2017 (4) TMI 504 - HC - Service Tax

Dispute between the contracting parties related to Service tax - invocation of unconditional bank guarantee - The petitioner contends in view of the nature of the dispute and clear assertion of the petitioner that service tax is not payable and the opinion of the Government on the basis of which the respondent invoked the bank guarantee is untenable in law. Held that - The parties have agreed to the appointment of an Arbitrator by this Court. Accordingly, Mr. J.P. Khaitan, Senior Advocate is appointed as Arbitrator to adjudicate the dispute between the parties within four months from the date of entering reference.- There shall be an unconditional order of injunction restraining the respondent to realise the amount from IDBI Limited for a period of seven days from date.

Issues:
1. Invocation of unconditional bank guarantee resisted by petitioner.
2. Dispute regarding liability towards service tax.
3. Motive behind the invocation of the bank guarantee questioned.
4. Legal aspects of unconditional bank guarantee and its invocation.
5. Proposal for furnishing a new bank guarantee and appointment of an Arbitrator.
6. Order of injunction restraining respondent from realizing the amount.
7. Merits of the dispute left to be decided by the Arbitrator.

Analysis:
1. The petitioner resisted the invocation of an unconditional bank guarantee based on the renewal request made by the respondent. The bank guarantee was invoked without prior intimation to the petitioner after a dispute regarding service tax liability was raised. The petitioner contended that the bank guarantee should not have been invoked due to the ongoing dispute.

2. The bank guarantee in question was unconditional, and the petitioner was not entitled to be informed before its invocation unless specified otherwise. The petitioner's dispute regarding service tax liability was deemed irrelevant to the bank's obligation to honor the guarantee. The petitioner's counsel questioned the motive behind invoking the bank guarantee.

3. The judgment reiterated the well-settled legal principle concerning unconditional bank guarantees, emphasizing the bank's obligation to honor properly invoked guarantees. The petitioner's attempt to introduce the concept of fraud lacked substance, and the court emphasized that the bank guarantee was independent of the underlying contract between the parties.

4. A proposal was made for the petitioner to furnish a new bank guarantee to replace the earlier one, subject to certain conditions. An Arbitrator was appointed to adjudicate the dispute between the parties within a specified timeframe, with the parties sharing the Arbitrator's remuneration and arbitration expenses equally.

5. An unconditional injunction was issued, restraining the respondent from realizing the amount from a specified entity for a limited period. The court clarified that the dispute's merits were not addressed in the judgment and would be decided by the Arbitrator in due course.

6. The judgment concluded by disposing of the application, noting that no affidavit-in-opposition was required, and considering the allegations in the petition as denied. The decision outlined the steps to be taken regarding the bank guarantee, the appointment of the Arbitrator, and the temporary injunction against the respondent.

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