Excise Duty Disputes Non-Arbitrable Only When Involving Sovereign Functions Including Determination Of Tax Rate Or Liability: Delhi High Court
The Delhi High Court bench of Justice Prateek Jalan has held that a dispute regarding excise duty is only non-arbitrable when it involves a sovereign function, such as determining tax liability or the rate at which duty must be paid to revenue authorities. The bench clarified that this issue is separate from the dispute which concerns whether the claimant is obligated to pay...
The Delhi High Court bench of Justice Prateek Jalan has held that a dispute regarding excise duty is only non-arbitrable when it involves a sovereign function, such as determining tax liability or the rate at which duty must be paid to revenue authorities.
The bench clarified that this issue is separate from the dispute which concerns whether the claimant is obligated to pay the respondent for the goods supplied including excise duty at the rate specified in the invoices.
Brief Facts:
Bharat Broadband Network Ltd. (Petitioner) challenged an arbitral award before the High Court under Section 34 of the Arbitration and Conciliation Act, 1996. The award was rendered in disputes arising from two Purchase Orders (POs) which the Petitioner placed with Paramount Communications Ltd (Respondent). The disputes pertained to the supply of optical fiber cable under Package A (North-West India) and Package F (East and North-East India) as part of a tender issued by the Petitioner. The arbitrator partially allowed the Respondent's claims and awarded a sum of Rs. 1,70,76,639/- out of a total claim of Rs. 12,77,08,909/- along with interest at the rate of 9% per annum and costs amounting to Rs. 5,00,000/-.
The Petitioner initially issued a Notice Inviting Tender (NIT) for the supply of optical fiber cable and accessories which was divided into six packages each corresponding to different regions of India. The Respondent submitted bids for Package A and Package F which led to the issuance of Advance Purchase Orders (APOs). These APOs were valued at Rs. 119,73,05,950.51/- for Package A and Rs. 187,29,38,962.66/- for Package F. Subsequent amendments were made to the APOs, which were accepted by the Respondent, resulted in the final POs being issued on 25.03.2014, valued at Rs. 30,25,28,952.07/- and Rs. 71,79,72,748.61/- for Package A and Package F respectively.
The primary issue in dispute was the excise duty payable on the goods supplied under the POs. The Petitioner classified the goods under Customs and Excise Tariff Head No. 90011000 in the APOs, which attracted a duty rate of 12.36%. However, in the POs, the goods were reclassified under Tariff Head No. 85447090, which attracted a reduced duty rate of 10.30%. The Respondent argued that the Excise Department classified the goods under Tariff Head No. 90011000 thereby obligating the Petitioner to pay the higher excise duty of 12.36%. The Respondent repeatedly communicated this to the Petitioner and requested amended POs which were not issued.
Apart from the excise duty differential, the Respondent also claimed differences in central sales tax and other deductions made by the Petitioner. The Respondent's claims in arbitration included Rs. 67,26,437/- for Package A, Rs. 1,85,70,315/- for Package F, Rs. 9,97,58,113/- in interest, and Rs. 26,54,043/- for interest on excess margin money and other related charges.
The Petitioner contested these claims, relying on Clause III.12.2 of the NIT, which stated that prices would remain fixed and would only be subject to revision in the event of a “change” in taxes. The Petitioner argued that the claims did not arise from any such change and that similar vendors for other packages had confirmed the classification adopted by the petitioner. The Petitioner also contended that disputes regarding the classification of goods for tax purposes were not arbitrable, as such matters fell within the sovereign domain.
The arbitrator ruled that the contract was governed by the POs and not the APOs, but nonetheless allowed the Respondent's claims regarding the excise duty differential. The arbitrator held that the matter was arbitrable and fell within the scope of a “change” in tax as defined by Clause III.12.2 of the NIT. The arbitrator rejected the Respondent's other claims due to inadequate pleadings. Consequently, the Respondent was awarded Rs. 51,10,050/- for Package A and Rs. 1,19,66,589/- for Package F, with 9% interest per annum and partial costs.
Observations by the High Court:
The High Court had three issues before it: arbitrability of disputes between the parties, the interpretation of tax-related provisions in the contract, and the Respondent's entitlement to recover the claimed amounts along with excise duty.
The first issue revolved around whether the disputes between the parties were arbitrable. The arbitrator held that the dispute was between two commercial entities and did not involve any adjudication regarding a sovereign function of the State. This was based on the judgment of the Supreme Court in Vidya Drolia v. Durga Trading Corpn. where it was held that disputes related to sovereign functions are not arbitrable. The arbitrator noted that the petitioner did not raise any objections under Section 16 of the Arbitration Act during the proceedings and even withdrew an application challenging the tribunal's jurisdiction. The High Court found no error in the arbitrator's reasoning and held that the dispute did not concern the liability to tax or the rate at which duty must be paid to revenue authorities but was limited to whether the Petitioner was liable to pay the Respondent the price of the goods supplied along with the excise duty mentioned in the invoices. As the revenue authorities were not parties to the dispute, and the matter concerned only the classification of goods between two commercial entities, the High Court upheld the arbitrability of the dispute.
The next question before the High Court was whether the contract allowed the Respondent to claim an amount exceeding the POs based on a difference in excise duty classification. The arbitrator relied on the Supreme Court's judgment in Forward Construction Co. v. Prabhat Mandal (Regd.) and a purposive approach to conclude that the Respondent's claim was contractually justified. The High Court noted that it could interfere with the arbitrator's construction of the contract under Section 34 of the Arbitration Act only if the construction was manifestly unreasonable or implausible. However, the High Court did not find the Petitioner's arguments to meet this standard. The contract, Clause III.12.1, provided for price variation caused by "changes in taxes/duties" and the arbitrator interpreted this provision to include changes in classification not just changes in duty rates within a given classification. The High Court found no implausibility in this analysis and upheld the arbitrator's reasoning.
The High Court noted that the arbitrator's observations on the classification of goods under Tariff Head No. 90011000 were made solely for the purpose of determining the extent of liability and did not constitute a declaration in rem nor did they bind any dispute between the assessee and the revenue authorities.
The High Court further held that the award did not suffer from any arbitrariness or perversity that would justify interference under Section 34 of the Arbitration Act. The High Court found that the Respondent adequately informed the Petitioner of the potential excise duty liabilities, and the documentary evidence presented including the certificate, sufficiently supported the arbitrator's conclusions. The High Court held that the assessment of evidence and the weight given to it are matters typically within the arbitrator's purview and the conclusions reached were reasonable and justified.
Consequently, the High Court found no merit in the petition and dismissed it along with all pending applications.
Case Title: Bharat Broadband Network Ltd. Vs Paramount Communications Ltd
Citation: 2024 LiveLaw (Del) 930
Case Number: O.M.P. (COMM) 355/2024 & I.As. 36554/2024, I.A. 36555/2024
Advocate for the Petitioner: Mr. Chandan Kumar, Advocate.
Advocate for the Respondent: None
Date of Judgment: 22.08.2024