable and / or levied on charter hire payment against this contract / agreement will be reimbursed by ONGC at actual against documentary evidence. Therefore, for the charter hire payment charges, ONGC has to bear service tax as per the above Clause 21 of the Contract.
12. The contention before the Arbitral Tribunal was that the nature of transaction and charges under the contract are not chartered hired payment but only the Goods Transport Agency charges. Therefore, the Tribunal roved into and ascertained the nature and character of the service rendered by the claimant / ONGC, so as to decide who is liable to pay service tax, as per the terms of the contract. As the ONGC had acquired for its exclusive use the tankers under the contract, ONGC had chartered the tankers transportation offered by the claimant for a period of two years. Therefore, the Tribunal held that the charges referred to in Clause 21 of the Contract is "charter hire payment".
13. The Tribunal rejected the contention of the ONGC that the service comes under Goods Transport Agency pointing out that as per the definition under Section 65(50b) of the Finance Act, 1994, the service provider should not only transport goods by road but also issue consignment note. The Tribunal also pointed out that the claimant had never issued consignment note and the consignor as well as the consignee in the transport is only ONGC and therefore, ONGC alone is liable to pay service tax if payable. Thus the Tribunal decided the nature of transaction only to conclude whether the claimant is liable to pay as per the terms of the contract and it has not gone into the question whether transaction under the contract is amenable for service tax or not.
14. Note 5 in Annexure III of the contract provides for recovery of service tax / sales tax from the contractors' bills for direct payment as per instructions from the tax authority. As per Clause 21 of the contract, the claimant is not liable to pay service tax and therefore, recovery under this note does not arise.
15. The Arbitral Tribunal has also rightly rejected the contention regarding Clause 23 of the bid as Clause 21 of the contract shall prevail, in view of Clause 35 of the Contract.
16. As far as Indemnity Bond executed by the claimant, the contention of the first respondent / claimant that it was given so as to get the pending amount with the ONGC cannot be brushed aside.
17. The Tribunal has awarded interest only for the post award period considering Clause 31 of the Contract by which both the parties agreed that they will not be entitled to any interest on the award amount.
18. The Tribunal has not travelled beyond the terms of the contract and viewing in any angle, there is absolutely no patent illegality. The learned single Judge has rightly dismissed the Original Petition and it does not warrant any interference and accordingly, this Original Side Appeal is liable to be dismissed.
In fine, this Original Side Appeal is dismissed, confirming the order of the learned single Judge, dated 20.03.2015 made in O.P.No.427 of 2011. No costs. Consequently, connected miscellaneous petition is closed.