2024 (10) TMI 332 - HC - Service Tax

Direction to petitioner/Railway to reimburse Service Tax along with interest paid by the respondent to the Tax Authorities - Section 34 of the Arbitration and Conciliation Act, 1996 - HELD THAT - It is an entrenched principle of Indian law that the courts cannot rewrite a contract between the parties. The said concept is an integral part of the fundamental policy of Indian law. Violating the same tantamounts to contravention with the fundamental policy of Indian law and being in conflict with the most basic notions of justice. Hence, such contravention affords a ground under Section 34 (2) (b) (ii), including its Explanations. Section 28 (3) of the 1996 Act provides that while deciding and making an award, the Arbitral Tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction. Since the terms of the contract between the parties in the present case were unambiguous, contravention of the same by the Arbitral Tribunal tantamounts to a patent illegality within the contemplation of Section 34 (2-A) of the 1996 Act. The Estimate, which was relied on by the Arbitral Tribunal to interpret the clause, is neither a part of the contract nor an agreement between the parties but, as discussed above, is an internal document of the petitioner/Railway for arriving at the estimated bare price of the work. Furthermore, the estimate deals only with the wages of the workmen in terms of the Minimum Wages Act and does not constitute the rates to be quoted by the individual bidders. The estimate merely provided the minimum rates, since if rates were quoted below the same, it would imply that the workmen would be deprived of their legitimate dues under the Minimum Wages Act. It was for the bidders to take into account such minimum price and add to it their own estimates of taxes payable, in the light of Clause 2.2 which mandates that the rates must include all taxes and duties etc. which are applicable to the work done under the tender. Hence, the reliance by the Arbitral Tribunal on the Estimate to interpret Clause 2.2 was patently perverse and illegal, vitiating the impugned award itself. There is no question of the authorities picking and choosing, since Clause 2.2 is universal in its application to all prospective bidders in the tender. Petition allowed.

Summary

Issues Involved:
1. Applicability of Service Tax to the contract.
2. Interpretation of Clause 2.2 of the contract regarding inclusion of taxes.
3. Legality of the Arbitral Tribunal's reliance on external documents for contract interpretation.
4. Grounds for setting aside an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996.

Issue-wise Detailed Analysis:

1. Applicability of Service Tax to the Contract:
The dispute arose from the imposition of Service Tax on the work performed by the respondent for the Railway. Initially, a Notification dated May 27, 2014, exempted Railway works from Service Tax, but this exemption was withdrawn by a subsequent Notification dated March 1, 2015, effective April 1, 2015. The bids for the tender were opened on May 27, 2015, one day after the Notification re-imposing Service Tax was published. The respondent was aware of the Service Tax liability when entering into the contract, as the agreement was executed on September 26, 2015.

2. Interpretation of Clause 2.2 of the Contract:
Clause 2.2 of the contract specified that the rates quoted by the tenderer should include all incidental charges, taxes, and duties, including VAT, Sales Tax, Excise Duty, Octroi, and "other taxes and duties, etc." The court found that this clause unambiguously included Service Tax, as it was applicable to Railway works at the time of the contract. The Arbitral Tribunal's interpretation deviated from this clear contractual provision, which was a critical point of contention.

3. Legality of the Arbitral Tribunal's Reliance on External Documents:
The Arbitral Tribunal relied on an internal Estimate of the Railway, dated March 27, 2015, which did not include Service Tax, to interpret Clause 2.2. The court held this reliance to be patently perverse, as the Estimate was not part of the contract, nor was it communicated to the respondent. The Estimate was merely a wage calculation for internal purposes and did not reflect the actual prices to be quoted by bidders. The court emphasized that the terms of the contract were unambiguous, and no external aid was needed for interpretation.

4. Grounds for Setting Aside an Arbitral Award under Section 34:
The court concluded that the Arbitral Tribunal's award was vitiated by patent illegality and contravened the fundamental policy of Indian law. The Tribunal's decision to reimburse Service Tax and interest to the respondent was against the explicit terms of the contract. The court cited precedents emphasizing that when contract terms are clear, external documents should not be used for interpretation. The award was set aside under Section 34 of the Arbitration and Conciliation Act, 1996, due to the Tribunal's failure to adhere to the contract terms and its reliance on irrelevant external documents.

In conclusion, the court allowed the petition challenging the arbitral award and dismissed the execution case, reinforcing the principle that clear contractual terms must be respected, and arbitral awards must align with the fundamental policy of Indian law.