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ORDINARY ORIGINAL CIVIL JURISDICTION
COMMERCIAL ARBITRATION PETITION NO.1380 OF 2019
IN
COMMERCIAL ARBITRATION PETITION NO.1380 OF 2019
National Co-operative Consumer’s
Federation of India Limited ...Petitioner
(Formerly Known as Mirah Dekor Limited) ...Respondent
Mr. Bhavik Manek a/w. Mr. Pranav Chavan i/b Mahesh Menon
& Co. for the Petitioner.
Ms. Sharan Jagtiani a/w. Mr. Mutahhar Khan, Mr. Vishal
Mehta and Ms. Prachy Mody i/b M/s. MV Law Partners for the
Respondent.
JUDGMENT
1. This is a Petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 (“the Act”), mounting a challenge to an arbitral award dated May 31, 2019 (“Impugned Award”) awarding the NOVEMBER 3, 2025 Aarti Palkar Respondent, Mirah Dekor Private Limited (“Mirah”) a sum of Rs. ~1.36 crores along with interest at the rate of 12% per annum on a sum of Rs. ~57.58 lakh from April 1, 2010 until realisation; and on a sum of Rs. ~78.58 lakh from April 1, 2011 until realisation. A further sum of Rs. 50,000 along with interest at 12% per annum, from the date of the award has been awarded.
2. The Petitioner, National Co-operative Consumers’ Federation of India Ltd. (“Federation”) has been directed to pay the amounts so awarded directly to the Income-Tax Authorities forthwith, subject to appeals filed by Mirah, with proof of payment being shown within 15 days of payment. This direction was in view of an order of the Joint Commissioner of Income-Tax attaching any payments due to Mirah of up to Rs. 17 crores.
3. Mirah supplies various consumer items including food stuff to government and non-government clients. The Federation is an apex body of consumer co-operatives. Mirah has been empanelled by the Federation as a supplier of groceries. The Federation has been delivering groceries to ashrams, schools and hostels of the Tribal Development Department, Nashik (“TDD”). The arrangement was that Mirah would directly deliver the groceries to TDD under instructions from the Federation while TDD would pay the Federation, which would deduct its margin and pay over the receipts to Mirah.
4. Mirah’s bid was selected pursuant to a tender for 2009-10 and the parties executed an agreement dated June 19, 2009, which was supplemented on June 23, 2009. Another agreement dated November 19, 2010 also covered the same subject of supply – these are collectively referred to, for convenience as “the Agreement”. The three constituent agreements cover the supplies made by Mirah to TDD on behalf of the Federation, during the years 2009-10, 2010-11 and 2011-12.
5. Mirah would raise invoices from time to time, and the Federation would pay the same after deducting its fixed margin of 1.5%. In addition, for the two financial years 2009-10 and 2010-11, tax was deducted at source (“TDS”) in the aggregate sum of Rs. ~1.37 crores. The reason for such deduction provided by the Federation was that TDD had effected TDS at 2% on Mirah’s bills under Section 194-C of the Income-Tax Act, 1961 (“IT Act”). Whether TDD’s deduction of TDS amounts was even necessary under law is disputed, but the facts are that such deductions were made and paid over to the Revenue to the Federation’s credit. Multiple letters were issued by Mirah to the Federation in May 2011 asking to be paid amounts corresponding to the TDS deductions.
6. The Federation confirmed to Mirah by a letter dated June 2, 2011 that it would pay an amount of Rs. ~1.36 crores once its tax assessments were completed. There is a gap of Rs. ~1.31 lakh between the amounts claimed by Mirah and the amounts admitted by the Federation.
7. Mirah wrote multiple letters in June 2011 and July 2011 following up, which again met with the reply that TDD had deducted the amounts involved and had issued certificates of deduction in Form 16-A under the IT Act. Federation stated that once its tax assessment was completed, the amounts would be paid. Mirah took the stance that if the Federation availed of the TDS effected by TDD, those payments were made by TDD to the Federation’s account, and therefore the Federation was in receipt of the sums. The Federation indicated that its head office was being pursued to complete tax assessments quickly. Mirah followed up with the Federation’s head office too. The head office indicated that the amounts were indeed taken credit for and were shown as such in the provisional Form 26AS of the Federation under the IT Act (the form relating to the tax returns of the recipient of amounts after TDS). Once assessment was completed, the “provisional” status would turn to “final” after which the credit being available to the Federation for such amount, would become absolutely certain.
8. This stand-off continued and eventually led to arbitration. Mirah’s stance in the arbitration was that under Section 153 of the IT Act, tax assessments were to be completed within a period of two years. Mirah also contended from the material on record that the tax assessment status for the Federation indicated that a refund was due. Mirah would contend that deductions by TDD attributable only to disputed quality or quantity of the supplies would not be payable by the Federation onwards to Mirah. Since TDS amounts accrued to the benefit of the Federation – despite deduction by TDD, they were paid to the Income-Tax Authorities to the credit of the Federation – these amounts could constitute payments made by TDD to the Federation.
9. On a separate note, the Office of the Joint Commissioner of Income-Tax had issued a notice to the Federation on February 19, 2018, directing the Federation to directly pay the Income-Tax Authorities, any amount owed and payable by the Federation to Mirah, which led to Mirah seeking the relief of directing the Federation to make payment of the amount claimed directly to the Income-Tax Authorities, to the credit of Mirah.
10. The Federation would contend that the claim was barred by limitation since the amounts owed for the years 2009-10 and 2010-11 had been due on April 1, 2010 and April 1, 2011 respectively. In the same breath, the Federation took the stance that only the amounts actually received by the Federation would be payable to Mirah, and unless the Federation was paid, the right to claim did not even arise. It was contended that the amounts showing in the Form 26AS as TDS amounts paid by TDD covered all vendors across the board and not just Mirah. That apart, it was contended that TDD would be a necessary party since all deliveries had been made directly to TDD on behalf of the Federation. Impugned Award
11. The Learned Arbitral Tribunal ruled that the claim was not barred by limitation. Mirah had invoked arbitration by notice dated October 20, 2014. Pursuant to this letter, the Managing Director of the Federation was appointed by Mirah as the arbitrator in line with the Agreement. However, the Managing Director did not initiate proceedings at all. Eventually, the Learned Arbitral Tribunal was constituted by this Court under Section 11 of the Act in disposal of a Section 11 Application by two parallel orders dated February 2, 2018.
12. The Learned Arbitral Tribunal found that by letters dated July 25, 2011, January 18, 2012 and February 8, 2012 and its internal letter dated November 27, 2014, the Federation admitted its liability to the extent of Rs. ~1.36 crores. The Learned Arbitral Tribunal also ruled that the Federation claimed on the one hand that the claim was premature since no amount would be payable unless tax assessments were completed, and that they were yet to be completed. Yet, in the same breath the Federation could not contend that the claim was barred by limitation. This position, coupled with the continual acknowledgment of liability, indicating that the cause of action of fighting against denial of payment had not arisen, was held to be mutually destructive, and the Learned Arbitral Tribunal was satisfied that the claim was not barred by limitation.
13. The Learned Arbitral Tribunal interpreted Clause 6 of the Agreement, which provided for the Federation deducting a sum of 1.5% towards the Federation’s margin from the total amount received by the Federation. The Agreement also provided that “any other deductions made” by TDD would be deducted from Mirah’s bills. The Agreement provided for a detailed framework of quality check and control and was persuaded to not include TDS amounts within the scope of deductions made by TDD in making payments to the Federation. The Learned Arbitral Tribunal held that it was imperative for the Federation to complete it tax assessments and if they were not completed, that could mean that Mirah would never be paid its rightful dues.
14. The Learned Arbitral Tribunal concluded that TDD was not a necessary party at all to the proceedings since the issue involved was of interpreting the Agreement and the implications for treatment of TDS.
15. The Learned Arbitral Tribunal was persuaded to hold that the sum of Rs. ~57.58 lakhs due on April 1, 2010 and the sum of Rs. ~78.58 lakhs, aggregating to Rs. ~1.36 crore was payable. This amount corresponds to the amount admitted as being payable in the correspondence from the Federation, indeed also claiming that the payment would be made after tax assessments were completed.
16. Disallowing a claim for interest at 18% per annum compounded, the Learned Arbitral Tribunal granted simple interest at 12% per annum. Costs claimed at Rs. 1 lakh, without any evidence to show the payment, were disallowed. Expenses incurred in the sum of Rs. 50,000 was allowed.
17. Taking note of the notice from the Joint Commissioner of Income-Tax asking for payments of up to Rs. 17 crores, if released by the Federation to Mirah, must be paid directly to the Income-Tax Authorities, the Learned Arbitral Tribunal directed that the amounts awarded be paid by the Federation to the Income-Tax Authorities to Mirah’s credit. Analysis and Findings:
18. I have heard Mr. Bhavin Manik, Learned Advocate for the Federation and Mr. Sharan Jagtiani, Learned Senior Advocate for Mirah at length and with the benefit of their verbal arguments and written submissions permitted to be filed after the hearing was concluded, examined the material on record. I have also examined the Impugned Award and the approach of the Learned Arbitral Tribunal. TDS as a Concept:
19. Notwithstanding the enthusiasm with which a multitude of points were presented by each side before the Learned Arbitral Tribunal and before this Court, the fact of the matter is that the issues that came up for adjudication fall in a rather narrow compass.
20. It is trite law that when tax is deducted by a deductor, who is liable to make payment to a deductee, the amount deducted by the deductor is required to be deposited with the Revenue. The deduction is actually tax owed by the deductee, which is appropriated on behalf of the Revenue by the deductor, and paid over to the Revenue. The payment of tax in this process, is a payment of tax owed by the deductee to the Revenue. The deductor is only an instrumentality of the State to deduct and pay over the tax amount owed by the deductee to the Revenue. The deductee would then get benefit of such tax paid. As such the TDS amount paid over to the Revenue is the amount paid over for and on behalf of the deductee.
21. Therefore, the entitlement to credit for the money so deposited belongs to the deductee. In other words, it is simply a cash flow arrangement mandated by the statute. The payments are, for all purposes, payments made by the deductor to the deductee, but instead of paying the deductee who would then pay it to the Revenue towards tax, the amount is paid by the deductor to the Revenue but to the credit of the deductee. The documents that evidence such credits are the tax deduction certificate issued by the deductor (Form 16A) and the certificate of entitlements of the deductee (Form 26 AS).
22. When seen in the light of this first principle of tax law, all amounts admittedly deducted by TDD and paid to the Revenue, are amounts for which the Federation had credit. The title to benefits flowing from such amounts is evidenced by the Form 16A and the Form 26AS. The Federation would have to pay a correspondingly lesser amount in its total tax bill. Whether the tax assessment results in payment of tax or refund of excess tax paid is totally irrelevant. Deductions by TDD and their effect:
23. Therefore, the sole point for consideration is really what the Agreement provided for in respect of reductions in payment to Mirah by the Federation. Towards this end, Clause 6 of the Agreement is noteworthy. This provision stipulated that the Federation would pay over to Mirah, “an amount after deducting 1.5% discount (margin of NCCF) from the total amount received” from TDD. Any other deductions made by TDD were to be deducted from the bills of Mirah.
24. Plainly put, should there be any deduction made by TDD, under the Agreement, the Federation would be insulated from it – such deductions could obviously be attributed by TDD to quality or quantity disputes or any other dispute over any portion of Mirah’s bills. On facts, admittedly there has been no cause for any such deduction. This solely leaves for consideration, the treatment to be accorded to the TDS amounts. Clause 6 provides for an obligation on the Federation to pay the amount received from TDD, after deducting 1.5%, which is the Federation’s margin.
25. The Federation is protected from any other deduction effected by TDD – that risk was to be borne solely by Mirah. The risk and reward for the Federation was assured – a margin of 1.5% while the risk and reward for Mirah was to supply the groceries and earn the proceeds, subject only to the deduction of 1.5% margin of the Federation.
26. Against this backdrop, and the first principles of tax law which would unequivocally point to the amount of TDS deducted by TDD accruing to the benefit of the Federation, it is evident to me that the TDS amount is an integral part of the amount received by the Federation. It is trite law that the total amount (including the TDS) is the income of the Federation and therefore, it is amount received by the Federation. Therefore, the Learned Arbitral Tribunal’s view that other deductions referred to in Clause 6 would entail deductions on the ground of quality and quantity for which there had been a framework provided for in the Agreement is a credible and accurate reading of the Agreement.
27. The Learned Arbitral Tribunal has examined witnesses, parsed the record, appreciated the evidence led by the parties, and returned findings in the matter. The Learned Arbitral Tribunal has also noticed that the amounts of TDS effected by TDD in respect of amounts paid to the Federation were in the aggregate across all vendors. Therefore, the Learned Arbitral Tribunal has only awarded the admitted and acknowledged amount of Rs.~1.36 crores. These findings are completely plausible and not at all perverse and therefore are safe from any interference by the Section 34 Court.
28. It is now trite law that if the Section 34 Court finds that the arbitral award returns a plausible and just outcome and if even implied reasons are discernible from the analysis by the Learned Arbitral Tribunal, the arbitral award should not be interfered with. This standard is well met by the Impugned Award, on the facet of TDS amount being an amount received by the Federation. Therefore Mirah being entitled to get the amount received by the Federation, subject to a discount of 1.5% towards the Federation’s margin, is a correct finding. Therefore, no cause for interference is made out. Limitation:
29. First, limitation being a mixed question of fact and law, it is noteworthy that the Learned Arbitral Tribunal has returned a finding that the claim was not barred by limitation. Second, Mirah has been chasing the Federation right since 2011. The Federation has not denied the obligation to pay the amount, but has even admitted that the amount is payable – the only hitch posed by the Federation was that the amount would be payable upon completion of tax assessments. The non-payment after follow up led to issuance of an invocation notice on October 20, 2014, appointing the managing director of the Federation as the arbitrator. The Federation simply did not act upon the request, insisting as it did, that the time to pay had not arisen.
30. On April 12, 2017, the second invocation was effected, followed by an application under Section 11 of the Act. There is nothing on record to indicate that the Federation took the stand that the filing of the Section 11 Application was barred by limitation. The Learned Arbitral Tribunal was appointed by consent. That Article 137 of the Limitation Act, 1963 would apply to applications filed under Section 11 of the Act is the law that is now well declared by Courts. The Section 11 Application was allowed on February 2, 2018 across both the references for the entire period of the supply. Therefore, the invocation was made within time, and the Section 11 was not opposed as not being made within time, and indeed there are admissions of liability by the Federation in the interregnum. Therefore, the view of the Learned Arbitral Tribunal on the facet of limitation is not perverse and being a plausible view, there is no case made out for taking a different view. Standard of Review:
31. In Dyna Technologies[1], the Supreme Court held thus: “24. There is no dispute that Section 34 of the Arbitration Act limits a challenge to an award only on the grounds provided therein or Dyna Technologies Private Limited v. Crompton Greaves Limited – (2019) 20 SCC as interpreted by various courts. We need to be cognizant of the fact that arbitral awards should not be interfered with in a casual and cavalier manner, unless the court comes to a conclusion that the perversity of the award goes to the root of the matter without there being a possibility of alternative interpretation which may sustain the arbitral award. Section 34 is different in its approach and cannot be equated with a normal appellate jurisdiction. The mandate under Section 34 is to respect the finality of the arbitral award and the party autonomy to get their dispute adjudicated by an alternative forum as provided under the law. If the courts were to interfere with the arbitral award in the usual course on factual aspects, then the commercial wisdom behind opting for alternate dispute resolution would stand frustrated.
25. Moreover, umpteen number of judgments of this Court have categorically held that the courts should not interfere with an award merely because an alternative view on facts and interpretation of contract exists. The courts need to be cautious and should defer to the view taken by the Arbitral Tribunal even if the reasoning provided in the award is implied unless such award portrays perversity unpardonable under Section 34 of the Arbitration Act.” [Emphasis Supplied]
32. Applying the aforesaid standard, which is but one of the multiple iterations of the principle laid down by the Supreme Court, namely, that even an alternate interpretation may sustain the arbitral award, in my opinion, no case is made out for interference with the Impugned Award, which is consistent with the first principles of tax law on treatment of TDS amounts.
33. Therefore, the Petition is dismissed. The ‘Notice of Motion’ too is accordingly disposed of.
34. Considering that a Learned Single Judge had protected the Petitioner from execution of the Impugned Award way back on June 25, 2021, the protection against execution is extended by a further period of four weeks from the upload of this judgement on this Court’s website.
35. All actions required to be taken pursuant to this order shall be taken upon receipt of a downloaded copy as available on this Court’s website. [SOMASEKHAR SUNDARESAN, J.]