2020 (10) TMI 870 - HC - Companies Law

Grant of Interim Relief - Amounts representing tax/Tax Deducted at Source (TDS) on the price of the FCDs and interest payable to the Respondent, which was required to be deposited in Court, is withheld - HELD THAT - The purchaser s liability to pay this amount (namely, the Holdback Amount) into the treasury towards the tax liability of the seller is essentially a matter of their inter se agreement, which is contained in clause 4.5.1 of the SDPA. The payability of the tax for the consideration received under the SPDA may be a matter between the assessee i.e. (the Respondent seller) and the revenue, but so far as the deposit of the Holdback Amount into treasury towards the tax liability of the Respondent is concerned, it is certainly a matter as between the Respondent and its contracting counter party, namely, the Appellants. There is a clear obligation on the part of the Appellants to deposit the Holdback Amount into the treasury; Section 205 of the Income Tax Act has nothing to do with the same. As far as Section 9 of the Act is concerned, it cannot be said that this court, while considering a relief thereunder, is strictly bound by the provisions of Order 38 Rule 5. As held by our Courts, the scope of Section 9 of the Act is very broad; the court has a discretion to grant thereunder a wide range of interim measures of protection as may appear to the court to be just and convenient , though such discretion has to be exercised judiciously and not arbitrarily. The court is, no doubt, guided by the principles which civil courts ordinarily employ for considering interim relief, particularly, Order 39 Rules 1 and 2 and Order 38 Rule 5; the court, however, is not unduly bound by their texts - In an appropriate case, where the court is of the view that there is practically no defence to the payability of the amount and where it is in the interest of justice to secure the amount, which forms part of the subject matter of the proposed arbitration reference, even if no case strictly within the letter of Order 38 Rule 1 or 2 is made out, though there are serious allegations concerning such case, it is certainly within the power of the court to order a suitable interim measure of protection. The deductor, both under the Income Tax Act and the contract between the parties (clause 4.5.1 of SDPA), is nevertheless required to deposit the amount deducted (the Holdback Amount) into the treasury. If no tax is payable, the deductee assessee would be entitled to refund of this amount. In any case, there is no way the deductor could retain the Holdback Amount. Appeal dismissed.

Summary

Issues:
- Challenge to an order passed under Section 9 of the Arbitration and Conciliation Act, 1996
- Interpretation of the Share and Debenture Purchase Agreement
- Obligation to deposit Holdback Amount into the treasury
- Scope of Section 9 of the Act and Order 38 Rule 5
- Court's discretion in granting interim relief
- Allegations of disposing of assets by the Appellants
- Benefit of tax in relation to the Holdback Amount
- Merit of the appeals and subsequent dismissal

Analysis:

The judgment pertains to commercial appeals challenging an order under Section 9 of the Arbitration and Conciliation Act, 1996, where the learned Single Judge granted interim relief to the Respondent, requiring the Appellants to deposit a specified amount in court. The disputes arose from a Share and Debenture Purchase Agreement (SDPA) between the parties, which allowed the Appellants to withhold sums representing tax/TDS on the price of debentures. The impugned order directed the deposit of the Holdback Amount into court, as the amount was neither paid to the revenue nor to the seller, based on the terms of the SDPA.

The Appellants contended that the obligation to deposit the Holdback Amount into the treasury was a matter of their agreement with the Respondent, distinct from the provisions of the Income Tax Act. The court highlighted that the scope of Section 9 of the Act is broad, allowing for a wide range of interim measures, and the court is not strictly bound by Order 38 Rule 5. The court must balance procedural principles with the promotion of arbitration efficacy. The absence of a defense regarding the Holdback Amount indicated no merit in the appeals, leading to their dismissal.

Moreover, serious allegations of asset disposal by the Appellants were raised, suggesting an attempt to evade potential liabilities. The Respondent's claim for depositing the Holdback Amount in court was deemed valid, irrespective of the tax's actual payability. The judgment emphasized that the deductor must deposit the Holdback Amount into the treasury, regardless of the tax's final status, and that the deductor cannot retain the amount in any scenario.

In conclusion, the appeals were dismissed, and the respective Interim Applications were also rejected. The Respondent's application for execution of the order was mentioned, with a statement to delay its hearing for four weeks. No stay order was necessary, ensuring the continuation of the pending arbitration reference.