2022 (1) TMI 311 - HC - VAT and Sales Tax

Validity of Arbitral Award - neglected to furnish the Form-Cs within the time prescribed resulting in a sales tax assessment - penalty imposed under the Take or Pay/Supply or Pay Clause - award of amount claimed by DSM on account of sales tax paid to the Sales Tax Authorities - whether the impugned award is vitiated by patent illegality as the Arbitral Tribunal has entered into an award in favour of HPCL for recovery of the amounts of penalty claimed in terms of Clause 3 of the Initial Agreements (Take or Pay/Supply or Pay Clause) and, in favour of DSM under a similarly worded clause in the Fifth Agreement? - HELD THAT - An amount equivalent to 10% of the basic rate would be payable for undelivered quantity, which falls short of the threshold of 90% of the ordered quantity. DSM was also entitled to receive penalty at the same rate for un-indented quantity that falls short of the said threshold. The clause also expressly records that it was a true estimate value of damage/loss. It is clear from the plain language of the said clause that it is in the nature of providing liquidated damages - Undisputedly, DSM would not be liable to pay any amount under the aforesaid clause if it was entitled to suspend the supplies on account of non-supply/delay in providing the Form-Cs. It is also not disputed that DSM had called upon HPCL to indemnify it for any loss that it may incur on account of delay or deficiency in providing the Form-Cs but HPCL had failed to provide any such indemnity. It is undisputed that HPCL was either required to furnish the Form-Cs or to pay the sales tax to DSM on such supplies as a part of the consideration. Failure to pay such sales tax or provide the requisite Form-C would in fact amount to a failure on the part of HPCL to pay full consideration for the supply of ethanol by DSM. There are only two reasons discernable from the impugned award for such rejection. First, that DSM had also claimed damages under Clause 3 of the Initial Agreements; and second, that the provisions of Clause 3 of the Initial Agreements could not be ignored. Since DSM had failed to supply the minimum 90% of the un-indented ordered quantity, it was liable to pay damages under Clause 3 of the Initial Agreements - HPCL had neither pleaded that it was not feasible to establish the loss nor had led any material to establish that it had suffered loss on account of non-supply of ethanol by DSM. There is also no pleading to the effect that ethanol was otherwise not readily available or available at a price higher than as agreed between DSM and HPCL. DSM s contention that HPCL had failed to establish any loss was contested on an erroneous premise that HPCL was not required to establish the same. HPCL had delayed in filing its counter claim, which was filed along with its sur-rejoinder after the pleadings were complete. The application to make an amendment was moved at the stage of final hearing of the claims. Undeniably, the same was at a much belated stage. Thus, the decision of the Arbitral Tribunal to deny HPCL s request to amend the claim cannot be faulted. The impugned award is set aside - Petition disposed off.

Summary

Issues Involved:
1. Validity of the penalty imposed under the 'Take or Pay/Supply or Pay' Clause.
2. Liability for sales tax due to non-furnishing of Form-C.
3. Permissibility of amending the counter-claim during arbitration proceedings.

Detailed Analysis:

1. Validity of the Penalty Imposed Under the 'Take or Pay/Supply or Pay' Clause:
The primary controversy revolved around whether the arbitral award was vitiated by patent illegality in awarding penalties under the 'Take or Pay/Supply or Pay' Clause. The agreements between the parties stipulated a penalty for failing to supply or uplift a minimum of 90% of the order quantity. DSM argued that it had not breached its obligations, as it suspended supplies due to HPCL's failure to provide Form-Cs, which resulted in a higher sales tax liability. The Arbitral Tribunal found DSM liable for penalties under the clause, reasoning that DSM had failed to deliver supplies against indents placed by HPCL. However, the Tribunal did not adequately address whether DSM was justified in suspending supplies due to HPCL's delay in furnishing Form-Cs. The Tribunal's conclusion that DSM was not justified in withholding supplies because no Form-C was pending at the time of suspension was deemed insufficient, as it failed to consider the prolonged delay in providing Form-Cs. The court held that HPCL was required to establish the loss suffered due to DSM's non-supply, which it did not. Therefore, the award of ?88,14,785/- in favor of HPCL was not sustainable.

2. Liability for Sales Tax Due to Non-Furnishing of Form-C:
DSM claimed compensation for the sales tax it paid due to HPCL's failure to provide Form-Cs on time. The Arbitral Tribunal awarded ?35,30,363/- to DSM for the sales tax paid. However, it was later established that DSM succeeded in its claim against the Uttar Pradesh Sales Tax Authorities, rendering the award for sales tax compensation unsustainable. Both parties agreed that the award for the sales tax amount should be set aside.

3. Permissibility of Amending the Counter-Claim During Arbitration Proceedings:
HPCL sought to amend its counter-claim to enhance the penalty amount from ?88,14,785/- to ?1,09,21,140/-. The Arbitral Tribunal rejected the application for amendment, citing it was highly belated. The court upheld this decision, noting that HPCL had delayed filing its counter-claim and sought the amendment at the final hearing stage. Section 23(3) of the Arbitration and Conciliation Act, 1996 allows amendments unless the Tribunal considers it inappropriate due to delay. Given the circumstances, the Tribunal's decision to deny the amendment was justified.

Conclusion:
The court set aside the impugned arbitral award. The award of penalties under the 'Take or Pay/Supply or Pay' Clause was found unsustainable due to HPCL's failure to establish the loss suffered. The award for sales tax compensation was also set aside, as DSM had succeeded in its claim against the tax authorities. The Tribunal's decision to reject the amendment of HPCL's counter-claim was upheld due to the delay in filing. The petitions were disposed of accordingly.