2000-(158)-CTR -0633 -BOM


Arbitration Petn. No. 233 of 1995 in Award No. 45 of 1995, decided on September 4, 1998.


R. A. Dada with Saraf i/b Vyas & Bhalwal, for the Petitioner : D. D. Madon, Nurgis Colabawalla & section B. Jijina i/b Mulla & Mulla, for the Respondent


A. P. SHAH, J. :

By the present petition under section 30 of the Arbitration Act, 1940, the petitioner is seeking to set aside the award dt. 25th Jan., 1995, passed by the umpire, Shri M. N. Chandurkar (retired Chief Justice).

2. The short facts concerning the arbitration award in question may be stated as follows. The petitioner is a statutory public sector corporation engaged in oil exploration, development and production of oil and natural gas. On 6th April, 1985, the petitioner published a tender notice inviting tenders from qualified marine construction contractors. The scope of work for which the ONGC sought bids included the design, engineering, procurement, fabrication, inspection, testing, load-out seafastening, tow-out, transportation, installation and pre-commissioning of the BB and BD well-head platform as well as optional pipelines and associated risers. Pursuant to the said tender notice, the respondent submitted a bid which was accepted by the petitioner and the contract was awarded to the respondent as per the terms and conditions in the contract dt. 15th Oct., 1986. Thereafter disputes have arisen between the petitioner and the respondent over the amounts due and payable to the respondent for the construction of two offshore well platforms at South Bassein field in the Arabian sea. In all, the respondent raised 13 claims, claiming US $ 2,380,473.88 described as claims A to L in the statement of claims which was referred to the arbitrators, Mr. R. P. Bhat nominated by the respondent and Mr. K. M. Anjeneyan nominated by the petitioner. Before the arbitrators, the petitioner filed a counter claim against the respondent claiming reduction in post drilling hook-up and short supply of spares claiming US $225,057.00. Oral evidence was recorded by the two arbitrators who also heard extensive arguments. There were, however, differences of opinion between the two arbitrators regarding the merits of the claim of the claimants and thus the matter came to be referred to the umpire, Shri M. N. Chandurkar. By the impugned award, the umpire partly granted Claims Nos. 1 to 7 and 9 to 11 of the respondent whilst Claims Nos. 8 and 12 were not pressed by the respondent. Claim No. 13 of the respondent pertaining to interest was not granted by the umpire. However, the umpire allowed interest at the rate of 12 per cent. per annum (US $) on the claims allowed by him from the dates mentioned against the amount till payment. Counter-claims made by the petitioner were rejected by the umpire in to.

3. In the petition, the petitioner herein contended that the arbitrator misconducted in misinterpreting and misconstruing various clauses of the contract pertaining to the work allotted to the respondent of construction of two offshore well platforms at South Bassein field in the Arabian Sea and also failed to appreciate the oral evidence of Mr. Muthukarupan, who is a chemical engineer, and on misconception of facts and misinterpretation of documents on record and by failing to consider some of the relevant facts and circumstances, the erroneous and illegal award was made. Some of the findings on the basis of which the impugned award was made, consequent upon misreading and misinterpreting relevant documents and evidence adduced are erroneous on the face of the record and have resulted in misconduct on the part of the umpire, thereby rendering the award illegal and invalid. In support of such contention reference to various findings of the arbitrator and the alleged impropriety of such findings with reference to certain facts and materials on record have been indicated.

4. I have heard Mr. Dada, for the petitioner, and Mr. Madon, for the respondent. Out of several criticisms of the impugned award only one pertaining to Claim No. 9 was seriously pressed before me by Mr. Dada. I may hasten to add that in respect of the remaining claims, I find no merit in any of the objections raised on behalf of the petitioner. As far as Claim No. 9 is concerned, Mr. Dada submitted that the umpire has committed an error apparent on the face of the record in accepting the claim of the respondent for difference in exchange rate. Mr. Dada submitted that the conclusion reached by the umpire are totally inconsistent with the findings that were recorded by him thereby rendering the award illegal and invalid. According to Mr. Dada, the umpire has misread and misinterpreted the relevant provisions of the IT Act and the award passed by him in respect of Claim No. 9 is contrary to the law laid down by the apex Court in P. V. Raghava Reddi vs. CIT (1962) 44 ITR 720 (SC): AIR 1962 SC 977 : TC 39R.354 and Standard Triumph Motor Co. Ltd. vs. CIT (1993) 110 CTR (SC) 270 : (1993) 201 ITR 391 (SC) : TC 39R.433.

5. In order to appreciate the submissions of Mr. Dada, it is necessary to refer to the respective pleadings of the parties. Under Claim No. 9, the respondent has in the statement of claim sought an award for an amount of US $ 432,500.35 which is claimed to have been deducted by the petitioner for the purpose of meeting the liability of the respondent for surtax under the Companies (Profits) Surtax Act, 1964 (hereinafter referred to as “the Surtax Act”). The Surtax Act was repealed in 1988, but during the time it was in force, it imposed a surtax, in addition to normal corporate tax, in the years in which the chargeable profits of the assessee for the previous year exceeded 15 per cent. of its capital computed in accordance with the Surtax Act. According to the respondent, its chargeable profits did not exceed 15 per cent. of its capital as computed in accordance with the Surtax Act and it was, therefore, not liable to pay any surtax nor was any surtax due from or payable by the respondent. Thus, according to the respondent, the petitioner has wrongfully withheld the sum of US $ 432,500.35. Admittedly, the petitioner has on 21st May, 1990, deposited with the IT authorities a sum of Rs. 88,16,484 on the basis of notices under section 226 (3) of the IT Act, 1961, the said amount having been held to be due by the IT authorities from the respondent. The claim as made in the statement of claim was that the petitioner was liable to pay to the respondent the entire amount of US $ 432,500.35, which was wrongly withheld, together with interest. An alternative claim was made that giving credit for the amount paid to the IT authorities by the petitioner, the respondent was entitled to get US $ 100,733.89 and interest thereon. The computation indicating this claim for US $ 100,733.89 was shown in annexure “A” to the statement of claim.

6. The stand taken by the petitioner was that they had really retained the amount with them under section 162 of the IT Act, 1961, and that this was not a deduction under section 195 of the IT Act, 1961. The petitioner referred to its letter dt. 20th April, 1989, addressed to the respondent informing the respondent that the matter regarding returning of surtax in respect of BB/BD and IJK projects had been referred to the Dy. CIT and the petitioner had not received any final decision from the said Dy. CIT. The petitioner also referred to a letter received from the IT Department by which the petitioner was directed not to release the surtax amount till further orders. A reference was then made to an order dt. 4th April, 1990, received from the Dy. CIT (Asst.), Special Range, Dehradun, informing the petitioner that no demand had been raised against the respondent in respect of the surtax but the petitioner was directed to deposit immediately the amount of surtax lying with them in pursuance of a notice under section 226 (3) towards liability of income-tax. According to the petitioner, they had thus deposited Rs. 88,16,484 which according to them was equivalent to US $ 689,807 in Government account on 21st May, 1990. Thus it was denied that there was any wrongful withholding of the amount.

The further case of the petitioner was that the accounts maintained by the petitioner are in terms of rupees and not US dollars and that the amount of US $ 689,807 retained by them cannot be converted at the current exchange rate. The petitioner while admitting that they had deducted the sum of US $ 689,807 during the year 1987 from the invoices of BB and BD and I.J.K. projects and gave the break up that from the amount of BB project US $ 432,500 were deducted and from I.J.K. project account US $ 257,317 were deducted thus making a total of US $ 689,807, took the stand that this amount was equivalent in rupees to Rs. 88,16,484 as on the date when the deduction was made. According to the petitioner, the said amount was kept in their books of account under the heading “Deduction of tax at source” at the exchange rate applicable during the year 1986-87. Consequently, according to the petitioner, it was not liable for payment of any difference in Indian rupee value and US dollar between the date when the deduction was made and the time when the amount was deposited, i.e., 21st May, 1990.

7. The umpire accepted the case of the petitioner that though an amount of US $ 432,500 is, at one stage, considered by the petitioner as tax deducted at source, the said amount was really the amount retained by the petitioner out of the monies payable by them having regard to the provisions in section 162 (2) of the IT Act. It was also accepted by the umpire that the IT Department treated the petitioner both for the asst. yr. 1985-86 and asst. yr. 1986-87 as a representative-assessee. It was observed by the umpire that having regard to the fact that the quantum of deduction was not disputed by the respondent and having regard to the fact that the IT Department had treated the petitioner as a representative-assessee it was not possible to hold that the petitioner had wrongfully made any deduction. In fact the umpire on careful examination of the correspondence between the parties found that the petitioner did not want to retain the amount longer than necessary and, therefore, the umpire rejected the contention of the respondent that there was wrongful deduction of the amount of US $ 432,500 by the petitioner.

8. The umpire accepted the alternative claim of the respondent towards the difference in Indian rupee value and US dollar between the date when the deduction was made and the time when the amount was deposited, i.e., 21st May, 1990. It was held, inter alia, by the umpire that the contract between the petitioner and the respondent was to pay the contract price to the respondent in terms of US dollars. Merely because the amount which was immediately payable in US dollars is paid late, whatever be the reason, the nature of the liability to pay back the deducted amount in US dollars does not change into a liability to pay in rupees. The rate of exchange at which the conversion of the tax liability in rupees into US dollars would be the rate which was prevalent on 21st May, 1990. As a consequence the balance due out of deduction made from the invoices would have to be refunded to the respondent in terms of dollars. Consequently, the respondent would be entitled to the refund of US $ 100,733.89 with interest thereon w.e.f. 21st May, 1990.

9. After considering the respective contentions of the parties and submissions made by learned counsel for the parties and the award impugned, it appears to me that the award suffers from a manifest error apparent ex-facie as far as Claim No. 9 is concerned. It is the finding of the umpire that the IT Department treated the petitioner as a representative-assessee under section 162 of the IT Act for the asst. yr. 1986-87 and the deduction was legal and not uncalled for. Thus the assessment against the petitioner was in its capacity as a representative-assessee. As held by the umpire the petitioner did not want to retain the monies beyond the period necessary. However, the petitioner was directed by the IT Department not to refund but to retain the amount of surtax on the basis of the computation under section 44BB of the IT Act. The petitioner was directed to deposit the amount retained by it of surtax and informed that the amount was required to be paid pursuant to the notice under section 226 (3) of the IT Act. It is thus clear that the money retained in rupees in 1987 towards tax liability of the respondent was credited in the account of the respondent in the books of account of the petitioner in rupees. In law the effect is that the petitioner had paid the amount to the respondent in 1987 as the money was held by it as a depositee.

10. In P. V. Raghava Reddi vs. CIT (supra), the non-resident company instructed the assessee, in view of the difficulties in this country in remitting the monies abroad, to credit the amount due to it on account of commission in the account books of the assessee awaiting further instructions regarding its remittance. The assessee was assessed as the statutory agent of the non-resident company. The ITO assessed the amounts credited in the accounts of the assessee as the income of the non-resident company. The contention of the assessee was that mere entry in the books of the assessee cannot amount to receipt and that the amounts cannot be assessed until they were actually paid over to the non-resident company or dealt with according to its directions. Rejecting the contention, it was held by the Supreme Court, as soon as the monies were credited to the accounts of non-resident (Japanese) company, it must be held that it “received” the same and are taxable. Hidayatullah, sitting in the Constitution Bench observed :

“Held that the amounts of commission credited to the aforesaid non-resident company’s account in the books of the assessee were chargeable in the hands of the assessee-firm under section 4 (1) (a). The assessee-firm must be treated as a statutory agent of the Japanese company and since a business connection subsisted during the years in question, the assessee-firm could be treated as an assessee for purposes of section 42.Till the money was so credited, there might be a relation of debtor and creditor; but after the amounts were credited, the money was held by the assessee-firm as a depositee. The money then belonged to the Japanese company and was held for and on behalf of that company and was at its disposal. The character of the money changed from a debt to a deposit in much the same way as if it was credited in a bank to the account of the company. Thus, the amount must be held, on the terms of the agreement to have been received by the Japanese company, and this attracts the application of section 4 (1) (a). Turner Morrison and Co. Ltd. vs. CIT (1953) 23 ITR 152 (SC) : AIR 1953 SC 140 : TC 39R.278 relied on.” This legal position was reiterated in Standard Triumph Motor Co. Ltd. vs. CIT (supra) wherein under a collaboration agreement between the appellant, a non-resident company and an Indian company, the appellant was entitled to royalty of five per cent. on all sales effected by the Indian company. The royalty less the Indian tax had to be remitted to the appellant in pounds sterling. The Indian company credited the royalty to the appellant in its account books. With respect to its Indian income, the appellant filed its returns through the Indian company. For the asst. yrs. 1967-68 and 1968-69, the appellant filed its returns disclosing the royalty in which it was stated that the appellant was maintaining its accounts on the mercantile basis. For the asst. yrs. 1969-70 and 1970-71, the appellant admitted the royalty but filed nil returns claiming that it was maintaining its accounts on cash basis and no part of the royalty had been received by it and that, therefore, nothing was taxable. It was argued that a mere entry in the account books of the Indian company does not amount to receipt of income by the assessee. In other words, the said royalty can be said to have been received by the assessee only when it received the same in the U. K. Rejecting the contention it was held that the credit entry into the accounts of the assessee in the books of the Indian company does amount to its receipt by the assessee and is accordingly taxable and that it is immaterial when it did actually receive it in the U. K.

11. Applying the above principle, it is clear that the money credited in the account books of the petitioner herein belonged to the respondent and it was held by the petitioner as a depositee. The finding of the umpire was that the amount was paid under section 226 (3) of the IT Act shows that the amount lying as credited in favour of the respondent was the respondent’s money and this can be only on the basis that it belonged to the respondent from 1987. This was not the case where the deduction was wrong or retention was wrong or there was an obligation to refund. In that case perhaps the petitioner would be liable to refund the sum to the respondent in U.section dollars but in the present case the petitioner was holding the money only as an assessee. The representative-assessee cannot be asked to pay fluctuation in the value of the foreign currency between the date of deduction of payment and the date of payment inasmuch as the date of payment is irrelevant as liability relates to the period of assessment. In my opinion, the findings recorded by the umpire are totally ex-facie inconsistent and self-contradictory and the award made by the umpire is clearly erroneous as regards claim No. 9. Thus to my mind, the umpire has committed a serious error of law in awarding the alternative claim made by the respondent.

12. Mr. Madon vehemently argued that the jurisdiction of this Court is extremely limited when this Court is called upon to decide the objections raised by the parties against the arbitration award and it has no jurisdiction to sit in appeal and examine the correctness of the award on the merits. Mr. Madon argued that the Court has no jurisdiction to substitute its own evaluation of the conclusion of law or facts to come to the conclusion that the umpire had acted contrary to the bargain between the parties. Mr. Madon referred to the celebrated case of Champsey Bhara & Co. vs. Jivraj Balloo Spinning and Weaving Co. Ltd. AIR 1923 PC 66, wherein it is observed : “an error in law on the face of the award means that you can find in the award or a document actually incorporated thereto, as for instance, a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous.” Mr Madon also relied upon the decisions of the Supreme Court in (i) State of Rajasthan vs. Puri Construction Co. Ltd. (1994) 6 SCC 485;

(ii) Sudarsan Trading Co. vs. Government of Kerala AIR 1989 SC 890 and

(iii) Hindustan Tea Co. vs. K. Sashikant & Co. AIR 1987 SC 81.

13. The decision of the Privy Council in Champsey Bhara’s case (supra), was explained by the Supreme Court in Dr. S. Dutt vs. University of Delhi AIR 1958 SC 1050. It was argued before the Supreme Court that even if the decision of the arbitrator was erroneous that was not enough; before it could be set aside, it had further to be shown that the error appeared on the face of the award. Reliance was placed on the above quoted observation in Champsey Bhara’s case (supra). In para 13 (p.1053) of the judgment, the Supreme Court observed :

“In our view, all that is necessary for an award to disclose an error on the face of it is that it must contain, either in itself or in some paper intended to be incorporated in it, some legal proposition which on the face of it and without more, can be said to be erroneous. This was the decision of the Judicial Committee in the Champsey Bhara & Co.’s case (supra).”

14. In Sudarsan Trading Co.’s case, relied upon by Mr. Madon, the Supreme Court has clearly recognised that the award may be set aside on the ground of error on the face of the award, but it is said that the award is not invalid merely because by a process of inference and argument it may be demonstrated that the arbitrator has committed some mistake in arriving at his conclusion.

15. Even in the other decision of State of Rajasthan vs. Puri Construction Co. Ltd. (supra), the Supreme Court observed as under :

“Where the error of finding of facts having a bearing on the award is patent and is easily demonstrable without the necessity of carefully weighing the various possible viewpoints, interference with the award based on erroneous finding of fact is permissible. Similarly, if an award is based by applying a principle of law which is patently erroneous, and but for such erroneous application of legal principle, the award could not have been made, such award is liable to be set aside by holding that there has been a legal misconduct on the part of the arbitrator . . .”

16. In K. P. Poulose vs. State of Kerala AIR 1975 SC 1259, the Supreme Court held that if the arbitrator has arrived at an inconsistent conclusion even on his own finding, the award suffered from a manifest error apparent ex-facie and applying this ratio, I am constrained to hold that the award of the umpire for difference in exchange rate is illegal and invalid.

17. In the result, the petition is allowed partly. The impugned award of the umpire is set aside so far as Claim No. 9 is concerned and, consequently, the award of interest on the said claim is also set aside.

In view of the fact that the award is confirmed except Claim No. 9, decree is hereby passed under r. 787 of the Original Side Rules in terms of the award except Claim No. 9 with future interest at the rate of 12 per cent. (twelve per cent.) from the date of the decree till payment.

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