Oil & Natural Gas Corporation Ltd. Vs. Atwood Oceanic
S.A.  INSC
907 (13 May 2008)
CIVIL APPELLATE JURISDICTION CIVIL
APPEAL NO. 1218 OF 2001 Oil & Natural Gas Corporation Ltd. .. Appellant
Versus Atwood Oceanic International, S.A. .. Respondent WITH
CIVIL APPEAL NO. 1219 OF 2001
Dalveer Bhandari, J.
These appeals are directed against
the judgment of the High Court of judicature at Bombay delivered in Appeal
Nos.141 and 142 of 1995 dated 8th February, 2000.
1 Brief facts which are necessary
to dispose of these appeals are recapitulated as under:
On 2nd March, 1983, the appellant,
Oil and Natural Gas Corporation Limited entered into an Agreement with the
respondent, Atwood Oceanic International, S.A. for carrying out drilling
operations in offshore waters of India and for rendering other related services
with regard to the drilling unit Sagar Pragati belonging to the appellant on
the terms and conditions set forth in the said Agreement.
The said Agreement contained an
Arbitration Clause 11.
The said Arbitration Clause 11
reads as under:- "Arbitration :
If any dispute, difference or
question shall at any time hereafter arise between the parties hereto or their
respective representative concerning anything herein contained or arising out
of these presents or as to the rights, liabilities, or duties of the said
parties hereunder and cannot be mutually resolved the same shall be referred to
arbitration, proceedings of which shall be held at (Bombay) India. Within
thirty(30) days of the receipt of the notice of any dispute, each party shall 2
appoint an arbitrator and such arbitrators shall appoint an Umpire before they
enter upon the reference and not later than one month from the latest date of
their respective appointments. If any of the parties fail to appoint
arbitrators within the specified period or should the two arbitrations fail to
agree upon the selection of an Umpire within the stipulated period, the Hon'ble
Chief Justice of the Supreme Court of India shall nominate the required
arbitrator or the Umpire as the case may be, who shall be a resident of India,
but not a national of the country of neither of the parties. The decision of
the arbitrators and failing an agreed decision by them, the decision of the
Umpire shall be final and binding on the parties thereto.
The arbitration proceedings shall
be held in accordance with the provisions of the Indian Arbitration Act,
1940 and the rules made thereunder as amended from time to time.
The arbitrator or the Umpire, as
the case may be, shall decide by whom and in what proportion the arbitrators
and Umpire's fees as well as the costs incurred in arbitration shall borne.
The arbitrators or the Umpire may,
with the consent of the parties enlarge the time, from time, to make and
publish their or his Award."
At the material time, when the
agreement was entered into, the provisions of the Indian Income Tax Act, 1961
(hereinafter referred to as the `1961 Act') were not applicable beyond the 3
territorial waters of India, i.e., beyond the limit of 12 nautical miles.
On 31st March, 1983 the Government
of India issued a notification in exercise of powers conferred by section
6(6)(a) and 7(7)(a) of the Territorial Waters, Continental Shelf, Exclusive
Economic Zone, and other Maritime Zones Act, 1976 extending the provisions of
the 1961 Act to the Continental Shelf and Exclusive Economic Zone of India with
effect from 1st April, 1983 with some modifications. It is not necessary to
deal with those modifications because they are not relevant so far as the
controversy involved in the instant case is concerned.
The respondent on 5th March, 1985
forwarded an invoice to the appellant claiming that pursuant to the
notification dated 31st March, 1983 issued by the Government of India there was
a change in the law with regard to income tax which had resulted in the
employees of the respondent becoming liable for income tax and consequently
under the employment contract, the respondent had incurred additional liability
for payment of 4 personnel income tax which the respondent claimed under the
terms of the contract had to be reimbursed. The appellant refuted this claim by
its reply dated 15th March, 1985 and took up the stand that the appellant was
not liable to reimburse the personnel tax dues due to change of law by way of
extension of the tax jurisdiction to offshore areas. On 22nd March, 1986 the
respondent sought arbitration of the dispute between itself and the appellant
on the aforesaid issues.
On 27th July, 1987, the dispute on
the aforesaid issues was referred to arbitration of Mr. Justice D.V. Patel
(Retd.) and Mr.
Justice D.M. Rege (Retd.). On 2nd
March, 1989, Mr. Justice D.V.
Patel made a speaking award by
which he rejected the claim of the respondent. The other learned arbitrator
Rege (Retd.) made a note of
disagreement on 15th June, 1989.
In view of the disagreement
between the two arbitrators, the dispute was referred to the arbitration of Mr.
Justice Tulzapurkar (Retd.) as Umpire. The learned Umpire made his 5 award on
13th October, 1989 by which the claims of the respondent were allowed.
The appellant aggrieved by the
award of the Umpire challenged the same before the learned Single Judge of the
Bombay High Court. It was urged by the appellant that there was error apparent
on the face of the record. Reliance was placed on Clauses 5-A and 7 of the
Agreement dated 2nd March, 1983. Clauses 5-A and 7 read as under:
"Clause 5-A: Taxes.
A. Personnel - Any taxes assessed
on employees of Contractor and based on income earned in the performance of
work for owner or otherwise shall be the responsibility of the
"In the event there occur
changes in the laws of Government of India during the course of the contract
from those prevalent on 25.8.1982, which result in increase decrease to the
Contractor's cost of carrying out its duties and responsibilities under this
Agreement, then the increase/decrease in the cost shall be settled and paid/recovered
after mutual discussion."
6 It was contended that in view of
the above clauses, tax assessed on the employees of the contractor was the
responsibility of the contractor/claimants. It is contended that in view of
clause 5-A, the learned Umpire erred in awarding the amount by way of increased
costs, particularly because the responsibility was that of the contractor. It
was further contended that taxes assessable on the employees of a contractor
and based on the income earned in the performance of work was one of the items.
It cannot constitute increase in the cost of carrying out
responsibilities/duties on the part of the claimants/contractor under the
Agreement. It was further contended that in view of clause 5-A of the
Agreement, the appellant was not liable to pay the amounts on the ground of
increased cost of the contract. The learned Single Judge observed as under:
"I do not see any merit in
the said submissions advanced on behalf of ONGC. The contractor has incurred
increased costs for the accounting year ending 31st March, 1983 and 31st March,
1984. The Government of India issued Notification on 31st March, 1983 which
made the salaries earned by the 7 expatriates taxable for the accounting year
ending 31st March 1983 and 31st March, 1984.
The judgment of this Court took
the view that the said Notification was prospective and not retrospective. In
the above circumstances, the Arbitrator came to the conclusion that since the
Notification is dated 31st March, 1983, Clause 7 of the said Agreement would
apply. The learned Umpire came to the conclusion that the Notification
constituted change in law of the Central Government during the course of the
contract. The said change admittedly came into force after 25th August, 1982.
In the above circumstances, on
reading Clause 2 read with Clause 5 read with Clause 7 of the Agreement, the
learned Umpire came to the conclusion that there was an increase in the
contractors' cost under the Agreement on account of change in the income-tax
Law and which resulted in the increase in the costs. The learned Umpire also
came to the conclusion on the basis of the evidence on record that the
claimant/contractor had agreed to pay the taxes assessable on the expatriates
and in the circumstances, the claimant had incurred the increased costs, and,
therefore, the taxes have been paid by the claimants and they are entitled to
that extent to the increased cost. The learned Umpire agreed with the decision
of one of the Arbitrators Shri D.M. Rege."
After hearing learned counsel for the
parties, the learned Single Judge further observed as under:- "In the
present case, the dispute referred to the Umpire was a very narrow dispute viz.
whether the contractor was
entitled to be reimbursed for the increased cost borne by 8 him on account of
salaries of the expatriates being made eligible to income-tax pursuant to the
Notification dated 31st March, 1983. The learned Umpire, after construing the
various provisions of Clause 2, 5A and Clause 7 of the Agreement has come to
the conclusion that since the tax law has been changed after 25th August, 1982
and since the contractor has paid the tax on behalf of its
employees/expatriates, the cost of contract had increased and to that extent
under Clause 7 he was entitled to be reimbursed. There is no merit in the
contention of ONGC that there was no increased cost of carrying out the
contract on account of taxes borne by the contractor on behalf of its
For the foregoing reasons, there
is no merit in the above Two Arbitration Petitions.
Both the Arbitration Petitions are
accordingly dismissed with costs. Consequently, the th impugned Award dated 13
October, 1989 is made Rule of this court. Decree in terms of the Award.
Further, interest to be paid @ 12% per annum from the date of the Decree till
payment on the respective principal amounts to be calculated in terms of the
The appellant aggrieved by the
said judgment of the learned Single Judge preferred an appeal before the
Division Bench of the Bombay High Court. The Division Bench heard the learned 9
counsel for the parties at length and examined the material documents.
The Division Bench carefully
perused the award of the Umpire and the judgment of the learned Single Judge
and observed that the Umpire has taken one of the possible views on a fair
reading of the contractual terms and this court cannot interfere with it. The
court further observed that we perceive no jurisdictional error committed by
the learned Umpire.
Before the Division Bench it was
contended on behalf of the appellant that at least with regard to Assessment
Year 1983-84, the direction in the award was clearly contrary to law and,
therefore, it ought to be interfered with. The Division Bench found substance
in this argument. The Division Bench held as under:
"Though in para 1 of the
impugned Award, the Umpire granted the claims pertaining to the two Assessment
years 1983-84 and 1984-85, in para 2, he referred to the judgment of this Union
of India and Others, reported in 173 ITR 155 and noticed that the said judgment
had taken the view that the Notification dated 10 31.3.1983 making the Indian
Income Tax Act applicable to personnel working within the Continental Shelf had
no retrospective effect and that it would not apply to Assessment Year 1983-84
(accounting year 1982-83). The Umpire thereafter proceeded to give a direction
that since the said decision was pending in Appeal before the Supreme Court and
there was a possibility of the Respondent being able to recover refund of the
income tax paid by it from the Income Tax Department, the respondent while
obtaining the decree from the appropriate Court, should give a written
undertaking to the Court that in case it recovers a refund of the concerned
amount of income tax it shall refund the said amount to the Appellant. The
award states that this direction was given at the instance of the respondent
itself with a view to prevent the respondent from receiving the amount of
income tax paid by it twice over, and for protection of the interest of the Appellant.
Mr. Madon, learned Counsel for the
respondent, contended that the directions with regard to the claims were only
contained in para 1 of the award which gave no reasons in support of the said
directions. Consequently, the entire award is a non-speaking award and is
immune from scrutiny of the Court. He explained away the reasons contained in
para 2 of the award as pertaining to the ancillary direction with regard to the
undertaking to be given by the respondent and not with regard to the award itself.
It is not possible to percept the contention that the award has to be read in
compartments. In our view, both paragraphs 1 and 2 of the award have to be read
in conjunction. When read in 11 conjunction, it appears to us, the Umpire was
alive to the fact that in Modermott International (supra) this Court had taken
the view that the Notification dated 31.3.1983 had no retrospective effect and
would not apply to Assessment Year 1983-84. If this was the law, then the
respondent's employees were not liable for making payment of income tax during
the year 1983-84 for income earned while carrying out work beyond the
territorial waters of India. Consequently, there was no question of increased
cost of services within the meaning of Clause 7 of the Contract between the
parties, or was there any scope for passing on a non-existing liability to the
Appellant. At least to this extent, it appears to us that this contention must
The Division Bench in the
concluding para of the judgment observed that the learned Single Judge erred in
not interfering with the direction contained in the award pertaining to
assessment year 1983-84, but the conclusion of the learned Single Judge with
regard to the direction pertaining to assessment year 1984-85 is perfectly
justified and needs no interference.
12 The Division Bench partly
allowed the appeal filed by the appellant and set aside the direction contained
in the Umpire's award with regard to the payment of Rs.28,26,359/- for the year
ending 31st March, 1983 (assessment year 1983-84) and uphold the rest of the
judgment of the learned Single Judge. The Division Bench further directed that
the decree is modified to the extent that there shall be a decree in accordance
with the award only pertaining to assessment year 1984-85, together with
interest as directed in the award and as granted by the learned Single Judge.
The appellant aggrieved by the
said judgment preferred these appeals before this Court. The appellant
reiterated the same argument before this court. The scope for interference by
this court is extremely limited in a case of this nature. We have carefully
perused the entire material on record and analysed the impugned judgment. In
our considered opinion, no interference is called for. The appeals being devoid
of any merit are accordingly dismissed. In the facts and circumstances of the
case, we direct the parties to bear their own costs.
(Dalveer Bhandari) New Delhi;
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