Arbitral Tribunal Acted With Patent Illegality, Against Indian Law In Awarding Reimbursement Of Service Tax Along With Interest: Calcutta High Court

The Calcutta High Court Bench of Justice Sabyasachi Bhattacharyya observed that award passed by Arbitral Tribunal was tainted with patent illegality and contravened the fundamental policy of Indian law. The award was challenged under section 34 of the Arbitration and Conciliation Act (act). The court set aside the award in which South Eastern Railway (railway) was directed to reimburse the respondent towards service tax and interest. Brief Facts The dispute emerged from the contract executed between South Eastern Railway and the respondent in which the respondent had to provide escort services to the coach attendants of the railway while distributing the bed-rolls on trains. The respondent raised invoices after completing the work which were paid by the railway. Thereafter, a show cause notice was received in November, 2017 by the respondent from tax authorities in which service tax was demanded for the services provided under the contract. The service tax was paid by the respondent under the scheme of Sabka Vishwas Legacy Dispute Resolution Scheme, 2019. Subsequently, this tax amount was claimed from the railway by the respondent. The railway refused the claim and the matter went to arbitration. The Arbitral Tribunal passed an award on November 28, 2023 in which the railway was directed to reimburse the respondent for the service tax paid along with interest. This award was challenged by the railway under section 34 of the act in which the award was sought to be set aside on the ground of patent illegality. Contentions It was submitted by the petitioner that the amount quoted by the tenderer should include all the taxes to be paid as per clause 2.2 of the contract. It was further argued that the services tax for railway works was reinstated on May 26, 2015 therefore the parties should be conscious of this fact by the time the contract was entered into. It was further submitted that the Arbitral Tribunal passed the award in direct contravention of the terms of the contract as clause 2.2 clearly included the taxes to be paid by the tenderer. Based on this , it was argued that this misinterpretation violated section 28(3) of the act therefore the award is liable to be set aside on the ground of patent illegality. The Supreme Court judgment in State of Chattisgarh v. SAL Udyog was relied upon wherein the court held that an award passed in contravention of contractual terms could be set aside on the ground of patent illegality. Per Contra, it was contended by the respondent that service tax was not included as a part of the costs in an internal estimate, which formed the basis of tender pricing, prepared by the railway. It was further argued that manpower was to be supplied under the contract and such contracts do not attract VAT taxes, sales taxes or other duties enumerated in clause 2.2 of the contract therefore the service tax was not contemplated in the quoted price. It was submitted that the arbitral tribunal did not commit any error in interpreting the tender documents and internal estimate therefore the award is not liable to be set aside for patent illegality and service tax is to be borne by the railway. They relied on two judgments of the Supreme Court in Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 and National Highways Authority of India v. Hindustan Construction Co. Ltd. (2024) 6 SCC 809, wherein it was established that the tribunal had discretion to consider the materials before it and the award is not liable to be interfered with unless it is perverse. High Court's Analysis The High Court after hearing both parties focused on clause 2.2 of the contract which was essential for the purpose of this dispute. The court observed that the clause included in the tender price all incidental charges and other taxes and duties and service tax falls under the category of other taxes and duties therefore the railway was not liable to pay service tax. The court further noted that the terms of the contract were clear and unequivocal for which no external documents like internal estimate was required to cull out the real intention of the parties as done by the arbitral tribunal. It was held as under: “Clause 2.2 does not restrict itself only to the taxes and duties mentioned therein such as VAT, Sales Tax, Excise Duty and Octroi but also supplements the same with the expression “and other taxes and duties, etc.”, thus, covering all other taxes and duties even apart from those specifically mentioned in the said clause. Since on the date of the contract between the parties Service Tax was already payable for Railway works, the expression “and other taxes and duties, etc.” included Service Tax”. The court found fault with the tribunal reliance on the internal estimate to interpret the contact for following reasons. Firstly, the estimate was prepared on March 27, 2015 before the issuance of letter...

Arbitral Tribunal Acted With Patent Illegality, Against Indian Law In Awarding Reimbursement Of Service Tax Along With Interest: Calcutta High Court

Mohd Malik Chauhan

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