2024 (10) TMI 1134 - HC - Service Tax

Challenge to Nil Arbitral Award, on extraneous consideration, levying the service tax on the petitioners on the NCA - interpretation of the terms of the Agreements - determination of contractual obligations viz indirect tax (service tax) liability and for the payment of damages constituted as costs incurred by the petitioner in defending the Assessment Order. The core argument of the Petitioners is that they had sought a Declaratory finding as to on whom the liability of any tax that may get imposed in future would lie, but this question has been left unanswered. HELD THAT - The first aspect which is agitated is that the Show Cause Notice and Assessment Order for payment of Service Tax in the sum of Rs. 9,68,50,000/- had been served upon the petitioners. The parties had specifically agreed in their NCA that there is no service tax leviable on the said Agreement. In case the Notice got issued in the name of the petitioners, it is for the petitioners to have defended the same in which they were successful - It was a Notice/Order issued for payment of service tax on the premise that NCA attracted the service tax. The Notice may have been found to be not sustainable by CESTAT, but in no way can the respondent be held responsible for the costs incurred by the petitioners in defending the said Notice/Order before the CESTAT. The overhead costs, expenses and interest on the overdraft to garner money for pre Appeal deposit may have been borne by the petitioners as the Notice was in their name, and under no law can the incurred expenses be fastened on the respondent. Furthermore, the specific challenge was to the Notice/Order vide which the Service Tax was sought to be imposed upon the petitioners, which was not leviable in the first instance. In view of erroneous Notice in the name of the Petitioners, it was only they who had to defend themselves from imposition of the Service Tax. The costs incurred for challenging. The Notices was specific to the petitioners and they cannot transpose their liability on the respondents - It cannot be overlooked that in the Agreements, in was specifically mentioned that the service Tax is not leviable on NCA fees. For the erroneous acts of the third party, the respondent can definitely not be held liable for the costs incurred in defending the Notices before CESTAT. There is no denying that the parties could have contracted in regard to which party would be liable for any taxes that may get imposed in regard to the Agreements between the parties, but Petitioners have not been able to show any such clause providing that any liability, whether rightly or wrongly sought to be imposed, shall be the responsibility or indemnified by the Respondent - The learned Arbitral Tribunal was thus, right in giving the Nil Award. The petitioners have also claimed that the costs of the arbitration proceedings which it had initiated for determination of the liability of which to pay the impeding tax demand - In fact, the respondent had even filed an Application under Section 16 of the Act to assert that the arbitration had been invoked prematurely, though the same got dismissed by the learned Arbitrator. The arbitration proceedings were not at the behest or at the instance of the respondent and, therefore, no costs can be recovered from the respondent. The ground of patent illegality is applied when there is a contravention of the substantive law of India, the Arbitration Act or the rules applicable to the substance of the dispute - it is evident that the grounds agitated by the petitioners, do not fall in either of the categories of patent illegality or fundamental breach of Indian Law. The scope of interference under Section 34 of the Act being limited, there is no merit in the present Petition under Section 34 of the Act, 1996 which is hereby dismissed.

Summary

Issues Involved:
1. Interpretation of Non-Compete Agreement (NCA) and Business Transfer Agreement (BTA) regarding Service Tax liability.
2. Validity of the Arbitral Tribunal's Nil Award.
3. Alleged procedural errors and non-consideration of evidence by the Arbitral Tribunal.
4. Limitation period for filing the petition under Section 34 of the Arbitration and Conciliation Act, 1996.

Issue-wise Detailed Analysis:

1. Interpretation of Non-Compete Agreement (NCA) and Business Transfer Agreement (BTA) regarding Service Tax liability:

The core issue was the interpretation of the NCA and BTA concerning the liability to pay Service Tax. The petitioners argued that the respondent was contractually obligated to bear the Service Tax liability as per the agreements. However, the Tribunal found that the agreements did not explicitly impose such a liability on the respondent. The CESTAT's order dated 01.01.2018, which held that Service Tax was not leviable on the NCA, was pivotal. The Tribunal concluded that since no Service Tax was applicable, the question of determining liability became academic. The petitioners' contention that the agreements implicitly transferred the tax liability to the respondent was not upheld, as there was no explicit clause to this effect.

2. Validity of the Arbitral Tribunal's Nil Award:

The Tribunal issued a Nil Award, reasoning that the primary issue of Service Tax liability was resolved by the CESTAT's order, rendering the arbitration academic. The petitioners challenged this, claiming the Tribunal failed to adjudicate on the contractual obligations regarding costs incurred in defending the Service Tax demand. However, the Tribunal noted that the costs incurred were due to the petitioners' own actions in defending the erroneous Assessment Order, which was not attributable to the respondent. Consequently, the Tribunal found no basis to award costs or damages to the petitioners.

3. Alleged procedural errors and non-consideration of evidence by the Arbitral Tribunal:

The petitioners argued that the Tribunal ignored evidence and procedural orders, particularly regarding their claims for litigation costs and interest on loans taken for pre-deposit. They claimed that the Tribunal dismissed their applications under Section 23(3) of the Act without proper consideration. However, the Tribunal held that the petitioners did not substantiate their claims with adequate evidence. The Tribunal's discretion in evaluating the quality and quantity of evidence was emphasized, and it was noted that mere filing of documents does not equate to proof of claims.

4. Limitation period for filing the petition under Section 34 of the Arbitration and Conciliation Act, 1996:

The respondent contended that the petition was filed beyond the limitation period prescribed under Section 34(3) of the Act. The Tribunal's unsigned award was communicated via email on 16.02.2019, and the signed copy was collected on 01.03.2019. The petitioners filed the petition on 21.05.2019 and refiled it on 25.05.2019 after removing objections. The court found that the petition was filed within the limitation period, as the signed award was received on 01.03.2019, and the filing was within the three-month period thereafter.

Conclusion:

The court dismissed the petition under Section 34 of the Arbitration and Conciliation Act, 1996, finding no merit in the claims of patent illegality or breach of fundamental policy of Indian law. The Tribunal's Nil Award was upheld, as it was based on the CESTAT's order and the absence of explicit contractual provisions transferring Service Tax liability to the respondent. The procedural conduct and evidence evaluation by the Tribunal were deemed appropriate, and the petition was filed within the prescribed limitation period.