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1999 Supreme(Bom) 889
BOMBAY HIGH COURT
D.K. Deshmukh, J.
OIL & NATURAL GAS CORPORATION LTD. - PETITIONER
v.
SUMITOMO HEAVY INDUSTRIES LTD. - RESPONDENT
Arbitration Petition No. 104 of 1998 in Award No. 11 of 1998,
Decided on: November 29, 1999
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Sh. Milon K. Banerji and Sh. Dara R. Zaiwala, Sr. Advocates with Sh. Gourav K. Banerji, Divya M. Shah and Sh. Virendra J. Pereira, Advocates i/b. Desai and Diwanji, for the Petitioner.
Sh. Virendra Tulzapurkar, Sh. Virag Tulzapurkar, Sh. Kirti Munshi and Sh. Hitesh Jain, Advocates i/b Sh. Udwadia, Udeshi and Berjis, for the Respondent.
Construction of Clause 17.3 of agreement - Whether question of law specifically referred to arbitrator - Jurisdiction of Court to interfere with finding of arbitrator - Applicability of Section 44-BB of Income-tax Act to case of subcontractor - Whether assessment of subcontractor done under Section 44-BB - Allegation of bias against umpire - Whether umpire under duty to disclose relationship with respondent's counsel - Whether likelihood of bias.
Headnote:
ARBITRATION - Setting aside of award - Change of law - Income-tax liability of subcontractor - Whether petitioner liable to reimburse respondent for income-tax paid by subcontractor - Construction of Clause 17.3 of agreement - Whether question of law specifically referred to arbitrator - Jurisdiction of Court to interfere with finding of arbitrator - Applicability of Section 44-BB of Income-tax Act to case of subcontractor - Whether assessment of subcontractor done under Section 44-BB - Allegation of bias against umpire - Whether umpire under duty to disclose relationship with respondent's counsel - Whether likelihood of bias.
Fact of the Case:
Petitioner, a statutory corporation, entered into a contract with respondent, a Japanese company, for installation and commissioning of a platform at Bombay High South. Subcontractor was engaged by respondent for offshore installation and fabrication/transportation of two tripods. Income-tax was levied on respondent for assessment years 1984-85 and 1985-86 in relation to work awarded to it by petitioner. Petitioner paid the income-tax levied on respondent. Subcontractor filed returns for assessment years 1984-85 and 1985-86 and claimed losses, hence no income-tax was assessed against subcontractor for those years. In 1988, authorities under Income-tax Act served notices on subcontractor and reopened assessment for above referred three years. Orders were passed by authorities imposing income-tax on subcontractor. Subcontractor called upon respondent to reimburse amount paid by it towards income-tax assessed on it for assessment years 1984-85 and 1985-86. Respondent paid US $ 1,112,447.84 to subcontractor. Respondent claimed reimbursement from petitioner of said amount, interest thereon and declaration that petitioner is liable to reimburse any further sum or sums that respondent may have to pay to subcontractor towards income-tax liability of subcontractor. Petitioner resisted claim on various grounds. Umpire found in favor of respondent and made an award.
Finding of the Court:
1. Clause 17.3 of agreement makes petitioner liable to compensate respondent for all necessary and reasonable extra costs caused by change in law. There must be direct nexus between change in law and incurring of extra costs. Incurring of extra costs by respondent was not direct result of change in law. Liability of payment of income-tax, which is required to be paid as a result of change in law by subcontractor was a voluntary act on part of respondent. Umpire was not justified in holding that petitioner is liable for reimbursement of amount paid by respondent to subcontractor, as income-tax. 2. Question of construction to be put on terms of Clause 17.3 was not specifically referred to arbitrator. Court is entitled to examine correctness or otherwise of decision of arbitrator on construction of Clause 17.3. 3. Construction put by umpire on terms of Clause 17.3 clearly ignores plain language of clause. Construction put by umpire was impossible and therefore Court is entitled to interfere with finding recorded by umpire. 4. Perusal of provisions of Section 44-BB of Income-tax Act shows that in order to attract provision of Section 44-BB, it must be shown that non-resident Indian is engaged in business of providing services or facilities in connection with or supply of plant and machinery on hire used or to be used in prospecting for or extraction or production of mineral oil. Contract between respondent and subcontractor involves element of sale. It is not entirely an agreement for providing services or facilities. It is not also an agreement only for supplying plant and machinery on hire. Totality of contract has to be taken into consideration. If contract involves any element of sale, then provisions of Section 44-BB would not be attracted. 5. Perusal of revised assessment of tax done in case of subcontractor shows that it cannot be an assessment under provisions of Section 44-BB of Act. Assessment done in relation to amounts received for work done outside India is totally irrelevant. In present case, it is common ground that no work of extraction of mineral oils was done outside India. Assessment of subcontractor was done under circular issued by department and assessment under circular was pursuant to an option exercised by subcontractor. Circular did not operate by its own force. Umpire has observed that 1% tax was charged under circular which according to umpire covers an area which is not covered by Section 44-BB. Conclusion reached by umpire on this aspect cannot be termed as impossible conclusion and therefore Court will not be justified in interfering with conclusion reached by umpire on this aspect of matter. 6. Umpire was not under duty to disclose to petitioner fact that umpire and counsel appearing for respondent belong to same chamber and they also share same clerks. Barristers are self employed and merely because Barristers have same chamber, share same clerks, does not impair their independence and there is no question of any bias in such a case.
Issues: 1. Whether petitioner is liable to reimburse respondent for income-tax paid by subcontractor under Clause 17.3 of agreement? 2. Whether question of construction of Clause 17.3 of agreement was specifically referred to arbitrator? 3. Whether construction put by umpire on terms of Clause 17.3 is correct? 4. Whether revised assessment of tax done in case of subcontractor was referable to provisions of Section 44-BB of Income-tax Act? 5. Whether assessment of subcontractor was done under Section 44-BB of Income-tax Act? 6. Whether umpire was under duty to disclose to petitioner relationship with respondent's counsel?
Ratio Decidendi: 1. Clause 17.3 of agreement makes petitioner liable to compensate respondent for all necessary and reasonable extra costs caused by change in law. There must be direct nexus between change in law and incurring of extra costs. Incurring of extra costs by respondent was not direct result of change in law. Liability of payment of income-tax, which is required to be paid as a result of change in law by subcontractor was a voluntary act on part of respondent. Umpire was not justified in holding that petitioner is liable for reimbursement of amount paid by respondent to subcontractor, as income-tax. 2. Question of construction to be put on terms of Clause 17.3 was not specifically referred to arbitrator. Court is entitled to examine correctness or otherwise of decision of arbitrator on construction of Clause 17.3. 3. Construction put by umpire on terms of Clause 17.3 clearly ignores plain language of clause. Construction put by umpire was impossible and therefore Court is entitled to interfere with finding recorded by umpire. 4. Perusal of provisions of Section 44-BB of Income-tax Act shows that in order to attract provision of Section 44-BB, it must be shown that non-resident Indian is engaged in business of providing services or facilities in connection with or supply of plant and machinery on hire used or to be used in prospecting for or extraction or production of mineral oil. Contract between respondent and subcontractor involves element of sale. It is not entirely an agreement for providing services or facilities. It is not also an agreement only for supplying plant and machinery on hire. Totality of contract has to be taken into consideration. If contract involves any element of sale, then provisions of Section 44-BB would not be attracted. 5. Perusal of revised assessment of tax done in case of subcontractor shows that it cannot be an assessment under provisions of Section 44-BB of Act. Assessment done in relation to amounts received for work done outside India is totally irrelevant. In present case, it is common ground that no work of extraction of mineral oils was done outside India. Assessment of subcontractor was done under circular issued by department and assessment under circular was pursuant to an option exercised by subcontractor. Circular did not operate by its own force. Umpire has observed that 1% tax was charged under circular which according to umpire covers an area which is not covered by Section 44-BB. Conclusion reached by umpire on this aspect cannot be termed as impossible conclusion and therefore Court will not be justified in interfering with conclusion reached by umpire on this aspect of matter. 6. Umpire was not under duty to disclose to petitioner fact that umpire and counsel appearing for respondent belong to same chamber and they also share same clerks. Barristers are self employed and merely because Barristers have same chamber, share same clerks, does not impair their independence and there is no question of any bias in such a case.
Final Decision: Petition allowed. Award made by umpire is set aside.
D.K. Deshmukh, J. - This petition has been filed under the provisions of the Arbitration Act, 1940 for setting aside the award dated 22nd June, 1995 made by the learned umpire Sir Michael Kerr. The respondent Sumitomo Heavy Industries Ltd. is a company established under the Laws of Japan. The petitioner is a statutory Corporation established under the Oil and Natural Gas Commission Act, 1959. By a contract dated 7th September, 1983, the respondent agreed to install and commission on a turnkey basis SH Phase II of a platform at the site of the petitioner known as "Bombay High South" for their site about 100 miles North-West of Bombay. Under this contract certain disputes arose between the parties and the respondent claimed certain sums from the petitioner, for which the petitioner denied the liabilities. Clause 17.2 of the agreement between the parties is the arbitration clause. That clause reads as under:
"If any dispute, difference or question shall at any time hereafter arise between the parties hereto or their respective representatives of assigns in respect of the construction of these presents or concerning anything herein contained or arising out of these presents or as to the rights, liabilities or duties of the said parties hereunder which cannot be mutually resolved by the parties, the same shall be referred to arbitration, the proceedings of which shall be held at London, U.K. Within 30 days of the receipt of the notice of intention of appointing Arbitrators each party shall appoint an Arbitrator of its own choice and inform the other party. Before entering upon the arbitration, the two Arbitrators shall appoint an umpire. In case the parties fail to appoint its Arbitrator within 30 days from the receipt of a notice from the other party in this behalf or if any dispute in selection of umpire, the President of International Chamber of Commerce, Paris, shall appoint the Arbitrator and/or the umpire as the case may be. The decision of the Arbitrators and failing to an agreed decision by them, the decision of the umpire shall be final and binding on the parties. The arbitration proceedings shall be held in accordance with the provision of International Chamber of Commerce and the rules made thereunder as amended from time to time. The arbitration proceedings shall be conducted in English language."
2. On or about 11th March, 1991 Mr. Robert A. MacCrindle QC was appointed as Arbitrator on behalf of the respondent. On or about 11th May, 1991 M/s. Desai & Diwanji, Advocates and Solicitors of the petitioner appointed Mr. Justice D. M. Chandrashekhar (Retired) as Arbitrator on behalf of the petitioner. Two Arbitrators appointed retired Hon'ble Judge of the English Court Sir Michael Kerr as umpire. At the conclusion of the hearing before the Arbitrators on 4th/28th July, 1994 Mr. Justice Chandrashekar issued a statement of reasons rejecting the claim made by the respondent. On or about 18th July, 1994 Mr. R. A. Macrindle issued reasons stating why he wished to make an award in favour of the respondent. Thereafter, two Arbitrators issued a joint notice of disagreement. It is, thereafter, that the umpire entered upon the reference. After conclusion of the hearing before the umpire, the award was made, which is the subject matter of challenge in this petition.
3. After contract was awarded in favour of the respondent, a part of the work for which the contract was given to the sub-contractor namely McDermot International Inc. by the respondent. The work in relation to which the subcontractor was given was for offshore installation and fabrication/transportation of two tripods. Clause 3 of the agreement between the petitioner and the respondent made a provision for subcontracting of a particular work to the subcontractor with the previous consent in writing of the petitioner.
4. So far as the income-tax liability of the respondent in India in relation to the work awarded to it by the petitioner is concerned, returns for th
