$~18 * IN THE HIGH COURT OF DELHI AT NEW DELHI + O.M.P. 1208/2014 M/S NATIONAL HIGHWAYS AUTHORITY OF INDIA ..... Petitioner Through: Ms.Tanu Priya Gupta, Adv. versus % M/S SSANGYONG ENGINEERING & CONSTRUCTION CO LTD ..... Respondent Through: Mr. Navin Kumar, Ms. Rashmeet Kaur and Ms. R. Joshi, Advs. CORAM: HON'BLE MR. JUSTICE RAJIV SHAKDHER ORDER
2711.2014 IA No.19623/2104 (Exemption) Allowed subject to just exceptions. OMP No.1208/2014 1. The short issue which has been raised by the petitioner while laying a challenge to the award dated 16.06.2014, passed by the arbitral tribunal, is that, the direction issued to reimburse the entry tax imposed on the respondent on account of its hike from 1% to 27% by the State of Madhya Pradesh, along with interest, is contrary to the provisions of the contract.
2. In order to appreciate the contours of the controversy involved in the present case, the following facts need to be noticed. 2.1 The petitioner had invited global bids for construction of four lane of Jhansi-Lakhanadon section between Km 187 to Km 211 of NH-26 in the State of Madhya Pradesh. This project was funded by the Asian Development Bank and, therefore, entailed certain benefits qua customs and excise duties vis-a-vis material and machinery used by contractors, who would ultimately get to execute the project. 2.2 The respondent also submitted its bid dated 27.10.2005, whereupon it was declared successful and a contract dated 12.04.2006 was executed with the petitioner. This was followed by a supplementary agreement dated 11.02.2009. The total value of the contract was a sum of Rs.133,48,38,663/-. The work assigned to the petitioner related to: (a) construction of new flexible two lane pavement parallel to existing carriage way, construction of new flexible 2/4 lane road/ bypasses/ detours/ service roads and reconstruction/ strengthening/ widening of the existing carriageway; (b) Construction of culverts, minor and major bridges and grade separators, rail over/ under bridges, widening/ rehabilitation, repair of existing bridges (hereinafter referred to as work in issue). 2.3 There is no dispute that the respondent completed the work in October, 2012 and had taken into account, at the stage of submission of bids, all taxes, duties and levies, which prevailed 28 days prior to the last date of the submission of the bid. The base date, with reference to which taxes, duties and levies were factored in, was admittedly, frozen at 29.09.2005. 2.4 It is also not in dispute that at the time of submission of bid, the State of Madhya Pradesh levied entry tax on High Speed Diesel (HSD), which was one of the items procured by the respondent for execution of the contract, at the rate of 1%. Admittedly, the State of Madhya Pradesh enhanced the entry tax from 1% to 27% by bringing about an amendment to the Madhya Pradesh Entry Tax Act, 1976 (in short 1976 Act). 2.5 In this behalf, the State Government of Madhya Pradesh issued a notification dated 01.04.2007, in exercise of its powers, under Section 4- A(1) of the 1976 Act. Thus, with effect from 01.04.2007, the entry tax on HSD procured from outside the State of Madhya Pradesh had to bear entry tax at the rate of 27%, as against 1% prior to the issuance of the aforementioned notification. 2.6 The respondent being aggrieved by the enhancement, raised the issue, with the independent engineer, appointed under the contract, on 12.10.2010. The independent engineer, however, rejected the claim of the respondent. Aggrieved by the decision of the independent engineer, the respondent escalated the matter with the Dispute Adjudication Board (in short DAB). The DAB, like the independent engineer, rejected the claim of the respondent. 2.7 Consequently, arbitration was invoked by the respondent on 01.11.2012. Upon constitution of arbitral tribunal, due opportunity was given to both parties for agitating their respective points of view, both by way of pleadings, and submissions. 2.8 Resultantly, after due deliberation, the arbitral tribunal allowed the claim of the respondent vide its award dated 16.06.2014. By virtue of the award, the arbitral tribunal has directed payment of a sum of Rs. 5,51,98,179/- on account of enhancement in the entry tax. In addition, a sum of Rs. 2,17,12,182/- has also been awarded towards interest on the aforesaid amount for the period commencing from the due date to the date of the award. 2.9 The arbitral tribunal has granted a leeway of 90 days for payment of the sums awarded, failing which, interest at the rate of 10% p.a. is to run on the principal sum of Rs. 5,51,98,179/- w.e.f. 17.06.2014, till the date of actual payment.
3. Aggrieved by the same the present petition under Section 34 of the Arbitration & Conciliation Act, 1996 (in short the Act), was instituted on 11.09.2014.
4. Ms Tanu Priya Dutta, who appeared for the petitioner, assailed the award on the ground that the award had resulted in a situation that the respondent stood to make a commercial gain at the expense of the petitioner. The learned counsel argued that HSD, could have been procured from Sagar, a place situate within the State of Madhya Pradesh, which necessarily would have meant that no entry tax would have been levied on the respondent. It was contended by the learned counsel, that the only reason which propelled respondent to procure HSD from Mathura, in U.P., was, that it could then evade payment of VAT; which was leviable at the rate of 26%. 4.1 This submission was as is obvious based on the assumption that the respondent would have procured HCD from Sagar, in Madhya Pradesh and not from Mathura. 4.2 The learned counsel for the petitioner further submitted that the fact that the petitioner had issued excise duty exemption certificate for procurement of HSD, did not entitle the respondent to seek reimbursement of enhanced entry tax paid by it, on HSD, in the absence of any specific contractual obligation cast on the petitioner, in that behalf. 4.3 The contract, according to the learned counsel, provided for price adjustment, based on the rates of HSD, which were prevalent at Sagar in Madhya Pradesh. 4.4 In this behalf it was stated by the learned counsel for the petitioner that the mere fact the contract documents provided that the HSD would be procured from IOCL, was a factor, which ought not to have weighed with the arbitral tribunal. 4.5 The learned counsel next contended that arbitral tribunal misinterpreted clause 70.7 of the Conditions of Particular Applications (COPA), while granting the relief to the respondent in as much as it ignored, the preceding sub-clauses i.e., clause 70.1 to 70.6 of the COPA, which were applicable to the issue at hand. Thus, according to the learned counsel, the arbitral tribunal had gone beyond the periphery drawn up by the terms of the contract.
5. I have heard the learned counsel for the petitioner, as also Mr Navin Kumar, who appeared on advance notice on behalf of the respondent. The moot point is : whether the tribunal in reaching the conclusion, which it did, had acted with patent illegality or in derogation of the public policy of India. The arbitral tribunal has directed reimbursement of enhanced entry tax based on clause 70.7 of the COPA. The said clause reads as follows:
“....If, after the date 28 days prior to, the latest date for submission of bids for the Contract there occurs in the country in which the works are being or are to be executed, changes to any National or State Statute, Ordinance, Decree or other law or any regulation or by-law of any local or other duly constituted authority, or the introduction of any such State Statute, Ordinance, Decree Law regulation or by-law in India or State of India which causes additional or reduced cost to the Contractor, other than under the preceding sub-clauses of this clause, in the execution of the contract, such additional or reduced cost shall, after due consultation with the Engineer and the Contractor, be determined by the Engineer and shall be added to or deducted from the Contract Price and the Engineer shall notify the Contractor accordingly with a copy to the Employer. Notwithstanding the foregoing, such additional or reduced cost shall not be separately paid or credited if the same shall already have been taken into account in the indexing of any inputs to the Price Adjustment Formulae in accordance with the provisions of sub-clauses 70.1 to 70.6...”
5.1 The issue which arises is, whether the arbitral tribunal was justified in applying the provisions of clause 70.7 of COPA. In this context, what is required to be noted is that, in terms of the conditions of the tender, the bids submitted by the respondent were based on taxes, duties and levies, prevailing 28 days prior to the last date of the submission of the bid, i.e., 29.09.2005. 5.2 It is also a matter of fact that right from the commencement of the execution of the work in issue, the respondent had been procuring HSD from Mathura, where IOCL’s refinery had been located, for the reason that with the exemption made available to it qua excise duty, the HSD procured by it, from Mathura, as against as against Sagar, was cheaper by about Rs. 11.05 per ltr., even prior to 01.04.2007, when entry tax was leviable at the rate of 1%. 5.3 The arbitral tribunal has also recorded a finding of fact that even after the enhancement of entry tax, from 1% to 27%, the HSD sourced by the respondent from Mathura, as against Sagar, was cheaper by Rs. 2.07 per ltr. 5.4 In this context, what the arbitral tribunal was called upon to examine, was that, was there, any provision in the contract, which mandated the respondent to procure HSD from Sagar, as contended by the petitioner. 5.5 The arbitral tribunal noted, and in my view, quite correctly, that while, the contract did not specify any place, within India, from which HSD had to be procured, they could not locate any provision which would require the respondent to procure HSD from a place other than that from which it chose to procure the same, i.e., Mathura. 5.6 There being no provision in the contract obliging the respondent to procure HSD from Sagar, it was rightly found by the arbitral tribunal that the respondent was free to procure HSD, from a source which, according to it was the cheapest option available to it. 5.7 A perusal of clause 70.7 of the COPA, would show that, it provides for, adjustment of costs, on account of subsequent legislation. There is no denying that a notification was issued post the base date, i.e., 29.09.2005. Therefore, once that condition is met, the adjustment of costs, is required to take place, based on the impact of the subsequent legislation. In the present case, it brought about an increase in cost as there was an enhancement of entry tax. 5.8 The only caveat to the adjustment of cost is, where addition or reduction in cost has already been taken into account, in indexing of any of the inputs to the price adjustment formulae; in accordance with the provisions of preceding sub-clause, i.e., sub-clauses 70.1 to 70.6. The arbitral tribunal has returned a finding of fact that additional cost had not been paid to the respondent under sub-clauses 70.1 to 70.6.
6. The other submissions made by the learned counsel for the petitioner that merely because excise duty exemption entitlement certificates were issued to the respondent with regard to the procurement of HSD from Mathura, or that the contract documents required the respondent to procure HSD from IOCL, was not a factor which ought to have weighed with the arbitral tribunal, are submissions which are completely misconceived. 6.1 The reason, is that, the ratio of the award is not, what is sought to be portrayed by the learned counsel for the petitioner. All that can be said in respect of the aforementioned submission, is that, it is not as if the petitioner was unaware of the fact that the respondent was procuring HSD from Mathura till such time the notification dated 01.04.2007 was not issued; the issuance of which was a fortuitous circumstance. The petitioner, till such time notification dated 01.04.2007 was issued, had no objection to the petitioner sourcing HSD from Mathura. It is when, the aforementioned notification, was issued and the respondent chose to make a claim for additional cost on account of enhanced entry tax, that the petitioner, had a problem, it appears, with the source from which HSD, was obtained. The submission of the learned counsel for the petitioner that the respondent chose to procure HSD from Mathura as against Sagar only to evade payment of VAT, is clearly untenable, in view of what is stated above. 6.2 As has been indicated above, the respondent is entitled to choose a source which results in optimum cost. The petitioner’s contention to the contrary overlooks the basic norm that every business seeks to achieve, which is, optimization of costs.
7. In these circumstances, the only conclusion which could be arrived at (and which is also the conclusion that the arbitral tribunal has arrived at), is that, the costs had to be adjusted on account of enhanced entry tax, which occurred, after the base date, i.e., 29.09.2005.
8. I find no error of law or fact in the conclusion arrived at by the arbitral tribunal. The petition is, therefore, dismissed. The parties will, however, bear their own costs. RAJIV SHAKDHER, J NOVEMBER27 2014 kk