2016 (4) TMI 801 - SC - Service Tax

Whether increase in rates of service tax in respect of bank guarantee and insurance premium is directly relatable to terms of the contract and performance under the Contract is certainly a possible view. Appellant submitted that only those claims which were constructional inputs alone would be eligible to be covered under Clause 70 of COPA. Also the service tax on bank guarantee could have been avoided by the claimant, if the bank guarantee was replaced by tendering cash and that the facility of bank guarantee was optional and at the discretion of the claimant. Similarly, money advances were given for the benefit of the claimant and any cost associated with such benefit would not come within the scope of Clause 70.8. However, respondent submitted that the bank guarantees were required to be given under the contract itself and such requirement was stipulated by the appellant primarily to reduce its financial risk and to bind the claimant for its performance or protecting the money advanced to the respondents. In his submission, furnishing a performance bank guarantee @ 10% of the contract price was a mandatory condition of the contract under Clauses 10.1 and 10.2 of COPA. Though at some stage the option of performance bond was mentioned in COPA, such option was withdrawn making performance security to be compulsorily in the form of an unconditional bank guarantee. Such requirement being directly referable to essential conditions and arising out of the terms of the Contract, according to him the matter was definitely within the ambit of Clause 70.8 of COPA. Held that - the assessment made by the Arbitral Tribunal as affirmed by the High Court was definitely within its jurisdiction. It has consistently been laid down by this Court that construction of the terms of a Contract is primarily for an Arbitrator or Arbitral Tribunal to decide and unless the Arbitrator or Arbitral Tribunal construes the contract in such a way that no fair minded or reasonable person could do, no interference by Court is called for. Viewed thus, we do not see any reason or justification to interfere in the matter. The view that the increase in rates of service tax in respect of bank guarantee and insurance premium is directly relatable to terms of the contract and performance under the Contract is certainly a possible view. - Decided against the appellant

Summary

Issues:
1. Interpretation of Clause 70.8 of Conditions of Particular Application (COPA) in a construction contract.
2. Reimbursement of additional costs due to changes in service tax rates on insurance premium and bank guarantee charges.
3. Jurisdiction of Arbitral Tribunal in deciding contractual disputes.
4. Applicability of Clause 70.8 to mandatory bank guarantee requirements.

Interpretation of Clause 70.8 of COPA:
The case involved disputes arising from a construction contract where the respondent claimed reimbursement for increased service tax rates on insurance premium and bank guarantee charges. The Arbitral Tribunal interpreted Clause 70.8 of COPA, which allowed for adjustments in contract price due to changes in legislation causing additional costs to the contractor. The Tribunal found that service tax was not an input in the Price Adjustment Formulae, thus entitling the respondent to reimbursement under the clause.

Reimbursement of Additional Costs:
The respondent sought reimbursement for excess service tax paid on insurance premium and bank guarantee charges due to revised rates. The Tribunal awarded specific sums under each dispute, citing Clause 70.8 as the basis for reimbursement. The High Court upheld the Tribunal's decision, emphasizing the contractual obligation to cover additional costs resulting from legislative changes, leading to the dismissal of the appellant's challenge.

Jurisdiction of Arbitral Tribunal:
The appellant challenged the Tribunal's award through Section 34 of the Arbitration and Conciliation Act, 1996, before the High Court. Both the Single Judge and Division Bench affirmed the Tribunal's decision, highlighting the Tribunal's authority in interpreting contract terms and resolving disputes. The Supreme Court reiterated that contractual interpretation primarily falls within the Arbitrator's domain, warranting minimal judicial interference unless unreasonable.

Applicability of Clause 70.8 to Mandatory Bank Guarantee:
The appellant contended that only constructional inputs were eligible under Clause 70 of COPA, excluding service tax on bank guarantee charges. However, the respondent argued that bank guarantees were contractually mandated to reduce financial risk and ensure performance, making them covered under Clause 70.8. The Court upheld the Tribunal's assessment, emphasizing the contractual relevance of bank guarantees and insurance premiums to performance under the contract.

Conclusion:
The Supreme Court dismissed the appeals, upholding the Tribunal's decision on reimbursement of additional costs under Clause 70.8 of COPA. The Court affirmed the Tribunal's jurisdiction in contract interpretation and dispute resolution, emphasizing the reasonableness of the Tribunal's assessment. The decision highlighted the contractual obligation to cover increased costs due to legislative changes, reinforcing the enforceability of contract terms in construction agreements.