CONVENTION HOTELS INDIA PRIVATE LIMITED v. AGER HOTELS GROUP LIMITED

The arbitral proceedings arose interalia from a claim of the Respondent No.1 for refund of a sum of Rs. 12,69,12,090/- with interest. It is the case of the Claimants that this amount was paid towards share subscription amounts by Ager Mauritius to CHI and the shares were not issued by CHI. It is therefore claimed in terms of Clause 10 of the SSA, the amount is to be refunded to the Claimant No. 1[i.e. Ager Mauritius], The claimants also claimed damages to the tune of Rs. 4,44,67,137/-. Clause 10 of the SSA is as under:

The Petitioner filed a statement of defence and a counter-claim before the learned Arbitrator contending the Claimants had committed a series of breaches of SSA and therefore is liable to pay a sum of Rs.65,11,00,000/towards losses and damages suffered on account of loss of business opportunity etc. and Rs.47,50,00,000/- towards the refund of the amount paid by it for the Amritsar Transaction to the present Petitioner.

D. AWARD

By its Award dated 06.10.2015, the Tribunal awarded Rs.19,92.51,981/to Ager India and Ager Mauritius against the respondent with interest@12% per annum from 26.8.2015 till payment. The sum of Rs.19,92,51,981/- was calculated on the basis of the principle of Rs.12,69.12,090/- plus interest @12% upto the date of the Award. The said sum of Rs.19,92,51,981/- was to further carry interest@12% till the date of payment. The amount of Rs.12,69,12,090/- was said to be the amount paid by Ager Mauritius to CHI in terms of Clause 3.[1] of the SSA. Although the SSA required 13.50 Crore to be paid, admittedly only Rs.12,69,12.090/- was paid by Ager Mauritius.

2. The petitioner has challenged the award primarily on two counts, besides other; (a) the learned arbitrator erred in awarding interest on the claim of the respondent in contravention of clause 10 above and (b) the report of M/s.Dun & Bradstreet Information Services India Private Limited filed by the petitioner qua damages was wrongly rejected without going into its details.

3. Qua (a) it is submitted by the learned counsel for the petitioner that RBI has specifically barred the refund of share subscription money and secondly clause 10 above does not provide for any interest to be paid on the same. The learned counsel for the petitioner referred to a circular dated November, 12, 2002 issued by the Reserve Bank of India, Exchange Control Department, Central Officer, Mumbai-4000001 which is as follows: Repatriation of refund of funds received for purchase of shares A.P. (DIR Series) Circular No.45 (November 12,2002)

RESERVE BANK OFINDIA EXCHANGE CONTROL DEPARTMENT CENTRAL OFFICE MUMBAI 400 001 A.P. (DIR Series) Circular No.45 To November 12,2002 All Authorised Dealers in Foreign Exchange Madam/Sirs, Repatriation of refund of funds received for purchase of shares Under the current exchange control regulations authorised dealers require prior permission of the Reserve Bank to allow repatriation of funds received for purchase of shares.

2. It has now been decided to delegate the authority to authorised dealers to allow repatriation of surplus funds/refund of remittance received for purchase of shares to a person resident outside India in the following cases; (a) Refund of funds received towards allotment of shares under Regulation 5(I) of the Reserve Bank Notification No. FEMA20/ 2000-RB dated May 3, 2000. (b) Remittance of surplus funds received for purchase of shares offered on rights basis.

(c) Remittance on account of surplus funds received for purchase of shares or on account of cancellation of trade, under Two-way fungibility of ADRs/GDRs.

3. Authorised dealers may, accordingly allow remittances representing refund of funds received from a person resident outside India for purchase of shares, in the cases listed in paragraph 2 above, provided that the authorised dealers are satisfied:

(i) with the bonafides of the applicant

(ii) that the repatriation represents refund of funds received for purchase of shares, by way of inward remittance from outside India or by debit to NRE/FCNR account maintained with an authorised dealer in India;

(iii) that no part of remittance represents interest on the funds received.

4. Authorised dealers may bring the contents, of this circular to the notice of their constituents concerned.

5. The directions contained in this circular have been issued under Section 10 (4) and Section 11(1) of the Foreign Exchange Management Act 1999 (42 of 1999). Yours faithfully, Grace Koshie Chief General Manager

4. The learned counsel for the petitioner has also referred to Section 10(1) and 10(4) of the Foreign Exchange Management Act which is as under: “10(1) The Reserve Bank may, on an application made to it in this behalf, authorise any person to be known as authorised person to deal in foreign exchange or in foreign securities, as an authorised dealer, money changer or offshore banking unit or in any other manner as it deems fit. 10(4) An authorised person shall, in all his dealings in foreign exchange or foreign security, comply with such general or special directions or orders as the Reserve Bank may, from time to time, think fit to give, and, except with the previous permission of the Reserve Bank, an authorised person shall not engage in any transaction involving any foreign exchange or foreign security which is not in conformity with the terms of his authorisation under this section.”

5. The learned counsel for the petitioner referred to an email dated 07.12.2012 from Gaurav Kukreja to respondents no. 1 and 2 and the relevant part of the email is as under:

6. Hence it is submitted by learned counsel for the petitioner that by awarding interest in violation of aforesaid circular which has a tapping of law, the learned arbitrator has gone against the fundamental policy of law. He cited Associate Builders V. Delhi Development Authority (2015) 3 SCC 49 says. Coming to each of the heads contained in the Saw Pipes judgment, we will first deal with the head "fundamental policy of Indian Law". It has already been seen from the Renusagar judgment that violation of the Foreign Exchange Act and disregarding orders of superior courts in India would be regarded as being contrary to the fundamental policy of Indian law. To this it could be added that the binding effect of the judgment of a superior court being disregarded would be equally violative of the fundamental policy of Indian law.

7. Further it is argued clause 10 of the share subscription agreement stated above does not provide for any interest. It is argued the interest probably has been awarded by the arbitrator by way of damages but since the claim of the damages made by the claimant is rejected then how interest be awarded as damages.

8. Another issue raised by the learned counsel for the petitioner is his counter claim for 65.11 crores in addition to refund of his investment (Jaipur as well as Amritsar) was not considered by the arbitrator despite the issues framed in this regard and that the learned arbitrator had dealt with the counter claim as under: There is a third reason as to why the question as to who committed default becomes unnecessary. This is because of the subsequent statement made by the learned counsel for the respondent, Mr.Muralidharan that the respondent is not seeking specific performance of the SSA and is also not examining any witness to prove the quantum of damages mentioned in the counter claim. We shall now refer to this aspect. Counsel for respondent no. I stated, even at the stage of the Sec.l[7] Application, that the respondent is not seeking specific performance of the SSA but that it is only claiming damages as stated in the Counter claim. So far as damages are concerned, the Respondent filed a Report regarding loss of profit etc as estimated by M/s Dun & Bradstreet Information Services Pvt.Ltd., (pages 279-371 of Respondents. documents). RW[1], in fact, during the course of his evidence, wanted to produce and prove the above report before the Tribunal. But there was an objection by the claimant's counsel that the said Report cannot be proved by RW[1] as RW[1] is not the author of the said report. It was contended that the author of the said Report must be allowed to be examined. Mr.Muralidharan, for the 1st respondent, then took time to examine the author of the said Report. Time was granted by the Tribunal. However, subsequently, by e-mail dated 21-11-014 to the Tribunal and to the Counsel for the claimants, Mr.Muralidharan stated that the Respondent is not examining anybody to prove the said Report which estimated the damages allegedly suffered by the 1st respondent. This is clear from the contents of said e-mail dated 21-11-2014 sent by Mr.Muralidharan: "We have to state and submit that no further witnesses are sought to be examined on behalf of the respondent no.1. It is therefore requested that the directions issued on 6-11-2014 for holding the next meetings of the Hon'ble Arbitral Tribunal at Hyderabad on 2-2-2015 and 3-2-2015 for cross examination of RW[2] be recalled and the said meetings may be cancelled." Therefore, if according to the learned Counsel for the Respondent, the Respondent is not seeking specific performance of the SSA nor proving the damages as set out in the Counter claim of the Respondent, there is, in our opinion, no need to consider whether claimant has committed breach of SSA in not complying with its obligations under the Ager Conditions Precedent.

9. It is argued by learned counsel for the petitioner that despite there being a breach of contract by the respondent, the learned arbitrator did not award any damages only because of non-producing the author of the report on damages despite there being sufficient oral evidence on record to prove such loss/counter claim of the petitioner which the learned arbitrator had ignored.

10. The learned counsel for the petitioner relied upon M/s A.T. Brij Paul Singh and others vs. State of Gujarat (1984) 4 Supreme Court Cases 59 which notes:

11. It is argued the learned arbitrator had not given any finding qua breach of contract but had only decided about quantum of damages and since there was no proof of the quantum, the counter claim was rejected. The finding of the Arbitral tribunal referred to is as under: "Therefore, if according to the learned Counsel for the Respondent, the Respondent is not seeking specific performance of the SSA nor proving the damages as set out in the Counter claim of the Respondent, there is, in our opinion, no need to consider whether claimant has committed breach of SSA in not complying with its obligations under the Ager Conditions Precedent. Plea of fundamental breach Learned counsel for the respondent no.1, then contended that this is a case of a "fundamental breach" of the SSA and that therefore, the provisions of Clause 10 of the SSA requiring refund of the amounts to claimants by.respondent no.1, cannot be applied. No authority has been cited by the learned counsel for the 1st respondent for the above contention. If the words "for whatever reason" in Clause 10 are of wide amplitude, as mentioned by us and are without any limitation, we are unable to carve out an exception to cases of "fundamental breach", as opposed to ordinary breaches of contract even if we assume that there is a fundamental breach by the claimants as contended by Respondent no.l. We therefore, reject this contention.”

12. The learned counsel for the petitioner then referred to para 7.[3] of the award which is noted as under: “7.[3] On Part (A), the Tribunal held that prima facie, the claimant no.l and 2 had committed breach of,,several Conditions Precedent which they had to perform under the SSA and therefore, they had not made out any prima facie case. On Part (B), the Tribunal, however, held in favour of the claimant, in the light of provisions of Clause 10 of the SSA, that as within 120 days of SSA, the respondent no.1 company had not allotted shares in the respondent no.1 company to claimants, the amount paid by claimant no.l (Rs.12,69,12,090/-) to Respondent 1), has to.be prima facie refunded to the claimant by Respondent No.1. It was held that the non-allotment of shares may be "for any reason whatsoever" under Cl.[1] 0 i.e., even if it is due to the defaults of claimants 1 and 2.”

13. The learned counsel for the petitioner referred to Order 8 Rule 6(A) CPC which runs as under: “6A. Counter claim by defendant.- (1) A defendant in a suit may, in addition to his right of pleading a set off under rule 6, set up, by way of counter claim against the claim of the plaintiff, any right or claim in respect of a cause of action accruing to the defendant against the plaintiff either before or after the filing of to suit but before the defendant has delivered his defence or before the time limited for delivering his defence has expired, whether such counter claim is in the nature of a claim for damages or not: Provided that such counter claim shall not exceed the pecuniary limits of the jurisdiction of the court. (2) Such counter claim shall have the same effect as a cross suit so as to enable the court to pronounce a final judgment in the same suit, both on the original claim and on the counter claim. (3) The plaintiff shall be at liberty to file a written statement in answer to the counter claim of the defendant within such period as may be fixed by the court. (4) The counter claim shall be treated as a plaint and governed by the rules applicable to plaints.”

14. If the amount of the counter claim is to be allowed then as per the petitioner the entire award could have been adjusted in the said counter claim. He argued the counter claim filed by petitioner was never considered by the arbitral tribunal and it rejected the damages payable.

15. The third argument of the learned counsel for the petitioner is the amounts were payable on round trip basis. The arbitral tribunal notes the same as under: “It is here that the "round tripping" payments by respondent no.1 to claimants for purchase of the claimant no.2's interest in Amritsar property, and the Jaipur property and the simultaneous payback of the said amounts by claimants to respondent no.l for purchase of shares in 1st respondent company, becomes important.”

16. It is submitted the round trip payment is violative of Section 96 (i)

(c) and Section 97 (b) (i) of the Income Tax Act. “Impermissible avoidance arrangement. 96.(1)An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it— (a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length; (b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

(c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or

(d) xxxx.

97. (1) An arrangement shall be deemed to lack commercial substance, if— (a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or (b) it involves or includes—

(i) round trip financing;”

17. Further submissions raised by the learned counsel for the petitioner is qua a cheque of Rs.2.50 crores issued by the respondent no.1 to petitioner which was for encashment but the learned tribunal held otherwise: “We have considered the evidence of the claimants and the respondents. We agree with the contention of the claimants that the evidence of RW[1] is consistent with the plea of claimant that the cheque was given only as security as stated by the claimant and not for purpose of encashment. On the other hand, the evidence of RW[1] in regard to this deposit is not consistent and full of gaps and is not reliable. We accept the evidence of CW[1] and reject the evidence of RW[1]. We, therefore, hold on Issue No.5 of the claim that the cheque bearing no.240926 for Rs.2.50 Crores was given by claimant no.2 to respondent no.l only as security and not for encashment. We also hold that the respondent no.l was not entitled to present the cheque for payment and claimant no.2 was justified in stopping payment by letter addressed to Bank.”

18. The learned counsel for the petitioner referred to Questions no. 105 and 106 alongwith its answers given as under: “Q105. Was the cheque of Rs.2.50 crores forming subject matter of the Section 138 proceedings referred to above handedover to Respondent No.1 as part of the transaction which is presently pending in this arbitration?

Q 106. I put it to you that the cheque of RS.2.50 crores referred to in previous question was given to Respondent No.1 to secure the transfer of the intercorporate deposit of Rs.2.50 crores as referred to in Clause 6.[4] of Ex.C-2 extended by Claimant No.2 to the Company known as Radhamohan Builders Private Limited to Respondent No.1 and that Respondent No.1 was not entitled to have encashed that cheque. What do you say?

19. Hence it is argued the award be set aside.

20. I have heard the arguments. The facts reveal an idea conceptualized by the parties to develop hotels and only for this reason the money was paid by the respondents for purchase of land and to build a hotel and to have control over the land by purchase of shares in such hotels. Since the assets were to be purchased so the respondent need to control the said company.

21. Now the basis issues involved are (a) the award if is opposed to public policy and (b) if no interest can be awarded per clause 10 of share subscription agreement, besides other connected issues.

22. The relevant provisions of Foreign Exchange Management Act (FEMA) viz. Section viz. 10(1), 10(4), 11(1), 13(1A) and Section 8 of the Foreign Exchange Management Act (Transfer or Issue of Security by a Non Resident of India) are as follows: “10(1) The Reserve Bank may, on an application made to it in this behalf, authorise any person to be known as authorised person to deal in foreign exchange or in foreign securities, as an authorised dealer, money changer or off-shore banking unit or in any other manner as it deems fit. 10(4) An authorised person shall, in all his dealings in foreign exchange or foreign security, comply with such general or special directions or orders as the Reserve Bank may, from time to time, think fit to give, and, except with the previous permission of the Reserve Bank, an authorised person shall not engage in any transaction involving any foreign exchange or foreign security which is not in conformity with the terms of his authorisation under this section. 11(1) The Reserve Bank may, for the purpose of securing compliance with the provisions of this Act and of any rules, regulations, notifications or directions made thereunder, give to the authorised persons any direction in regard to making of payment or the doing or desist from doing any act relating to foreign exchange or foreign security. 13(1A) If any person is found to have acquired any foreign exchange, foreign security or immovable property, situated outside India, of the aggregate value exceeding the threshold prescribed under the proviso to sub-section (1) of section 37A, he shall be liable to a penalty up to three times the sum involved in such contravention and confiscation of the value equivalent, situated in India, the Foreign exchange, foreign security or immovable property. Proviso: Provided further that the Reserve Bank may, on an application made to it and for sufficient reasons permit an Indian Company to refund the amount of consideration received towards issue of security, if such amount is outstanding beyond a period of 180 days from the date of receipt.

8. Realisation and repatriation of foreign exchange.— Save as otherwise provided in this Act, where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank. — Save as otherwise provided in this Act, where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realise and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank”

23. All these provisions above are rather to monitor the money coming from outside to India. It tells us how to deal with such money. Mere reading of aforesaid provisions and circular(s) reveal such provisions delegate the authority to the various dealers to allow repatriation of surplus funds/refund of remittance received for purchase of shares but it nowhere provides an absolute bar on such remittances which include the component of interest, especially ordered under a legally binding award. Even the permission(s) may be taken from Reserve Bank of India in this regard. Such prohibition is neither contemplated under the FEMA Act nor is in any of the circular(s). There is no prohibitive bar prescribed in the aforesaid circular as sought to be claimed by the petitioner. It only provides general provision available to the Indian companies to refund the amount received towards the purchase of share from time to time. The present circular of RBI only outlines the scheme of establishment under the enactment with regard to the purchase of equity instruments by a person resident outside India and mechanism with regard to the inward remittance and refunds in such case if any. The crux is if any money comes to India for purchase of shares and the shares are not purchased within 180 days, the money needs to be refunded, as simple as that.

24. In Cruz City 1 Mauritius Holdings vs. Unitech Limited (2017) 239 DLT 649 it was held:

25. The next issue raised is of damages and round tripping. The arbitral tribunal has held: “Whether Respondent No. I is entitled to a refund of a sum of Rs. 47,50,00,000/- and interest thereon as claimed ? While according to the claimant, on account of the non allotment of shares by respondent no.1 to claimant no.1 and 2, the share purchase money of Rs.l[2],69,12,090/- paid to the Respondent no.1 has to be refunded, it is the contention of the respondent no.1 that if that be so, all the payments made by respondent no.1 to claimants I and 2, in respect of the interest of claimant no.2 in Amritsar property, and the Jaipur property, being payments of Rs.[4] 7,50,000/- and Rs.16,01,000/- respectively, should also be refunded to the Respondent no.1. (Admittedly there was no payments in respect of the third item, the Visakhapatnam property of Visu ). In answer, Claimants contend that under the "round tripping" method of mutual payments adopted by both parties, identical amounts of Rs.47.50 Crores and Rs.16.01 Crores have already been paid back by claimants to respondent no.1 for purchase of shares in 1st respondent company. Then the following method was adopted by both parties for the payments of Rs.47.50 Crores and Rs.16.01 Crores to each other for the Amritsar and Jaipur properties, namely, the "round tripping" procedure. It will be seen that all the payments by each party to other in respect of Rs.47.50 Crores and Rs.l[6].0 1 Crores were made from the initial amount of Rs.12,69, 12,090/- paid by claimant no.1 through claimant no.2 in rupees and not in USD. This is done by way of respondent no.1 issuing a cheque for Rs.[5] Crores from out of Rs.12,69,12,090/- in favor of claimants and simultaneously, claimants issuing a cheque for Rs.[5] Crores in favor of respondent no. I and repeating such issuance of cheques by each side to the other, to complete the mutual payments of Rs.47.50 Crores and Rs.16.01 Crores. We shall explain this procedure in more detail. The net result is that only the first payment of Rs.12,69,12,090/- made by claimant no.1 (through claimant no.2) to respondent no.1, remains with the respondent unpaid. We have already held under Issue no.2 of the claim that the respondent no.1 has to pay back Rs.12,69,12,090/- to claimants.”

26. To find if petitioner is entitle to any damages we need to refer to Section 73 of the Contract Act:-

27. Under Section above if damages are not proved it cannot be awarded. The arbitral tribunal noted the petitioner had to prove the damages which it did not prove hence damages were never granted and rightly so.

28. In Fateh Chand Vs. Balkishan Dass (1964) 1 SCR 515 the Court held:

29. Thus even if there is any breach on the part of the petitioner then also clause 10 of the agreement would be applicable i.e. if the shares were not given within stipulated period the money need to be returned to the petitioner.

30. Another issue raised by the petitioner is if no damages were to be granted to the respondent then interest also ought not to have been granted. It is a wrong argument, the respondent raised two claims i.e., of Rs.12 crores approx. and of Rs.4.44 crores etc. which were for the exchange rate fluctuation. The arbitral tribunal did not grant the exchange rate fluctuations and if such claim was not granted then it is wrong for the petitioner to allege the interest on outstanding dues also ought not to have been granted.

31. On issue of security the arbitral tribunal also took a plausible view to hold: “We, therefore, hold on Issue No.5 of the claim that the cheque bearing no.240926 for Rs.2.50 Crores was given by claimant no.2 to respondent no.l only as security and not for encashment. We also hold that the respondent no.l was not entitled to present the cheque for payment and claimant no.2 justified in stopping payment by letter addressed to Bank.”

32. There is no need to interfere in the above reasoning.

33. Another issue raised is of round tripping. The Cruz (supra) takes care of that. Moreso I would also like to refer to various provisions of the agreement to show certain warranties given by the petitioner. “(iii)The execution and delivery of this Shareholders' Agreement does-not and will not contravene; (I) any provisions of the respective Memorandum and Articles of Association of or charter or partnership deed, as the case may be; (II) result in a default or give rise to any right of termination, cancellation or acceleration under any of the terms, conditions or provisions of any material Indenture, mortgage, note, lien, license, government registration, contract, lease, agreement or other Instrument or obligation to which it is a party or by which the Company or the Promoters may be bound; or (Ill) violate any law, order, writ, judgment, Injunction, decree, statue, ordinance, rule or regulation applicable to it

(iv) Each party has all necessary consents, licenses and approvals in connection with the entry Into, and performance of, its obligations under this agreement and as a shareholder In the Company.

(vi) The Parties hereto confirm the enforceability of these presents Inter-se.”

34. Though on round tripping the learned counsel for petitioner highlighted certain provisions of Income Tax Act, but had itself taken its benefit and the department never proceeded against either of the parties till date so its allegations are also frivolous.

35. I would here like to refer to K.Sugumar and Another vs. Hindustan Petroleum Corporation Ltd. and Anr., Civil Appeal No. 419 of 2018 wherein the Court held:

36. Thus the facts disclose the award passed by the learned arbitrator is a reasoned one, based on appreciation of evidence so recorded and this Court would not sit in appeal against a reasoned award. The petition being devoid of merits is thus dismissed. The pending miscellaneous application also is dismissed.

37. No order as to costs.

YOGESH KHANNA, J FEBRUARY 27, 2018 VLD/DU