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JSA Prism | Dispute Resolution | May 2024

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Supreme Court: For the parties to be referred to arbitration, there must be a specific and conscious incorporation of an arbitration clause from another contract

In NBCC (India) Limited vs. Zillion Infraprojects Pvt.Ltd.[1], the Supreme Court has held that a general reference in a contract (“Contract 1”) to a separate contract (“Contract 2”) would not incorporate the arbitration clause contained in Contract 2 for resolution of disputes that arise under Contract 1. In view of this judgment, if the parties want to incorporate an arbitration clause from another contract, they should ensure that there is a specific reference in Contract 1 to the arbitration clause contained in Contract 2.

Brief Facts

NBCC (India) Limited (“NBCC”) and Zillion Infraprojects Pvt. Ltd. (“Zillion”) entered into a contract (“NBCC Contract”) for construction of Weir with Allied Structures across river Damodar.
The NBCC Contract provided that:
- All terms and conditions as contained in the tender (“DVC Contract”) issued by Damodar Valley Corporation (“DVC”) to NBCC would apply mutatis mutandis except where these were expressly modified by NBCC (clause 2).
- The redressal of disputes between the NBCC and Zillion would only be through civil courts at Delhi (clause 7).
The DVC Contract contained an arbitration clause.
When disputes arose between Zillion and NBCC under the NBCC Contract, Zillion referred the dispute to arbitration in terms of the arbitration clause contained in the DVC Contract. Zillion filed a petition under Section 11 of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”) praying for appointment of an arbitrator.
Though NBCC objected to the appointment of an arbitrator on the ground that no arbitration clause existed under the NBCC Contract, the Delhi High Court held that an arbitration clause existed between the parties (as per the DVC Contract) and appointed an arbitrator.
NBCC challenged the judgment passed by the High Court before the Supreme Court.

Issue

The issue before the Supreme Court was whether by referring to the DVC Contract, the parties had also incorporated the arbitration agreement contained in the DVC Contract to the NBCC Contract.

Findings and Analysis

The Supreme Court reiterated the following law relating to incorporation of an arbitration clause by reference:
- Section 7(5) of the Arbitration Act provides for a conscious acceptance of the arbitration clause from another document by the parties, before such arbitration clause could be read as a part of the contract between the parties. Reference in terms of Section 7 (5) of the Arbitration Act should be such that shows the intention to incorporate the arbitration clause contained in the document into the contract.
- When parties enter into a contract, making a general reference to another contract (for execution, performance etc.) would not have the effect of ipso facto incorporating the arbitration clause from that contract. Arbitration clause from another contract can be incorporated only by a specific reference to such arbitration clause.
- Where the contract provides that the standard form of terms and conditions of (i) an independent trade or professional institution; or of (ii) one of the parties to the contract will bind them or apply to the contract, such standard form of terms and conditions including any provision for arbitration in such standard terms and conditions, will be deemed to be incorporated by reference. The court held that such cases (where standard terms and conditions are incorporated) are ‘single-contract’ cases and not ‘two-contract’ cases (as in the present case).

On facts, the Supreme Court set aside the High Court’s judgment and held that no arbitration clause existed between NBCC and Zillion because:
- Clause 7 in the present case used the word “only” before the words “be through civil courts having jurisdiction of Delhi alone” and therefore, the intention of the parties was to give jurisdiction to only courts at Delhi (and not to submit to arbitration).
- Zillion’s argument that clause 7 only modified the jurisdiction of court from Calcutta (as in the DVC Contract) to Delhi but did not have the effect of modifying the arbitration agreement contained in the DVC Contract was rejected.

Conclusion

The parties would have to be careful in drafting their contracts and if the intention is to be bound by an arbitration clause contained in another contract, the parties should ensure that a ‘specific’ reference is made to incorporate the arbitration clause of the other contract. As stated in the judgment, this principle should not apply in cases where standard terms and conditions are incorporated (in which case, the arbitration clause is deemed to be specifically incorporated).

This Prism has been prepared by:

Dhirendra Negi
Partner

Pragya Chauhan
Partner

For more details, please contact [email protected].

[1] 2024 INSC 218

Tags Dispute Resolution, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, Supreme Court

JSA successfully represented foreign directors and an authorised signatory of an Indian JV entity in contempt of court proceedings before the Bombay High Court

By a judgment of 26 April 2024, a single judge of the Bombay High Court dismissed a contempt petition filed by a company against an Indian JV company for failing to deposit certain amounts with the Court registry within the period prescribed in the order of the court (“Order”). The Order also stated that the JV company’s right to file a statement of defence or counter claim in pending arbitration proceedings with the applicant company was conditional upon the deposit being made. The deposit was not made, and the entity’s right of defence in the arbitration was lost.

The contempt petition, filed by the applicant company, was admitted and show cause notices were issued to the directors and the authorised signatory of the Indian JV entity. At the final hearing of the contempt petition, the directors and authorised signatory of the Indian JV entity contended, amongst other things, that –

Given the non-compliance with the Order, a contempt petition was filed and subsequently admitted; and show cause notices were issued to the directors and the authorised signatory of the Indian JV entity. In the contempt proceedings, the directors and authorised signatory of the Indian JV entity contended that there was no wilful disobedience of the Order since –

the Indian JV entity was in a precarious financial condition and did not have the requisite funds to comply with the Order.
amounts available with the Indian JV entity during the concerned period were expended to meet legitimate expenses, including tax dues and staff salaries.
the Indian JV entity had expected to recover substantial amounts from its creditors to comply with the Order, but no amounts were recovered on account of the COVID-19 pandemic.
the Order was self-operating and provided for drastic consequences for non-compliance, which had in fact taken place.

The Hon’ble High Court observed that in the face of the self-operative clause in the Order for adverse consequences upon failure to make the deposit, such an order could not be the basis for initiating contempt proceedings, and the consequences of the failure to deposit had been suffered and execution proceedings were being faced by the Indian JV entity. The Hon’ble Court also took into consideration the financial crunch suffered by the JV entity, the closure of its business, and the impact of the Covid-19 pandemic and the lockdowns. It concluded that while the fact that the Order could not be obeyed was made out, the court was not inclined to hold that there was wilful disobedience of the order. Accordingly, the contempt petition was dismissed.

Our Disputes Team Comprised Lead Partner – Farhad Sorabjee, Partner – Shanaya Cyrus Irani and Principal Associate – Siddhesh Pradhan.

Tags Joint Venture, JSA, Leading Law Firm, Leading Lawyers

Challenges of change and judiciary: Key learnings from SC judgement in GIB case

The GIB case has brought to fore a larger critical issue at a juncture when the National Litigation Policy is under review, the need for a holistic and informed adjudication by courts. This becomes critical in cases involving challenges to scientific, economic, social or environmental policies; or decisions with significant public implications.

Please click here to read the full article by Amit Kapur, published in The Economic Times – ET Energy World.

Tags ESG, JSA, Leading Law Firm, Leading Lawyers, National Litigation Policy

JSA successfully represents Resolution Professional of Smaaash Entertainment Private Limited before the Ld. NCLAT, New Delhi, dismissing the appeal filed by FGAPL against the order of the Ld. NCLT, Mumbai; thereby cancelling and annulling the Deed of Assignment of executed by the ex-promoters for the brand “SMAAASH”

JSA successfully represents Resolution Professional of Smaaash Entertainment Private Limited before the Ld. NCLAT, New Delhi

JSA successfully represented Mr. Bhrugesh Amin (Resolution Professional of Smaaash Entertainment Private Limited) in an appeal before the Ld. National Company Law Appellate Tribunal, New Delhi (“NCLAT”), wherein the Ld. NCLAT upheld the order dated 22.11.2023 (“Impugned Order”) passed by the Ld. National Company Law Tribunal, Mumbai (“NCLT”) cancelling and annulling the Deed of Assignment dated 19.04.2022 executed by the ex-promoters for the brand “SMAAASH” (“Deed of Assignment”).

By the Deed of Assignment, the erstwhile promoters of Smaaash Entertainment Private Limited (“Corporate Debtor”), assigned the brand name “SMAAASH” in favour of Fun Gateway Arena Private Limited (“FGAPL”) at a paltry consideration of Rs. 1.5 Crores, merely 18 days before commencement of CIRP. The said consideration was not paid to the Corporate Debtor and was set-off against an antecedent debt owed by the Corporate Debtor to its related party, being AHA Holdings Private Limited. On 22.11.2023, the Ld. NCLT vide its Impugned Order inter-alia held that:

The assignment of brand name “SMAAASH” (being the most valuable asset of the Corporate Debtor) by the erstwhile promoters of the Corporate Debtor in favour of FGAPL is a fraudulent transaction and the same was executed to scuttle the CIRP process.
The assignment of brand name “SMAAASH” is an undervalued and fraudulent transaction within the look-back period under the IBC.
Accordingly, NCLT directed cancellation and annulment of Deed of Assignment and the erstwhile promoters of the Corporate Debtor are injuncted from using the brand name “SMAAASH” in any manner.

Being aggrieved by the Impugned Order, FGAPL challenged the same before the Ld. NCLAT. The Ld. NCLAT while dismissing the appeal, upheld the Impugned Order and noted that the Impugned Order continues to remain operative.

Our Disputes Team Comprised Partner – Varghese Thomas, Dheeraj Nair, Kunal Kaul, and Fatema Kachwalla, Senior Associate – Avni Sharma, and Associate – Virgil Braganza.

Our Banking and Finance Team Comprised Partner – Tirthankar Datta, Aditi Sehgal and Associate – Ciol Kumar

Tags CIRP, JSA, Leading Law Firm, Leading Lawyers, Nclat

JSA Prism | Dispute Resolution | April 2024

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An arbitral tribunal has the power to implead a non-signatory to arbitration proceedings under Section 16 of Arbitration Act

A single bench of the Bombay High Court (“Bombay HC”) has in Cardinal Energy and Infra Structure Private Limited & Anr. v. Subramanya Construction and Development Co. Limited & Ors.[1] held that the power to implead a non-signatory to an arbitration proceeding vests in an arbitral tribunal on the basis of the group of companies doctrine laid down in Cox and Kings Limited v. SAP India Private Limited & Anr[2] (“Cox and Kings”).

Brief Facts

Subramanya Construction and Development Company Limited (“SCDCL”, respondent no. 1) and Prakruthi Infrastructure and Development Company Limited (“PIDCL”, respondent no. 2) entered into a memorandum of understanding (“MoU”) with Swan Energy Limited (“Swan”, respondent no. 3). The MoU contained an arbitration agreement. Disputes arose between the parties leading to the issuance of a notice invoking arbitration by SCDCL and PIDCL against Swan. Pursuant to an application filed by SCDCL and PIDCL against Swan under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), the Bombay HC appointed a sole arbitrator to adjudicate the disputes arising out of the MoU.

The parties filed their respective pleadings before the arbitral tribunal. In the Statement of Defence filed by Swan, a preliminary objection was raised alleging that Cardinal Energy and Infra Structure Private Limited (“Cardinal”, petitioner no. 1) and Pegasus Energy and Infrastructure Private Limited (“Pegasus”, petitioner no. 2) (together referred to as the “Petitioners”) were necessary parties without whom the claim was not maintainable since the Petitioners had performed an aspect of the contract.

Given the averment made in the Statement of Defence, SCDCL and PIDCL filed an application under Order 1 Rule 10 of the Code of Civil Procedure, 1908 (“CPC”) to implead the Petitioners as respondents to the arbitration proceedings. Swan opposed the application on the ground that the arbitral tribunal did not have the power to direct impleadment of the Petitioners and that this could have only been done by the referring court. The parties, including the Petitioners, were heard by the arbitral tribunal. After considering the submissions made, the arbitral tribunal passed an ‘order’ / ‘award’ allowing the application (“Impugned Award”).

Aggrieved by this decision, the Petitioners filed a petition under Section 34 of the Arbitration Act challenging the Impugned Award before the Bombay HC.

Issue

Whether the arbitral tribunal could have of its own accord allowed the impleadment of the Petitioners who were non-signatories to the arbitration agreement without such a power being expressly endowed upon it by the referral court at the time of reference.

Findings and Analysis

The Bombay HC dismissed the petition and inter alia held as follows:

In Cox and Kings, the Supreme Court has held that when at a referral stage, impleadment of a non-signatory to the arbitration agreement is raised, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement. The Supreme Court has considered the arbitral tribunal to be the appropriate forum to determine the issue as to joinder of a non-signatory to an arbitration agreement.
The arbitral tribunal has the power to decide whether the non-signatory is bound by the arbitration agreement and to implead the non-signatory if answered in the affirmative.
The applicability of the group of companies doctrine is not excluded merely by there being no prayer for impleadment of a non-signatory in the Section 11 application.
Despite the arbitral tribunal not having the specific power to consider an application for impleadment and/or the power of a civil court under Order 1 Rule 10 of the CPC, the Cox and Kings judgment has changed the law with respect to impleadment of non-signatories on the basis of the group of companies doctrine and has left the issue to be determined by an arbitral tribunal.
The Supreme Court in National Insurance Company Ltd. v. Boghara Polyfab Private Limited[3] has referred to issues which the Chief Justice or his designate is bound to decide, including whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Arbitration Act is a party to such an agreement. However, the same does not preclude the arbitral tribunal from deciding the issue of impleadment of a non-signatory to an arbitration agreement, particularly when the issue is not before the referral court.
In the present case, the Arbitral Tribunal was justified in determining the issue of whether the Petitioners as non-signatories to the arbitration agreement could be impleaded as parties to the arbitration.
The decision of the arbitral tribunal in an application under Section 16 of the Arbitration Act can always be challenged in a petition under Section 34 of the Arbitration Act after the final award has been passed. The Impugned Award was not in the nature of a final determination since it would be open to the Petitioners to lead evidence on the issues framed and invite a final adjudication by the arbitral tribunal.

Conclusion

This judgement clarifies the position that an arbitral tribunal has inherent powers under Section 16 of the Arbitration Act to implead a non-signatory / third party to an arbitration proceeding on the basis of the ‘group of companies’ doctrine. This is even in the absence of a specific prayer for impleadment of a non-signatory before a referral court. The judgment gives effect to the decision of the Supreme Court in Cox and Kings to reduce judicial intervention and leave issues including in respect of the impleadment of non-signatory parties to be decided by an arbitral tribunal.

This Prism has been prepared by:

Farhad Sorabjee
Partner

Shanaya Cyrus Irani
Partner

Siddhesh Pradhan
Principal Associate

Meher
Mistri
Associate

For more details, please contact [email protected]

[1] Comm Arbitration Petition (L) No. 2603 of 2024

[2] 2023 INSC 1051

Tags Arbitration Act, Bombay High Court, Dispute Resolution, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, Supreme Court

JSA Prism | Dispute Resolution | April 2024

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Supreme Court holds that stamp duty is not payable on every increase in the authorized capital of a company if the prescribed maximum duty is already paid

The Supreme Court of India (“Supreme Court”) in its recent judgement State of Maharashtra & Anr., Vs National Organic Chemical Industries Limited [1], has held that once the maximum duty payable on the authorised share capital of a company is paid, as prescribed under the relevant stamp laws, no additional duty is payable for subsequent increase in the share capital, unless the law specifically requires payment of additional stamp duty. The Supreme Court further clarified that the form filed with the registrar of companies (“RoC”), notifying the increase in the authorised share capital of a company is not an instrument for the purpose of levying stamp duty. This judgement of the Supreme Court is significant since it settles the law that, if the state laws do not expressly provide for stamping every increase in the authorized capital, then no additional duty is payable for increase in the authorized capital, if the maximum prescribed duty has been paid earlier.

Brief Facts

In 1992, National Organic Chemical Industries Limited (“NOCIL”) paid a stamp duty of INR 1,12,80,000 (Indian Rupees one crore twelve lakh eighty thousand) after it increased its share capital from INR 36,00,00,000 (Indian Rupees thirty-six crore) to INR 600, 00,00,000 (Indian Rupees six hundred crore) under the Bombay Stamp Act, 1958 (“Stamp Act”)[2]. In 1994, the State of Maharashtra amended[3] the Stamp Act, introducing a cap of INR 25,00,000 (Indian Rupees twenty-five lakh) for companies increasing the authorised share capital. NOCIL subsequently increased its authorised share capital to INR 1,200 crore (Indian Rupees one thousand two hundred crore) inadvertently paying INR 25,00,000 (Indian Rupees twenty-five lakh) as stamp duty. NOCIL had also filed Form No.5[4] with the RoC as required under the Companies Act, 1956 (“CA 1956”). NOCIL sought refund which was rejected by the Deputy Superintendent of Stamps. NOCIL challenged this before the Bombay High Court which allowed the writ petition and directed the State of Maharashtra to refund the stamp duty plus interest. Against the said order, the State of Maharashtra and Deputy Superintendent of Stamps preferred an appeal before the Supreme Court.

Contentions

The State of Maharashtra contended that the stamp duty was payable every time a company increased its share capital and filed Form No.5[5] with the RoC. The State of Maharashtra further contended that the instrument liable to tax is Form No. 5 filed for increase in authorised capital. Section 14A of the Stamp Act was relied upon to contend that any material or substantial alteration in the character of an instrument requires a fresh stamp duty according to its altered character. It was further contended that the stamp duty paid earlier cannot be taken into consideration since the earlier payment was made in 1992 and the amendment imposing a cap on duty payable was introduced subsequently, in 1994.

NOCIL contended that the stamp duty was only payable on the article of association (“AoA”), which alone is the instrument referred to Article 10 of Schedule-I of the Stamp Act; and the filing of Form No. 5 to the RoC was merely to notify the increase in share capital, and the form is not an instrument under the Stamp Act. It was further contended that increase in the share capital of a company does not materially or substantially alter the character of the AoA in order to fall within Section 14A of the Stamp Act. Reliance was placed on Section 31 of the CA 1956 to contend that any alterations made to the AoA are valid and are to be taken as if originally contained therein.

Decision of the Supreme Court

The Supreme Court by relying on the view taken by Allahabad High Court in New Egerton Wollen Mills[6], held that filing of Form No. 5 is only for intimating the RoC about the increase in the share capital. The instrument as per Section 2(1) of the Stamp Act, that is liable to be assessed for stamp duty is the AoA as mentioned in Article 10 of Schedule-I of the Stamp Act.

The Supreme Court while dealing with the interplay between Section 14A of the Stamp Act and Section 31 of the CA 1956, held that CA 1956 being a special law and Stamp Act being a general law with regard to AoA, the special law will override the general law, in case of conflict. The Supreme Court clarified that in terms of Section 31 of the CA 1956, any increase in the share capital of the company shall be valid as if it were originally there when the AoA was first stamped; and that the amended AoA cannot be considered as a fresh instrument.

In view of the above and considering that the resolution to increase the authorised capital was passed by NOCIL after the amendment in 1994 was introduced, the Supreme Court held that stamp duty paid by NOCIL on the AoA in 1992 will have to be taken into account, while calculating the duty payable on the increased authorised capital. The Supreme Court further held that no additional duty is payable by NOCIL on the increased authorised capital, since the maximum duty payable under the Stamp Act had already been paid. Consequently, the Supreme Court dismissed the appeal; and directed the State of Maharashtra to refund the stamp duty with interest.

Conclusion

The judgement reiterates the position of law that taxing / fiscal statutes must be interpreted strictly. The judgement also affirms the proposition that a codified law overrides common practices, in as much as, it is clarified that the practice of stamping Form No. 5 does not make it an instrument and the actual instrument liable to be assessed for duty is the AoA as stated in Article 10 of Schedule 1 to the Stamp Act.

Subject to the state specific laws, the benefit based on this judgement can be availed by the companies not only for mere increase in authorized capital, but also during restructuring such as mergers.

This Prism has been prepared by:

Vinod Kumar
Partner

Srinivasan M.D
Partner

Sai Barath
Associate

For more details, please contact [email protected]

[1] Judgement dated April 5, 2024 in Civil Appeal No.8821 of 2011.

[2] The stamp duty payable on articles of association at that point in time was INR 1000 (Indian Rupees five thousand) for every INR 5,00,000 (Indian Rupees five lakh) or part thereof.

[3] The amendment to Article 10 of Schedule-I of the Stamp Act was introduced vide notification dated August 2, 1994.

[4] Form No. 5 of the Companies (Central Government’s) General Rules & Forms, 1965 is the prescribed form of notice, which has to be sent under Section 97 of the CA 1956. Under Section 64 of the Companies Act, 2013 read along with Rule 15 of the Companies (Share Capital and Debentures) Rules 2014, there is a requirement for the company to notify the RoC in Form SH-7 regarding the increase in the authorized share capital of the company.

[6] 1899 SCC Online All 22

Tags Dispute Resolution, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, Stamp Act, Supreme Court

JSA Prism | Dispute Resolution | April 2024

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Bombay High Court upholds the authority of the State of Maharashtra to levy stamp duty on delivery orders under the Maharashtra Stamp Act, 1958

The division bench of the Bombay High Court (“Bombay HC”) has in Saurer Textile Solutions Pvt Ltd v. The State of Maharashtra & Ors and Connected Writ Petitions[1] (“Writ Petitions”) held that the action of the State of Maharashtra in levying stamp duty on delivery orders (“DO”) under Article 29 of Schedule I of the Maharashtra Stamp Act, 1958 (“Stamp Act”) – (a) is within the legislative competence of the State; (b) does not intrude upon the legislative domain of the Parliament as reserved in Entries 41 and 83 of List I of Schedule VII to the Constitution of India; and (c) is not ultra vires Articles 246(1), 286(1)(b) and 286(2) of the Constitution of India.

Brief Facts

Saurer Textile Solutions Pvt. Ltd. and the other petitioners (“Petitioners”) are corporate entities who import goods from outside India and are required by the State of Maharashtra to pay stamp duty on the DOs to receive the delivery of imported goods. The Petitioners have been paying the stamp duty on the DOs since the enactment of the Stamp Act in 1958.

The process of import and export of goods begins with a foreign exporter/supplier engaging a ship owner to be the carrier of goods to be exported. The carrier issues a ‘Bill of Lading’ (“BoL”) to the exporter which stipulates the type, quantity and destination of the goods being carried. On the arrival of the goods at the port of destination, the carrier files the ‘Import General Manifest’ before the customs authority based on the invoice and the BoL. The containers are then unloaded at the port and taken for customs clearance.

Meanwhile, the importers file a ‘Bill of Entry’ (“BoE”) with the customs authority based on which the customs duty is computed. Once the customs duty is paid, the goods can be cleared out of the customs area but not before the carrier issues a DO directing the custodian of the goods to deliver the same to the person named therein or holder thereof. The importers are then required to pay stamp duty at 0.10% of the total assessed value of the goods under the Stamp Act and are not entitled to receive the delivery of the goods till the stamp duty on the DO is paid.

In February 2010, a single judge of the Gujarat High Court held that stamp duty cannot be levied on the BoE since – (a) it is not an instrument creating any right or liability in any person in respect of the goods; and (b) it does not amount to a DO within the meaning of the Bombay Stamp Act, 1958.[2] The division bench of the Gujarat High Court upheld this decision with a limited modification to hold that a BoL was a DO[3] (“Gujarat High Court Judgement”).

Persuaded by the Gujarat High Court Judgement, the Petitioners filed Writ Petitions before the Bombay HC assailing the legislative competence of the State of Maharashtra to impose, levy, collect the stamp duty on DOs under Article 29 of the Stamp Act where the supply of goods takes place in the course of import of such goods into the territory of India as being ultra vires Articles 246(1), 286(1)(b) and 286(2) read with Entries 41 and 83 of List I of Schedule VII to the Constitution of India. The Petitioners inter alia contended that the constitutional scheme confers exclusive legislative competence on the Union of India in respect of import and export customs frontiers and the State was not empowered to levy any charges on the same.

Issue

Whether the State of Maharashtra has the legislative competence to levy, impose and collect stamp duty on a DO under the MSA.

Findings and Analysis

The division bench of the Bombay HC dismissed the writ petitions and inter alia observed the following:

The power to legislate under Article 246 of the Constitution of India must be read with the entries in the 3 (three) Lists which define the respective areas of legislative competence of the Union and State legislatures. The doctrine of pith and substance must be applied to ascertain the true nature of the legislation and the entry within which it would fall. When an enactment substantially falls within the powers expressly conferred by the Constitution of India upon the legislature which enacted it, it cannot be held to be invalid merely because it incidentally encroaches on matters assigned to another legislature.
The MSA is a fiscal measure enacted to secure revenue for the State on certain types of instruments. Under the Constitution of India, Parliament has the power to levy stamp duty on instruments specified in Article 246 read with Entry 91 of List I of Schedule VII whereas the State Governments have the power to levy stamp duty on instruments falling under Article 246 read with Entry 63 of List II of Schedule VII.
The Customs Act, 1962 (“Customs Act”) provides for levy of customs duty when goods are transported across borders between countries. Customs duty are taxes that governments impose on export and import of goods. Customs duty falls within List I of Schedule VII to the Constitution of India and the Parliament enjoys exclusive jurisdiction to levy customs duty.
The definitions under the Customs Act demonstrate that the goods are cleared for home consumption only when cleared by customs authority. A BoE is presented for computing the customs duty. Once such duty is paid, the customs authority clears the goods and the import process insofar as the Customs Act stands concluded. It is only thereafter that the DO is issued by the shipper upon proof of payment of customs duty and its own charges. Accordingly, the DO does not form part of the chain of the import process and the taxing event occurs beyond the course of import. There is thus no overlap in the legislative field; and the State and the Centre are both well within their own occupied areas of legislation. The imposition of stamp duty on a DO in no manner encroaches upon the parliamentary legislative power in Entry 83 of List I of Schedule VII.
A plain reading of the Stamp Act suggests that a DO mentioned in Article 29 therein is not excluded from the definition of ‘instrument’ under Section 2(l) of the Stamp Act. Section 2(l) of the Stamp Act defines an ‘instrument’ to include every document which creates any right or liability but specifically excludes BoL. A DO is neither a BoL nor a BoE; and merely entitles the person named therein to take the delivery of goods after discharging the dues of a shipper (whose lien on the goods then stands extinguished). It is not necessary for a DO to be a document of title to fall within the purview of the definition of ‘instrument’ under the Stamp Act.
The computation of the stamp duty amount based on the valuation of goods does not preclude a DO from being an ‘instrument’ chargeable to stamp duty by the State. It is not the transaction which is liable to stamp duty but the ‘instrument’.
The Gujarat High Court Judgement has no application in the State of Maharashtra since – (a) the challenge therein was with respect to the levy of stamp duty on a BOE which was held to be distinct from a DO and not an instrument contemplated under Article 24 of the Bombay Stamp Act, 1958 (as applicable in Gujarat); (b) the State of Maharashtra had not formulated any regulation equivalent to Regulation 16 of the Gujarat Maritime Board (Landing & Wharfage) Regulations, 1956 which provided for a BOL to be a DO; and (c) a BoL was specifically excluded from the definition of ‘instrument’ under Section 2(l) of the MSA (as applicable in Maharashtra) and a DO was not covered by any exclusions under the MSA.

Conclusion

By this judgement, the Bombay HC has clarified the authority of the State of Maharashtra in levying stamp duty on DOs under the Stamp Act in respect of imported goods. This judgement carries significant fiscal implications on corporate entities in diverse sectors who import goods as a part of their business activities in Maharashtra. Simultaneously, this judgement also has a bearing on the revenue of the State of Maharashtra. It may be noted that the State of Gujarat has appealed against the Gujarat High Court Judgement before the Supreme Court of India which is currently pending adjudication. At present, there is no appeal against this Bombay HC judgement.

This Prism has been prepared by:

Farhad Sorabjee
Partner

Pratik Pawar
Partner

Shanaya Cyrus Irani
Partner

For more details, please contact [email protected]

[1] 2024 SCC OnLine Bom 950.

[2] Essar Steel Limited v. Superintendent of Stamps, 2010 SCC OnLine Guj 1826.

[3] State of Gujarat v. Reliance Industries Ltd., 2011 SCC OnLine Guj 5032.

Tags Bombay High Court, Constitution, Constitutional Rights, Dispute Resolution, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates

Sidharth Sethi | Panel Discussion | International Conference on Cross-Border and Group Insolvency in India | New Delhi

Sidharth Sethi was invited at the ‘International Conference on Cross-Border and Group Insolvency in India’ for a panel discussion on “Group Insolvency: Challenges and Opportunities”.

This conference was organised on 13 April 2024 by the Indian Institute of Insolvency Professionals of ICAI (“IIIPI”), in association with the Insolvency and Bankruptcy Board of India (“IBBI”), Foreign, Commonwealth and Development Office, Government of the United Kingdom (“UKFCDO”) and Institute of Chartered Accountants of India (“ICAI”). Ernst & Young (“E&Y”) were the technical partners for the conference.

The other distinguished speakers on the panel were:

Mr. Virender Ganda, Senior Advocate (President, NCLT and NCLAT Bar Association);
Mr. Benjamin Barker, Senior Policy Advisor, The Insolvency Service, UK;
CA Hansraj Chugh, Central Council Member, ICAI;
Mr. Ashok Kumar, Partner, Black Oak LLC, Singapore;
Mr. Abhilash Lal, Insolvency Professional.

The session was moderated by Mr. Ganda, and explored various nuances, challenges and opportunities concerning Group Insolvency in India.

Tags Insolvency, JSA, Leading Law Firm, Leading Lawyers

Supreme Court in exercise of curative jurisdiction, sets aside arbitral award on the grounds of patent illegality and perversity

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A 3 (three) judge bench of the Supreme Court of India (“Supreme Court”), while deciding a curative petition[1] filed with regard to the decision in Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd.[2] (“Curative Petition”), has set aside an arbitral award on the ground of patent illegality and perversity, recognised as grounds for challenge under Section 34(2A) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

The decision reaffirms the position of law enunciated in Ssangyong Engineering & Construction Co. Ltd. v. NHAI[3] and Associate Builders v. Delhi Development Authority[4]. It is well settled that an award rendered is perverse or irrational where the findings are: (a) based on no evidence; (b) based on irrelevant material; and (c) award ignores vital evidence. Further, an award is considered patently illegal when the award contains no reasons at all, so as to be considered as a reasoned award.

Brief Facts

The disputes arose from a concession agreement (“Agreement”) between Delhi Metro Rail Corporation Ltd. (“DMRC”) and Delhi Airport Metro Express Private Limited (“DAMEPL”), for construction, operation and maintenance of Airport Metro Express Line Project (“AMEL”).

DAMEPL suspended the operation of AMEL in 2012, alleging that it was unsafe to operate, owing to serious design and quality issues.

DAMEPL issued a notice under Clause 29.5.1 of the Agreement requiring DMRC to cure the list of defects within a period of 90 (ninety) days, failing which an event of default would be triggered in terms of the Agreement and entitling DAMEPL to terminate the Agreement. Clause 29.5.1(i) of the Agreement entitled DAMEPL to terminate the Agreement if DMRC failed to cure “such breach or take effective steps for curing such breach” within 90 (ninety) days of receipt of notice from DAMEPL.

Thereafter, upon DMRC’s alleged failure to cure defects within the 90 (ninety) days period, on October 8, 2012, DAMEPL terminated the Agreement.

On October 23, 2012, DMRC initiated the arbitration proceedings, after exhausting the pre-reference remedies stipulated in the Agreement.

On November 19, 2012, DAMEPL and DMRC made a joint application to the Commissioner of Metro Railway Safety (“CMRS”) for re-opening of AMEL. After due inquiry and inspection, the CMRS issued the sanction on January 18, 2013.

Based on the CMRS certification, operations of AMEL were resumed on January 22, 2013. Shortly thereafter, on June 30, 2013, DAMEPL halted operations and handed over assets of AMEL to DMRC.

In August 2013, a 3 (three) member Arbitral Tribunal (“Tribunal”) was constituted. The Tribunal passed a unanimous award in favour of DAMEPL (“Award“). The Award inter alia held that DAMEPL was entitled to: (a) termination payment in terms of the Agreement; (b) expenses incurred in operating the AMEL from January 7, 2013 to June 30, 2013 and debt service made by DAMEPL during this period; (c) refund of bank guarantee, which had been encashed, along with interest thereon; (iv) refund of security deposits with service providers along with interest thereon. It was also held that DMRC was entitled to concession fee for the period from February 23, 2012, to January 7, 2013.

The Award was based on the following findings: (a) the termination notice issued by DAMEPL was valid; (b) DMRC had failed to cure the breach within 90 (ninety) days, nor had effective steps been taken to cure such defects; and (c) this resulted in a material adverse effect on the concessionaire.

Assailing the Award, DMRC filed a challenge petition under Section 34 of the Arbitration Act. The said petition was dismissed by a Single Judge of the Delhi High Court. It was held that so long as the Award was reasonable and plausible, considering the material before the Tribunal, no interference was warranted, even if an alternative view was possible.

This gave rise to an appeal under Section 37 of the Arbitration Act before a Division Bench of the Delhi High Court (“Division Bench”). The Division Bench set aside the Award on the grounds of perversity and patent illegality.

Against the decision of the Division Bench, DAMEPL filed a Special Leave Petition (“SLP”) under Article 136 of the Constitution. A 2 (two) judge bench of the Supreme Court allowed the SLP and restored the Award. The review petition assailing this decision was dismissed. DMRC then filed a curative petition.

Issues before Supreme Court in the Curative Petition

The issues considered by the Supreme Court in the Curative Petition included: (a) whether the curative petition was maintainable; and (b) whether the 2 (two) judge bench of the Supreme Court was justified in restoring the Award, which had been set aside by the Division Bench on the grounds that it suffered from patent illegality.

Supreme Court’s Decision

The decision of the Supreme Court on both the primary issues was interlinked.

On the first issue, it was held that in essence, the jurisdiction of the Supreme Court, while deciding a curative petition, extended to cases where the court had acted beyond its jurisdiction, resulting in a grave miscarriage of justice.

The Supreme Court, thereafter, examined the scope of interference with arbitral awards under Section 34 of the Arbitration Act. In this regard, it was held that although the interpretation of a contract was exclusively within the domain of the arbitrator, construction of a contract in a manner that no fair-minded or reasonable person would take, was impermissible, and would result in the award suffering from the vice of patent illegality.

On the second issue, the Supreme Court concluded that the 2 (two) judge bench of the Supreme Court erred in interfering with the decision of the Division Bench. While holding so, the Supreme Court concluded that the decision of the Division Bench was based on a correct application of the test under Section 34 of the Arbitration Act.

It was further held that the decision of the Division Bench provided adequate reasons to come to the conclusion that the Award suffered from perversity and patent illegality inter alia: (a) the Award overlooked crucial facts and evidence on record that were crucial to the determination of the issues before the Tribunal, particularly the CMRS certificate which had led to resumption of the AMEL services, although all defects had not been cured; (b) the Award overlooked the express terms of the terms of the Agreement i.e., Clause 29.5.1(i) which stipulated that “if effective steps” were taken during the cure period by DMRC, the contractual power to terminate the Agreement, could not be exercised.

In view of the foregoing, the Supreme Court held that the decision of Division Bench of the Delhi HC was in line with the settled precedent including Ssangyong (supra) and Associate Builders (supra) and that the Division Bench had correctly held that the Tribunal ignored vital evidence on record, resulting in perversity and patent illegality, warranting interference. It was further held that “by setting aside the judgement of the Division Bench, this Court restored a patently illegal award which saddled a public utility with an exorbitant liability. This has caused a grave miscarriage of justice.”

Accordingly, the Supreme Court held that the facts of the case warranted exercise of the curative jurisdiction of the Supreme Court, in terms of the judgment in Rupa Hurra v. Ashok Hurra[5], and set aside the Award.

The Supreme Court did, however, caution that the curative jurisdiction should not be used to open the floodgates and create a fourth or fifth stage of court intervention in an arbitral award.

Conclusion

On the face of it, the decision of the Supreme Court may be said to be in consonance with the law laid down and the position of law enunciated in the Ssangyong (supra) and Associate Builders (supra) decisions. However, the setting aside of the Award, that too in exercise of curative jurisdiction, appears to be contrary to the principles of minimal judicial intervention under the Arbitration Act. The fact that the Supreme Court has effectively reappreciated the evidence on record and has examined the interpretation of the terms of the Agreement between the parties, both of which are ordinarily within the domain of the tribunal, leads to the concern that floodgates will be opened for another layer of judicial scrutiny of arbitral awards, notwithstanding the words of caution in this regard in the judgment. The judgment also begs the question whether curative jurisdiction would have been exercised with respect to an arbitral award if a public utility was not a party to the proceedings.

This Prism has been prepared by:

Ananya Kumar
Partner

Kamaljeet Singh
Partner

Shriya Luke
Principal Associate

For more details, please contact [email protected]

[1] Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express Pvt. Ltd. Curative Petition (C) Nos. 108 -2019 of 2022 in Review Petition (C) No. 1158 – 1159 of 2021 in Civil Appeal Nos. 5627 – 5628 of 2021.

[2] (2022) 1 SCC 131.

[3] (2019) 15 SCC 131.

[4] (2015) 3 SCC 49.

[5] 2022 4 SCC 388.

Tags Arbitration Act, Dispute Resolution, JSA, JSA Prism, Leading Law Firm, Leading Lawyers, Legal Updates, Supreme Court

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