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Wednesday, April 25, 2012

Arbitration and conciliation Act - while passing award , the arbitrator deducted the service tax on the bills of the respondent, which was challenged- high court reversed the finding of arbitrator and set aside the award itself.The Apex court held that deducting service tax on the bills of respondent is not illegal and for that sake no award is liable to be set aside as the high court himself substituted its view over the view taken by Umprie as if an appeal court is wrong.-mpire has considered the fact situation and placed a construction on the clauses of the agreement which according to him was the correct one. One may at the highest say that one would have preferred another construction of Clause 17.3 but that cannot make the award in any way perverse. Nor can one substitute one's own view in such a situation, in place of the one taken by the umpire, which would amount to sitting in appeal. As held by this Court in Kwality Mfg. Corpn. v. Central Warehousing Corpn*. The Court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the arbitrator, which is what the High Court has practically done in this matter. The umpire is legitimately entitled to take the view which he holds to be the correct one after considering the material before him and after interpreting the provisions of the agreement. If he does so, the decision of the umpire has to be accepted as final and binding.” *[2009 (5) SCC 142] 30. In view of what is stated above, the respondent as the contractor had to bear the service tax under clause 9.3 as the liability in connection with the discharge of his obligations under the contract. The appellant could not be faulted for deducting the service tax from the bills of the respondent under clause 9.3, and there was no reason for the High Court to interfere in the view taken by the arbitrator which was based, in any case on a possible interpretation of clause 9.3. The learned single Judge as well as the Division Bench clearly erred in interfering with the award rendered by the arbitrator. Both those judgments will, therefore, have to be set-aside. 31. Accordingly, the appeal is allowed and the impugned judgments of the learned Single Judge as well as of the Division Bench, are hereby set aside. The award made by the arbitrator is upheld. The parties will bear their own costs.


                                                           Reportable
                        IN THE SUPREME COURT OF INDIA
                        CIVIL APPELLATE JURISDICTION
                        CIVIL APPEAL NO.3905 OF 2012
  (Arising out of SPECIAL LEAVE PETITION (CIVIL) NO. 17943/2008)
Rashtriya Ispat Nigam Limited                      …      Appellant

                                    Versus

M/s Dewan Chand Ram Saran                            …     Respondent





                          J  U  D  G  E  M  E  N  T

H.L. Gokhale J.

            Leave granted.

2.          This appeal is directed against the  judgment  and  order  dated
25.2.2008 rendered by a Division Bench of the Bombay High  Court  in  Appeal
No.188/2006 confirming the decision of a single Judge of  that  court  dated
4.7.2005 in Arbitration Petition No.364/2004, whereby  the  High  Court  has
set aside the award dated 25.5.2004 passed by a sole arbitrator which  award
had dismissed the Claim Petition of the  respondent  against  the  appellant
herein.

3.           The  questions  involved  in  this  appeal  are  two-fold,  (i)
firstly, whether under the relevant clause 9.3 of the terms  and  conditions
of the contract between the parties, the appellant was  right  in  deducting
the service tax from  the  bills  of  the  respondent  and,  (ii)  secondly,
whether the interpretation of this clause and the consequent award  rendered
by the arbitrator was against  the  terms  of  the  contract  and  therefore
illegal as held by the  High  Court,  or  whether  the  view  taken  by  the
arbitrator was a possible, if not a plausible view.

      The contract and the relevant clause:

4.          The appellant – a Govt. of India undertaking is engaged  in  the
manufacture of steel products and pig-iron for  sale  in  the  domestic  and
export markets.  The respondent  is  a  partnership  firm  carrying  on  the
business of transportation of  goods.   In  the  year  1997,  the  appellant
appointed  the  respondent  as  the  handling  contractor  in   respect   of
appellant’s iron and steel materials  from  their  stockyard  at  Kalamboli,
Navi Mumbai.  A formal contract was entered into between the two of them  on
17.6.1998.  ‘Terms and conditions for handling of iron and steel  materials’
though recorded in a separate document, formed  a  part  of  this  contract.
Clause 9.0 of these terms and  conditions  was  concerning  the  payment  of
bills.  Clause 9.3 thereof read as follows:-
            “9.3.      The Contractor shall bear and pay all  taxes,  duties
      and other liabilities in connection with discharge of his  obligations
      under this order.  Any income tax or any other taxes or  duties  which
      the company may be required by law to  deduct  shall  be  deducted  at
      source and the same shall be paid  to  the  Tax  Authorities  for  the
      account of the Contractor and the Company shall provide the Contractor
      with required Tax Deduction Certificate.”


      Evolution of service tax:

       5.        Service  Tax  was  introduced  for  the  first  time  under
Chapter V of the Finance Act, 1994.  Section 66 of the Act was the  charging
section and it provided for the levy of service tax at the rate of five  per
cent of the value of the taxable services.  “Taxable  service”  was  defined
in Section 65 to include only three services namely any service provided  to
an investor by a stockbroker, to a subscriber by  the  telegraph  authority,
and  to  a  policy-holder  by  an  insurer  carrying  on  general  insurance
business. Section 68 required every  person  providing  taxable  service  to
collect the service tax at specified rates. Section 69 of the  Finance  Act,
1994 provided for registration of the  persons  responsible  for  collecting
service tax. Sub-sections (2) and (5) indicated that it was the provider  of
the service who was responsible for collecting the tax and  obliged  to  get
registered.

      6.         By the Finance Act, 1997 the first amendment to Section  65
of the Finance Act, 1994 was made, inter alia, by extending the  meaning  of
“taxable service” from three services to 18 different  services  categorised
in Section 65(41), sub-clauses (a) to (r).  Sub-clause (j) made  service  to
a client by clearing and forwarding  agents  in  relation  to  clearing  and
forwarding operations, a taxable service. Similarly, service to  a  customer
of a goods transport operator in relation to carriage of goods by road in  a
goods carriage was, by sub-clause (m), also included within the umbrella  of
taxable service. The phrases “clearing  and  forwarding  agent”  and  “goods
transport operator” were defined as follows:
            “65. (10) ‘clearing and forwarding agent’ means any  person  who
      is engaged in providing any service, either  directly  or  indirectly,
      connected with clearing and forwarding operations in any manner to any
      other person and includes a consignment agent;
                                     ***
            (17) ‘goods transport operator’  means  any  commercial  concern
      engaged in the transportation of goods but does not include a  courier
      agency;”




7.          The service  tax  was  brought  into  force  on  5.11.1997  vide
Notification No.44/77 with effect from  16.11.1997.   Consequent  thereupon,
the appellant deducted 5% tax on the bills of the respondent for the  period
30.11.1997 to 6.8.1999.  The respondent,  however,  refused  to  accept  the
deductions, and raised a dispute for arbitration  under  clause  15  of  the
terms and conditions mentioned above. This  dispute  was  referred  for  the
arbitration of a sole arbitrator, a retired Judge of the Delhi  High  Court.

8.          Rules 2 (xii) and 2 (xvii) of the Service  Tax  Rules,  1994  as
amended in 1997 made the customers or clients  of  clearing  and  forwarding
agents and of goods transport operators as assesses.   These  amended  rules
were challenged and were held ultra vires the Act by  this  Court  in  Laghu
Udyog Bharati vs. Union of India reported in 1999 (6) SCC  418.   The  Court
examined the provisions of the Act  and  particularly  Section  68  and  the
definition of  “person  responsible  for  collecting  the  service  tax”  in
Section 65(28) and in terms held in paragraph 9 that  “the  service  tax  is
levied by reason of the services which are offered.  The  imposition  is  on
the person rendering service.”

9.          To overcome the law laid down in Laghu  Udyog  Bharati  (supra),
the Finance Act 2000 brought in an amendment on  12.5.2000  (effective  from
16.7.1997) in the manner indicated in Section 116 which reads as follows:
            “116.  Amendment  of  Act  32  of  1994.  —  During  the  period
           commencing on and from the 16th day of  July,  1997  and  ending
           with the 16th day of October, 1998, the provisions of Chapter  V
           of the Finance Act, 1994 shall be  deemed  to  have  had  effect
           subject to the following modifications, namely—
           (a) in Section 65,—

            (i)  for  clause   (6),   the   following   clause   had   been
           substituted, namely—

               ‘(6) “assessee” means a  person  liable  for  collecting  the
            service tax and includes—

               (i)  his agent; or

               (ii) in relation to  services  provided  by  a  clearing  and
            forwarding agent,  every  person  who  engages  a  clearing  and
            forwarding agent and by  whom  remuneration  or  commission  (by
            whatever name called) is paid for  such  services  to  the  said
            agent; or

               (iii) in relation to services provided by a  goods  transport
            operator, every person who pays or is liable to pay the  freight
            either himself or through his agent for  the  transportation  of
            goods by road in a goods carriage;’

        (ii) after clause (18), the following clauses had been substituted,
        namely—

                 ‘(18-A) “goods carriage” has the meaning assigned to it in
        clause (14) of Section 2 of the Motor Vehicles Act,   1988;

                 (18-B) “goods transport  operator”  means  any  commercial
        concern engaged in the transportation of goods but does not include
        a courier agency;’;

        (iii) in clause (48), after  sub-clause  (m),  the  following  sub-
        clause had been inserted, namely—

                 ‘(m-a) to a customer, by  a  goods  transport  operator  in
        relation to carriage of goods by road in a goods carriage;’;

        (b) in Section 66, for sub-section (3), the  following  sub-section
      had been substituted, namely—

           ‘(3) On and from the 16th day of  July,  1997,  there  shall  be
        levied a tax at the rate of five per cent of the value  of  taxable
        services referred to in sub-clauses (g), (h), (i), (j),  (k),  (l),
        (m), (m-a), (n) and (o) of clause (48) of Section 65 and  collected
        in such manner as may be prescribed.’;

        (c) in Section 67, after clause (k), the following clause had  been
      inserted, namely—
      ‘(k-a) in relation to service provided by goods transport operator  to
      a customer, shall be the gross amount charged  by  such  operator  for
      services in relation to carrying goods by road in a goods carriage and
      includes the freight  charges  but  does  not  include  any  insurance
      charges’.”








      Proceedings prior to this appeal:

10.         The respondent contended before the learned arbitrator that  its
dominant work was of transporting and forwarding of goods by road,  and  not
of a handling contractor, and that the mere fact that it may be required  to
handle the goods in  a manner and to the extent  provided  in  the  contract
between  the  parties,  was  merely  incidental.  The  learned   arbitrator,
however, noted  that  the  contract  between  the  parties  dated  17.6.1998
referred the respondent as the ‘handling contractor’,  who  shall  undertake
the job of handling iron and steel materials at  the yard of the company  on
the terms and conditions stipulated therein as also in  the  manner  and  in
all respects as mentioned in  the  contract.   He  referred  to  the  notice
inviting tender, the declaration of particulars relating to the tender,  the
schedule of  rates,  the  provision  relating  to  scope  of  work  and  the
obligations of the contractor detailed in clause 6.    In  that  connection,
he referred to the letter dated  27.11.1997  received  from  the  office  of
Commissioner of Central Excise, Chennai wherein he had also  held  the  work
of the handling contractor as that of  the  clearing  and  forwarding  agent
liable  to  pay  service  tax.   The  arbitrator  therefore  held  that  the
respondent was forwarding and clearing contractor.

11.        Thereafter, he dealt with the question of liability  to  pay  the
service  tax,  and  by  a  detailed  award  dated  25.5.2004  rejected   the
contentions of the respondent and dismissed the  Claim  Petition.    In  the
penultimate paragraph, the learned arbitrator held as follows:-

            “Clause 9.3 of the Tender Terms and Conditions of the  Contract,
      to my mind is clear & unambiguous.  Thus it is the Respondent  who  is
      the assessee.  It is also true that liability is of the Respondent  to
      pay the tax.  But then, under the contract, under  clause  9.3  to  be
      more precise, it was agreed that it would be the  claimant  who  shall
      bear “all taxes, duties and other liabilities” which accrue or  become
      payable “In connection with the discharge of his obligation.”  Service
      tax was one such tax/duty or a liability which was directly  connected
      with “the discharge of his obligation” as the  clearing  &  forwarding
      agent.  It is this contractual obligation which binds the claimant and
      though under the law it is the respondent who is the assessee, it  can
      & rightly did deduct the service tax from the bills of the claimant in
      terms of the said contractual obligation, the validity and legality of
      which has not been challenged before me.”

12.         This award led the respondent to file a petition  under  Section
34 of the Arbitration and Conciliation Act, 1996 being Arbitration  Petition
No.364/2004 before the High  Court  of  Judicature  at  Bombay.   A  Learned
Single Judge of the High Court allowed that  petition,  and  set  aside  the
award with costs by judgment and order dated 4.7.2005.   The  learned  Judge
while arriving at that conclusion referred to the  definition  of  the  term
“assessee” and held that insofar as service tax under the Finance Act,  1994
is concerned, the appellant as the assessee was liable to pay the tax.   The
learned Judge observed as follows:-
           “The purpose of clause 9.3 is not to shift the burden  of  taxes
      from the assessee who is liable under the law to pay the  taxes  to  a
      person who is not liable to  pay  the  taxes  under  the  law.  In  my
      opinion, the award therefore suffers  from  total  non-application  of
      mind and therefore, it is required to be set aside.”

13.         The appellant preferred an appeal to a Division Bench of  Bombay
High Court against the said judgment and order.  The appeal was numbered  as
Appeal No. 188/2006.  The Division Bench dismissed the appeal by holding  as
follows:
           “16. ……..As noted, the Respondents are not “Assessee” under  the
      Service Tax Act.  The Appellants are, being recipients,  resisted  and
      have filed the return.  It is, therefore, the  appellant’s  obligation
      to pay the Service Tax and not that of the Respondents,  there  is  no
      specific clause that such service tax, liability would  be  deductible
      from the amount payable by the Appellants to the  Respondent  pursuant
      to the contract in question.  The deduction as claimed and as directed
      by the award in absence of any agreement or clause, therefore, is  not
      correct.”

14.         Being aggrieved by the said  judgment  and  order,  the  present
appeal has been filed.  Mr. S. Ganesh, learned Senior Counsel  has  appeared
for the appellant, and Mr. K.K. Rai, learned  Senior  Counsel  has  appeared
for the respondent.

      Submissions on behalf of the appellant:

15.         As stated at  the  outset,  the  question  involved  before  the
arbitrator  and  in  the   offshoots   therefrom,   is   with   respect   to
interpretation of the above referred clause  No.9.3.   Mr.  Ganesh,  learned
counsel for the appellant submitted that the  entire  purpose  in  providing
this clause was to provide that the contractor will be responsible  for  the
taxes, duties and the liabilities  which  would  arise  in  connection  with
discharge of the obligations of the  contractor.   The  obligations  of  the
contractor were laid down  in  clause  6.0  of  the  terms  and  conditions,
referred to  above.   This  clause  provides  the  details  of  contractor’s
responsibility for clearance of the  consignments  of  the  appellant.   The
liability to pay the service tax arises out of the service provided  by  the
respondent.  There is  no  dispute  that  in  view  of  the  above  referred
amendment of 2000, the appellant as the recipient  of  the  service  is  the
assessee under the service tax law.  However, there  is  no  prohibition  in
the law against shifting the burden of the tax liability.   In  the  instant
case, the tax liability will depend upon the value of  the  taxable  service
provided  by  the  respondent,  and  therefore  clause  9.3   required   the
respondent to take the burden. Mr. Ganesh cited the  example  of  sales  tax
which the assessee can shift  to  the  customer.   In  his  submission,  the
phrase, “liabilities in connection with the discharge  of  his  obligations”
under this clause will have to be construed in that context.

16.         The learned counsel submitted that interpretation of clause  9.3
by the arbitrator was the correct one, and in any case, was  a  possible  if
not a plausible one.  The Courts were, therefore, not expected to  interfere
therein. He submitted that the dispute in the present  case  was  concerning
the interpretation of a term of the contract.  It  has  been  laid  down  by
this Court that in such situations, even if one is  of  the  view  that  the
interpretation rendered by the arbitrator is erroneous, one is not  expected
to interfere therein if two views were possible.   Mr.  Ganesh  referred  to
the following observations of this Court in  H.P.  State  Electricity  Board
vs. R.J. Shah reported in [1999 (4) SCC 214] at the  end  of  paragraph  27,
which are to the following effect:-
            “27. ……..The dispute before the arbitrators, therefore,  clearly
      related to the interpretation of the terms of the contract.  The  said
      contract was being read by the parties differently.   The  arbitrators
      were, therefore, clearly called upon  to  construe  or  interpret  the
      terms of the contract.  The decision thereon, even if it be erroneous,
      cannot be said to be without jurisdiction.  It cannot be said that the
      award showed that there was an error of jurisdiction even though there
      may have been  an  error  in  the  exercise  of  jurisdiction  by  the
      arbitrators.”

17.         It was also submitted by the learned counsel that the  court  is
not expected to substitute its evaluation of the conclusion of law  or  fact
arrived at by the arbitrator and referred to the  following  observation  in
paragraph 31 in M/s Sudarsan Trading Co. vs. Govt.  of  Kerala  reported  in
[1989 (2) SCC 38].

            “…………in the instant case the court had  examined  the  different
      claims not to find out whether these claims were within  the  disputes
      referable to the arbitrator, but to find out whether  in  arriving  at
      the decision, the  arbitrator  had  acted  correctly  or  incorrectly.
      This, in our opinion, the court had no  jurisdiction  to  do,  namely,
      substitution of its own evaluation of the conclusion of law or fact to
      come to the conclusion that the arbitrator had acted contrary  to  the
      bargain between the parties.……….”

      Submissions on behalf of the respondent
18.         Learned senior counsel for the respondent Mr. Rai, on the  other
hand, submitted that the concerned clause cannot be read to  imply  a  right
to shift the tax  liability.   He  submitted  that  the  appellant  was  the
assessee for the payment of service tax, and  the  concerned  clause  merely
laid down that the contractor will have to pay all taxes, duties  and  other
liabilities which he  was  otherwise  required  to  pay  if  they  arise  in
connection with  discharge  of  his  obligations  under  the  contract.  The
appellant was entitled to deduct only the income  tax  and  other  taxes  or
duties which it was so required by law to deduct.  The  disputed  deductions
would mean that the contractor had taken  over  the  tax  liability  of  the
appellant as if the liability was on the contractor.   He  referred  to  the
judgment of this Court in Gujarat Ambuja Cements Ltd.  vs.  Union  of  India
reported in [2005 (4) SCC 214].  This judgment discusses  the  evolution  of
the service tax as to how service tax was introduced  by  the  Finance  Act,
1994, how the meaning of taxable service was extended in 1997, and  how  the
definition of assessee  subsequently  included  the  person  who  engages  a
clearing and forwarding  agent, or a goods transport operator.
19.         He drew our attention to paragraph 21 of Gujarat  Ambuja  Cement
Ltd. (supra) wherein this Court observed as follows:

            “21.  As is apparent from Section 116 of the Finance Act,  2000,
      all the material portions of the two sections which were found  to  be
      incompatible with the Service Tax Rules  were  themselves  amended  so
      that now in the body of the Act by virtue of the amendment to the word
      “assessee” in Section 65(5) and the amendment to  Section  66(3),  the
      liability to pay the tax is not on the person  providing  the  taxable
      service  but,  as  far  as  the  services  provided  by  clearing  and
      forwarding agents and goods transport operators are concerned, on  the
      person who pays for  the  services.  As  far  as  Section  68(1-A)  is
      concerned by virtue of the proviso added in 2003, the persons availing
      of  the  services  of  goods  transport  operators  or  clearing   and
      forwarding agents have explicitly been made liable to pay the  service
      tax.”



20.         The respondent relied upon the judgment of this  Court  in  Bank
of India vs. K. Mohan Das reported in [2009  (5)  SCC  313]  by  one  of  us
(Lodha,  J.).   The  issue  in  that  matter  was  with   respect   to   the
interpretation of some of the provisions of the voluntary retirement  scheme
of 2000 of the appellant bank.  In  paragraph  32  thereof  this  Court  has
observed as follows:-

           “….32.  The fundamental position is that it  is  the  banks  who
           were responsible for formulation of the terms in the contractual
           Scheme that the optees of voluntary retirement under that Scheme
           will be eligible to pension under the Pension Regulation,  1995,
           and, therefore, they bear the risk of lack of clarity,  if  any.
           It is a well-known principle of construction of a contract  that
           if the terms applied by one party are unclear, an interpretation
           against  that  party  is  preferred  (verba  chartarum   fortius
           accipiuntur contra proferentem).”

      Based on this paragraph, it was  submitted  that  the  arbitrator  was
bound to follow the principle of contra proferentem  in  the  present  case.
It was  contended  that  since  the  propounder  of  the  contract  was  the
petitioner in case of vagueness, the rule of contra  proferentem  will  have
to  be  applied  in  interpreting  the  present  contract.   Therefore,  the
liability to pay service tax was on the appellant as the  assessee,  and  it
could not be contended that under Clause 9.3 that liability was accepted  by
the respondent.  The judgment in Bank of  India  (supra)  was  also  pressed
into service to submit that clause 9.3 and the contract must be  read  as  a
whole, and an attempt should be made to harmonise the provisions.

21.         It was submitted by the respondent that this Hon’ble Court  very
succinctly summarised the legal principles for setting  aside  an  award  in
SAIL vs. Gupta Brother Steel Tubes Ltd. (by one of us – Lodha  J.)  reported
in [2009 (10) SCC 63] in paragraph 18  wherefrom  principles  (i)  and  (iv)
would be attracted.  As against that, the appellant stressed sub-paras  (ii)
& (vi) of the  same  paragraph  18.   We  may  therefore  quote  the  entire
paragraph which reads as follows:-
           “….18. It is not necessary to multiply the references.   Suffice
      it to say that the legal position that emerges from  the  decisions  o
      this Court can be summarised thus:

             i) In a case where an arbitrator travels beyond  the  contract,
                the award would be without jurisdiction and would amount  to
                legal misconduct and because of which the award would become
                amenable for being set aside by a court.

            ii) An error relatable to interpretation of the contract  by  an
                arbitrator is an error  within  his  jurisdiction  and  such
                error is not amenable to correction by courts as such  error
                is not an error on the face of the award.

           iii) If a specific question of law is submitted to the arbitrator
                and he answers it, the fact  that  the  answer  involves  an
                erroneous decision in point of law does not make  the  award
                bad on its face.

            iv) An award contrary to substantive provision of law or against
                the terms of contract would be patently illegal.”

             v) Where the parties have deliberately specified the amount  of
                compensation in express terms, the party who has suffered by
                such breach can only claim the sum specified in the contract
                and not in excess thereof.  In  other  words,  no  award  of
                compensation in case of breach  of  contract,  if  named  or
                specified in  the  contract,  could  be  awarded  in  excess
                thereof.

            vi) If the conclusion of the arbitrator is based on  a  possible
                view of the matter, the court should not interfere with  the
                award.”


      Consideration of the rival submissions:
22.         We have noted the submissions of both the learned  counsel.   If
we see the evolution of the service tax law, initially the liability to  pay
the service tax was on the service provider, though it is  now  provided  by
the amendment of 2000 that the same is on  the  person  who  avails  of  the
service.  It is relevant to note that the agreement between the parties  was
entered into on 7.6.1998.  The appellant had deducted 5% service tax on  the
bills of the respondent for the period 30.11.1997 to 6.8.1999 which in  fact
it was required to deduct under the  service  tax  law  as  it  then  stood.
Subsequently, by the amendment of the definition  of  assessee  effected  on
12.5.2000 (though retrospectively effective from  16.7.1997)  the  liability
to pay the service tax was shifted  to  the  person  who  was  availing  the
service as the assessee.  We must  note  that  it  is  thereafter  that  the
parties have gone for arbitration, and the respondent has  relied  upon  the
changed definition of assessee to contend that the tax  liability  was  that
of the appellant.

23.         We are concerned with the question as to what was the  intention
of the parties when they entered into the contract on 7.6.1998, and how  the
particular clause 9.3 is to be read.   Since  clause  9.3  of  the  contract
refers to the liabilities of the contractor in connection with discharge  of
his obligations, one will have to refer  to  clause  6  of  the  “Terms  and
Conditions for Handling of Iron and Steel Materials of RINL, VSP” which  was
an integral part of the contract between the petitioner and the  respondent,
and which was titled “Obligations of the Contractor”.  The said paragraph  6
deals in great details with the work which was required to be  done  by  the
respondent as clearing and forwarding agent.   It  is  therefore  absolutely
clear that the term “his obligations under this order” in clause 9.3 of  the
contract  denoted  the  contractor’s  responsibilities  under  clause  6  in
relation to the work  which  he  was  required  to  carry  out  as  handling
contractor.

24.         If we look into this clause 6.0, we find  that  the  obligations
of the contractor are defined and spelt out in minute details.   Clause  6.0
is split into 33  sub-clauses,  and  it  provides  for  obligations  of  the
contractor in various situations concerning the clearance  of  consignments,
and  the  services  to  be  provided  by  the  respondent  as  the  handling
contractor wherefrom the tax  liability  arises.   The  contractor  is  made
responsible for pilferage, any loss  or  misplacement  of  the  consignments
also. Clause 9.0 which deals with payment of bills, provides in clauses  9.1
and 9.2 that the  bills  will  be  prepared  on  the  basis  of  the  actual
operations performed and the materials accounted  on  the  basis  of  weight
carried and received.  Clause 9.3 has to be seen on  this  background.   The
tax liability will depend upon the value of the  taxable  service  provided,
which will vary depending upon the volume of the goods handled.

25.         It was submitted on behalf of the  respondent  that  clause  9.3
and the contract must be read as a whole  and  one  must  harmonise  various
provisions thereof.  However, in fact when that is  done  as  above,  clause
9.3 will have to be held as containing the  stipulation  of  the  contractor
accepting the liability to pay the service  tax,  since  the  liability  did
arise out of the discharge  of  his  obligations  under  the  contract.   It
appears that the rationale behind clause 9.3 was that the  petitioner  as  a
Public Sector Undertaking should be thereby exposed  only  to  a  known  and
determined liability under the  contract,  and  all  other  risks  regarding
taxes arising out of the obligations of the contractor are  assumed  by  the
contractor.

26.         As far as  the  submission  of  shifting  of  tax  liability  is
concerned, as observed in  paragraph  9  of  Laghu  Udyog  Bharati  (Supra),
service tax is an indirect tax, and it is possible that  it  may  be  passed
on.  Therefore, an assessee can certainly enter into  a  contract  to  shift
its liability of service tax.  Though the appellant became the assessee  due
to amendment of 2000, his position is exactly the  same  as  in  respect  of
Sales Tax, where the seller is the assessee, and is liable to pay Sales  Tax
to the tax authorities, but it is open to the  seller,  under  his  contract
with the buyer, to recover the Sales Tax from the buyer, and to pass on  the
tax burden to him.  Therefore, though there is no  difficulty  in  accepting
that after the amendment of 2000 the liability to pay the service tax is  on
the appellant as the assessee, the  liability  arose  out  of  the  services
rendered by the respondent to the appellant, and  that  too  prior  to  this
amendment when the liability was on the service  provider.   The  provisions
concerning service tax are relevant only as  between  the  appellant  as  an
assessee  under  the  statute  and  the  tax  authorities.   This  statutory
provision can be of no relevance to determine  the  rights  and  liabilities
between the appellant and the respondent as agreed in the  contract  between
two of them.   There was nothing  in  law  to  prevent  the  appellant  from
entering into an agreement with the respondent handling contractor that  the
burden of any tax arising out of obligations of  the  respondent  under  the
contract would be borne by the respondent.

27.         If this clause was to be read as  meaning  that  the  respondent
would be liable only  to  honour  his  own  tax  liabilities,  and  not  the
liabilities arising out of the obligations under the contract, there was  no
need to make such a provision in a bilateral  commercial  document  executed
by the parties, since the respondent would be otherwise also liable for  the
same. In Bank of India (supra) one party viz. the bank was  responsible  for
the formulation of the Voluntary Retirement Scheme, and  the  employees  had
only to decide whether to opt for it or not, and  the  principle  of  contra
proferentem was applied.  Unlike the VRS scheme, in the present case we  are
concerned with a clause in  a  commercial  contract  which  is  a  bilateral
document mutually  agreed  upon,  and  hence  this  principle  can  have  no
application. Therefore, clause 9.3 will have  to  be  read  as  incorporated
only with  a  view  to  provide  for  contractor’s  acceptance  of  the  tax
liability arising out of his obligations under the contract.
28.       It was  pointed  out  on  behalf  of  the  appellant  that  it  is
conventional and accepted commercial practice to  shift  such  liability  to
the contractor.  A similar clause was considered by this Court in  the  case
of Numaligarh Refinery Ltd. vs. Daelim  Industrial  Co.  Ltd.,  reported  in
[2007 (8) SCC 466].  In that matter, the question  was  as  to  whether  the
contractor was liable to  pay  and  bear  the  countervailing  duty  on  the
imports though  this  duty  came  into  force  subsequent  to  the  relevant
contract.  The relevant clause 2(b) read as follows:
           “2(b) All taxes and duties in respect of job  mentioned  in  the
      aforesaid  contracts  shall  be  the  entire  responsibility  of   the
      contractor…”

Reading this clause and the connected documents, this Court held  that  they
leave no manner of doubt that all the taxes and levies  shall  be  borne  by
the contractor including this countervailing duty.

29.       In  any  case,  assuming  that  clause  9.3  was  capable  of  two
interpretations, the view taken by the arbitrator was clearly a possible  if
not a plausible one.  It is not possible to  say  that  the  arbitrator  had
travelled outside his jurisdiction, or  that  the  view  taken  by  him  was
against the terms of contract. That being the position, the High  Court  had
no reason to interfere with the award and substitute its view  in  place  of
the interpretation accepted by the arbitrator.  The legal position  in  this
behalf has been summarized in paragaph 18 of the judgment of this  court  in
SAIL vs. Gupta Brother Steel Tubes Ltd. (supra) and which has been  referred
to above.  Similar view has been taken later in  Sumitomo  Heavy  Industries
Ltd. vs. ONGC Ltd. reported in [2010 (11)  SCC  296]  to  which  one  of  us
(Gokhale J.) was a party.  The observations  in  paragraph  43  thereof  are
instructive in this behalf.  This paragraph 43 reads as follows:
            “43. ………The umpire has considered the fact situation and  placed
    a construction on the clauses of the agreement which according  to  him
    was the correct one. One may at the highest say  that  one  would  have
    preferred another construction of Clause 17.3 but that cannot make  the
    award in any way perverse. Nor can one substitute  one's  own  view  in
    such a situation, in place of the one taken by the umpire, which  would
    amount to sitting in appeal. As held by  this  Court  in  Kwality  Mfg.
    Corpn. v. Central  Warehousing  Corpn*.  The  Court  while  considering
    challenge to arbitral award does not sit in appeal  over  the  findings
    and decision of the arbitrator,  which  is  what  the  High  Court  has
    practically done in this matter. The umpire is legitimately entitled to
    take the view which he holds to be the correct  one  after  considering
    the material before him and after interpreting the  provisions  of  the
    agreement. If he does so, the decision of the umpire has to be accepted
    as final and binding.”

                                          *[2009      (5)      SCC      142]


30.         In  view  of  what  is  stated  above,  the  respondent  as  the
contractor had to bear the service tax under clause 9.3 as the liability  in
connection with the discharge of his obligations under  the  contract.   The
appellant could not be faulted for deducting the service tax from the  bills
of the respondent under clause 9.3, and there was no  reason  for  the  High
Court to interfere in the view taken by the arbitrator which was  based,  in
any case on a possible interpretation of clause  9.3.   The  learned  single
Judge as well as the Division Bench clearly erred in  interfering  with  the
award rendered by the arbitrator.  Both  those  judgments  will,  therefore,
have to be set-aside.
31.        Accordingly, the appeal is allowed and the impugned judgments  of
the learned Single Judge as well as of the Division Bench,  are  hereby  set
aside.  The award made by the arbitrator is upheld.  The parties  will  bear
their own costs.

                                       …………..……………………..J.
                                       [ R.M. Lodha]



                                       …………………………………..J.
                                        [ H.L. Gokhale  ]

New Delhi
Dated : 25th April, 2012

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