Wednesday, 19 June 2019

Whether interpretation of contract terms regarding taxes will be in arbitrator's domain?

 From the legal position as noted it is evident whether the service
tax liability has been agreed not to be passed on to the recipient of the
service would depend on the interpretation of clauses entered into
between the parties.
 In the instant case, the clause in question does not fix liability on
the contractor to pay service tax that apart from, the clause required
interpretation and in view of the aforenoted Judgments regarding the

interpretation of the contract, view taken by the learned Arbitrator
cannot be faulted.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION

APPEAL NO. 284 OF 2019
IN
ARBITRATION PETITION NO. 214 OF 2014

Central Warehousing Corporation Vs. Aqdas Maritime Agency Pvt. Ltd

CORAM : PRADEEP NANDRAJOG, C.J. &
N. M. JAMDAR, J.
DATE : 14 th JUNE, 2019.
 (Per Chief Justice)

1. Having heard learned Counsel for the Appellant in the five

captioned Appeals which lay a challenge to a singular Judgment dated
18.02.2019 dismissing five Arbitration Petitions filed under Section 34
of the Arbitration and Conciliation Act, 1996 challenging five Awards
of even date, we find no case made out to issue notice to the
Respondent and thus dismiss the Appeals in limine.
2. The matter of the dispute before the Arbitrator was five contracts
of different dates having identical terms whereunder the Respondent
was functioning as the handling and transport contractor of the
Appellant. Reimbursing the contractor service tax deposited by the
contractor with the Income Tax Department, the Appellant took a stand
that under bonafide mistake it had reimbursed the service tax. Claim
before the Arbitrator was praying that Award be passed in favour of the
Appellant for the amount of service tax paid by the Appellant to the
Respondent who had deposited the service tax with the Income Tax
Department. Reliance was placed on Clause XII, Para (i), which was
identical in all the contracts. The Clause reads:
“(i) All the taxes/levies/fees/charges payable to any
Government body/Local body shall be paid by the contractor
and no claim what so ever shall be against the Corporation
on this account.”

3. Overruling technical objection raised by the contractor, the
learned Arbitrator has held that the Appellant, as the service recipient,
was liable to pay the service tax and that as per the clause in question,
the Respondent had not taken over the liability to bear the service tax.
4. In the impugned decision, the learned Single Judge has held that
the construction of the clause of the contract by the learned Arbitrator
fell within the domain of the Arbitrator and thus the decision could not
be challenged.
5. In the decision reported as (2007) 7 SCC 527 All India
Federation of Tax Practitioners & Ors. Vs. UOI & Ors., the Supreme
Court noted that service tax is an indirect tax levied on certain services
provided by certain categories of persons including companies,
associations, firms, body of individuals etc. The service sector
contributes about 64% to the GDP. It noted that in the contemporary
world, development of service sector has become synonymous with the
advancement of the economy and the Economists hold the view that
there is no distinction between the consumption of goods and

consumption of services as both satisfy the human needs. It was noted
that Value Added Tax (in short VAT) which is a general tax applies in
principle to all commercial activities involving the production of goods
and provision of services. The Supreme Court held that VAT is a
consumption tax as it is borne by the consumer and Service Tax is a
VAT which in turn is destination based consumption tax. The Supreme
Court noted that just as excise duty is a tax on value addition on goods,
Service tax is on value addition by the rendition of services. Broadly
“Services” fall into two categories, namely, property-based services and
performance based services. Property-based services cover service
providers such as architects, interior designers, real estate agents,
construction services, mandapwalas etc. and the later being services
provided by stock-brokers, practising chartered accountants, practising
cost accountants, security agencies, tour operators, event managers,
travel agents etc.
6. In the decision reported as AIR 2012 SC 2829 Rashtriya Ispat
Nigam Ltd.vs. M/s Dewan Chand Ram Saran it was held:
"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."
7. Section 83 of the Finance Act, 2007 made certain provisions of
the Central Excise Act, 1944 as in force from time to time applicable in
relation to Service Tax as they apply in relation to a duty of excise. The
Section reads as under:
"83. Application of certain provisions of Act 1 of 1944:
The provisions of the following section of the Central Excise Act,
1944 ( 1 of 1944), as in force from time to time, shall apply, so far
as may be, in relation to service tax as they apply in relation to a
duty of excise: -
9C, 9D, 11B, 11BB, 11C, 12 12A, 12B. 12C, 12D, 12E, 14,
[14AA]*, 15, 33A, 35F, 35-FF to 35-O (both inclusive), 35Q, 36,
36A, 36B, 37A, 37B, 37C, 37D, [38A]* and 40."

8. Section 12 (b) of the Central Excise Act reads as under:
"12B. PRESUMPTION THAT INCIDENCE OF DUTY HAS
BEEN PASSED ON TO THE BUYER.
Every person who has paid the duty of excise on any goods under
this Act shall, unless the contrary is proved by him, be deemed to
have passed on the full incidence of such duty to the buyer of such
goods."
9. Thus Section 83 of the Finance Act is a legislation by
incorporation applying inter alia Section 12B of the Central Excise Act
to the Service Tax.
10. Halsbury’s Law of England (4th Edn., Vol.44 (1)), para 127 page
744 deals with the incorporation of other enactments by reference as
under:
"It is a common device of legislative drafters to incorporate earlier
statutory provisions by reference, rather than setting out similar
provisions in full. This saves space and also attracts the case law
and other learning attached to the earlier provision. Its main
advantage is a Parliamentary one, however, since it shortens Bills
and cuts down the area for debate."
11. In the decision reported as 2011 (3) SCC 1 Girnar Traders vs.
State of Maharashtra & Ors., the Constitution Bench while dealing with

legislation by incorporation held that with the development of law, the
legislature has adopted the common practice of referring to the
provisions of the existing statute while enacting new laws. It was held
that reference to an earlier law in the later law could be a simple
reference of provisions of the earlier statute or a specific reference where
the earlier law is made an integral part of the new law, that is, by
incorporation. In contrast to such simple reference, legal incident of
legislation by incorporation is that it becomes part of the existing law
which implies bodily lifting provisions of one enactment and making
them part of another and in such cases, subsequent amendments in the
incorporated Act could not be treated as part of the incorporating Act.
The obvious advantage of legislation by incorporation is that the judicial
precedents and discussions on the earlier enactment apply to the later
enactments.
12. Section 83 of the Finance Act 2007, though a legislation by
incorporation, also takes care of non-applicability of the future
amendments, as it provides for applicability of the relevant Sections of
the Central Excise Act 1944 as in force from time to time. Thus the

future amendments in the provisions of the Central Excise Act would
also be applicable mutatis mutandis to Service Tax. As noted above,
Section 12B of the Central Excise Act, which applies to the Service Tax
raises a presumption that the incidence of duty has been passed to the
buyer unless the contrary is proved. Thus in the absence of a contract
for the liability of a service tax, it will be presumed that the same has
been passed over to the service recipient.
13. Based on the Rule of Equity, similar provision exists in the Sales of
Goods Act, 1930, that is, Section 64A. The Supreme Court in the
decision reported as 2007 (8) SCC 466 Numaligarh Refinery Ltd. Vs.
Daelim Industries Co. Ltd., held that whether a party is entitled to be
paid such a tax or increase has to be ascertained from the intention of
the parties to the contract and unless a different intention appears from
the terms of the contract, in the case of imposition or increase in the tax
after the making of a contract, the party shall be entitled to be paid such
taxes or such increase. It was held:
"18. In this connection, learned Counsel has invited our attention
to Section 64A of the Sale of Goods Act, 1930 which reads as
under:

"64-A. In contracts of sale, amount of increased or decreased taxes
to be added or deducted.- (1) Unless a different intention appears
from the terms of the contract, in the event of any tax of the nature
described in Sub-section (2) being imposed, increased, decreased
or remitted in respect of any goods after the making of any
contract for the sale or purchase of such goods without stipulation
as to the payment of tax where tax was not chargeable at the time
of the making of the contract, or for the sale or purchase of such
goods tax-paid where tax was chargeable at that time-
(a) if such imposition or increase so takes effect that the tax or
increased tax, as the case may be, or any part of such tax is paid or
is payable, the seller may add so much to the contract price as will
be equivalent to the amount paid or payable in respect of such tax
or increase of tax, and he shall be entitled to be paid and to sue for
and recover such addition; and
(b) if such decrease or remission so takes effect that the decreased
tax only, or no tax, as the case may be, is paid or is payable, the
buyer may deduct so much from the contract price as will be
equivalent to the decrease of tax or remitted tax, and he shall not
be liable to pay, or be sued for, or in respect of, such deduction.
(2) The provisions of Sub-section (1) apply to the following taxes,
namely;-
(a) any duty of customs or excise on goods;
(b) any tax on the sale or purchase of goods. This section also
clearly says that unless a different intention appears from the terms
of the contract, in case of the imposition or increase in the tax after
the making of a contract, the party shall be entitled to be paid such
tax or such increase. In this connection, the intention of the parties
is to be ascertained, as per the clauses mentioned above.
14. In the decision reported as 1997 (5) SCC 536 Mafatlal Industries
Ltd. & Ors. Vs. Union of India & Ors. a nine judges Bench of the

Supreme Court of India while dealing with the claim of refund held that
the same was maintainable by virtue of declaration contained in Article
265 of the Constitution of India as also under Section 72 of the
Contract Act subject to one exception. Noting that the duties under the
Central Excise and Customs are indirect taxes and supposed to be and
are permitted to be passed on to the buyers, it was held:
"80. For the purpose of this discussion, we take the situation
arising from the declaration of invalidity of a provision of the Act
under which duty his been paid or collected, as the bases,
inasmuch as that is the only situation surviving in view of our
holding on (I) and (II). In such cases the claim for refund is
maintainable by virtue of the declaration contained in Article 265
as also under Section 72 of the Contract Act as explained
hereinbefore subject, to one exception : where a person approaches
the High Court or Supreme Court challenging the constitutional
validity of a provision but fails, he cannot take advantage of the
declaration of unconstitutionality obtained by another person on
another ground; this is for the reason that so far as he is concerned,
the decision has become final and cannot be re-opened on the basis
of the decision on another person's case; this is the ratio of the
opinion of Hidayatullah, CJ. In Tilokchand Motichand and we
respectfully agree with it. In such cases, the plaintiff may also
invoke Section 17(1)(c) of the Limitation Act for the purpose of
determining the period of limitation for filing a suit. It may also be
permissible to adopt a similar rule of limitation in the case of writ
petitions seeking refund in such cases. But whether the right to
refund or restitution, as it is called, is treated as a constitutional
right flowing from Article 265 or a statutory right arising from
Section 72 of the Contract Act, it is neither automatic nor
unconditional. The position arising under Article 265 is dealt with
later in Paras 75 to 77. Here we shall deal with the position under
Section 72. Section 72 is a rule of equity. This is not disputed by
Sri F.S. Nariman or any of the other counsel appearing for the
appellants-petitioners. Once it is a rule of equity, it is un-

understandable how can it be said that equitable considerations
have no place where a claim is made under the said provision.
What those equitable considerations should be is not a matter of
law. That depends upon the facts of each case. But to say that
equitable considerations have no place where a claim is founded
upon Section 72 is, in our respectful opinion, a contradiction in
terms. Indeed, in Kanhaiyalal, the Court accepts that the right to
recover the taxes - or the obligation of the State to refund such
taxes – under Section 72 of the Contract Act is subject to
"questions of estoppel, waiver, limitation or the like", but at the
same time, the decision holds that equitable considerations cannot
be imported because of the clear and unambiguous language of
Section 72. With great respect, we think that a certain amount of
inconsistency is involved in the aforesaid two propositions.
"Estoppel, waiver...or the like", though rules of evidence, are yet
based upon rules of equity and good conscience. So is Section 72.
We are, therefore, of the opinion that equitable considerations
cannot be held to be irrelevant where a claim for refund is made
under Section 72. Now, one of the equitable considerations may be
the fact that the person claiming the refund has passed on the
burden of duty to another. In other words, the person claiming the
refund has not really suffered any prejudice or loss. If so, there is
no question of reimbursing him. He cannot be re compensated for
what he has not lost. The loser, if any, is the person who has really
borne the burden of duty; the manufacturer who is the claimant
has certainly not borne the duty notwithstanding the fact that it is
he who has paid the duty. Where such a claim is made, it would be
wholly permissible for the court to call upon the
petitioner/plaintiff to establish that he has not passed on the
burden of duty to a third party and to deny the relief of refund if
he is not able to establish the same, as has been done by this Court
in I.T.C. In this connection, it is necessary to remember that
whether the burden of the duty has been passed on to a third party
is a matter within the exclusive knowledge of the manufacturer. He
has the relevant evidence - best evidence - in his possession.
Nobody else can be reasonably called upon to prove that fact.
Since the manufacturer is claiming the refund and also because the
fact of passing on the burden of duty is within his special and
exclusive knowledge, it is for him to allege and establish that he
has not passed on the duty to a third party. This is the requirement
which flows from the fact that Section 72 is an equitable provision

and that it incorporates a rule of equity. This requirement flows
not only because Section 72 incorporates a rules of equity but also
because both the Central Excises duties and the Customs duties are
indirect taxes which are supposed to be and are permitted to be
passed on to the buyer. That these duties are indirect taxes, meant
to be passed on, is statutorily recognised by Section 64A of the Sale
of Goods Act, 1930.”
15. Noting sub-section 2 of Section 64A of the Sales of Goods Act
expressly made sub-Section 1 of Section 64A applicable to the duty of
customs or excise on goods and referring to the decisions of the Federal
Court in AIR 1942 FC 33 The Province of Madras Vs. Boddu Paidanna
& Sons and the Supreme Court reported as AIR 1962 SC 1281 R. C.
Jall v. Union of India, it was held in Mafatlal (supra) that in such a
situation, it would be legitimate for the Court to presume, until the
contrary is established, that a duty of excise or a customs duty has been
passed on. It is a presumption of fact which a Court is entitled to draw
under Section 114 of the Indian Evidence Act the same being
undoubtedly a rebuttable presumption but the burden of rebutting it
lies upon the person who claims the refund and it is for him to allege
and establish that as a fact he has not passed on the duty and, therefore,
equity demands that his claim for refund be allowed.

16. Thus as a legislation by reference sub-Section (2) of Section 64A
of the Sales of Goods Act making applicable sub-Section (1) of Section
64A to any duty of Customs or Excise on goods and as a legislation by
incorporation Section 83 of the Finance Act making applicable Section
12B of the Central Excise Act to Service Act, Section 64A(1) is
applicable to Service Tax. From the provisions as noted and the
decisions of the larger benches it is evident that a service tax is a VAT
which in turn is a destination based consumption tax and is to be borne
by the consumer of goods. Further, unless contracted to the contrary,
the consumer of service is liable to refund the said tax to the service
provider who in turn is liable to pay to the government.
17. From the legal position as noted it is evident whether the service
tax liability has been agreed not to be passed on to the recipient of the
service would depend on the interpretation of clauses entered into
between the parties. Before adverting to the relevant clauses inter se the
parties in the present case it would be appropriate to note a few
decisions on the interpretation of a contract.

18. The House of Lords in the decision reported as [1998] 1 WLR
896 Investors Compensation Scheme Ltd. vs. West Bromwich Building
Society summarized the principle of interpretation of contractual
documents as under:
"(1) Interpretation is the ascertainment of the meaning which the
document would convey to a reasonable person having all the
background knowledge which would reasonably have been
available to the parties in the situation in which they were at the
time of the contract.
(2) The background was famously referred to by Lord Wilberforce
as the "matrix of fact," but this phrase is, if anything, an
understated description of what the background may include.
Subject to the requirement that it should have been reasonably
available to the parties and to the exception to be mentioned next,
it includes absolutely anything which would have affected the way
in which the language of the document would have been
understood by a reasonable man.
(3) The law excludes from the admissible background the previous
negotiations of the parties and their declarations of subjective
intent. They are admissible only in an action for rectification. The
law makes this distinction for reasons of practical policy and, in
this respect only, legal interpretation differs from the way we
would interpret utterances in ordinary life. The boundaries of this
exception are in some respects unclear. But this is not the occasion
on which to explore them.
(4) The meaning which a document (or any other utterance)
would convey to a reasonable man is not the same thing as the
meaning of its words. The meaning of words is a matter of
dictionaries and grammars; the meaning of the document is what
the parties using those words against the relevant background
would reasonably have been understood to mean. The background
may not merely enable the reasonable man to choose between the
possible meanings of words which are ambiguous but even (as
occasionally happens in ordinary life) to conclude that the parties

must, for whatever reason, have used the wrong words or syntax:
see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co.
Ltd. [1997] A.C. 749.
(5) The "rule" that words should be given their "natural and
ordinary meaning" reflects the common sense proposition that we
do not easily accept that people have made linguistic mistakes,
particularly in formal documents. On the other hand, if one would
nevertheless conclude from the background that something must
have gone wrong with the language, the law does not require
judges to attribute to the parties an intention which they plainly
could not have had. Lord Diplock made this point more vigorously
when he said in Antaios Compania Naviera S.A. v. Salen
Rederierna A.B. [1985] A.C. 191, 201:
"if detailed semantic and syntactical analysis of words in a
commercial contract is going to lead to a conclusion that flouts
business commonsense, it must be made to yield to business
commonsense."
19. In the decision reported as [2009] 2 All ER, 26 Durham vs. BAI
(Run Off) Ltd.(in scheme of arrangement) & Ors. the Queen’s Bench
Division while dealing with the construction of commercial contracts
noted:
"(203) A summary of helpful principles, drawn largely from the
words of Longmore LJ in Absalom (on behalf Lloyd's Syndicate
957) v. TCRU Ltd (2005) EWCA Civ 1586 at (7), (2006) 1 All
ER (Comm) 375 at (7), (2006) 2 Lloyd's Rep 129, and based
upon submissions to me by counsel, which I had approved, in the
recent case of Reilly v. National Insurance *Guarantee Corporation
Ltd (2008) EWHC 722 (Comm) at (13), (2008) 2 All ER
(Comm) 612 at (13), was again the subject matter of agreement,
and I repeat and incorporate it:

“(a) Ordinary Meaning. There is a presumption that the words to
be construed should be construed in their ordinary and popular
sense, since the parties to the contract must be taken to have
intended, as reasonable men, to use words and phrases in their
commonly understood and accepted sense. (See also para (7)(i)-
(iii) in the judgment of Longmore LJ and in particular: "The object
of the inquiry is not necessarily to probe the “real‟ intention of the intention of the
parties, but to ascertain what the language they used in the
document would signify to a properly informed observer.")
(b) Businesslike Interpretation. It is an accepted canon of
construction that a commercial document, such as an insurance
policy, should be construed in accordance with sound commercial
principles and good business sense, so that its provisions receive a
fair and sensible application. (See also the words of Lord Diplock
in Antaios Cia Navieras SA v. Salen Rederierna AB, The Antaios
(1984) 3 All ER 229 at 233, (1985) AC 191 at 201 cited at (7)(iv)
by Longmore LJ: If a "detailed semantic and syntactical analysis of
words in a commercial contract is going to lead to a conclusion that
flouts business common sense, it must be made to yield to business
common sense".)
(c) Commercial Object. The commercial object or function of the
clause in question and its relationship to the contract as a whole
will be relevant in resolving any ambiguity in the wording.
(d) Construction to avoid unreasonable results. If the wording of a
clause is ambiguous, and one reading produces a fairer result than
the alternative, the reasonable interpretation should be adopted. It
is to be presumed that the parties, as reasonable men, would have
intended to include reasonable stipulation in their contract."
20. In the instant case, the clause in question does not fix liability on
the contractor to pay service tax that apart from, the clause required
interpretation and in view of the aforenoted Judgments regarding the

interpretation of the contract, view taken by the learned Arbitrator
cannot be faulted.
21. The Five Appeals are, accordingly, dismissed.
[N. M. JAMDAR, J.] [CHIEF JUSTICE]

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