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2015 (4) TMI 1096 - SUPREME COURT

2015 (4) TMI 1096 - SUPREME COURT - 2015 (6) SCR 107, 2015 (5) SCALE 554 - Additional amount of royalty payable by the respondent as a result of the notification for upward revision of royalty (Seignorage Fee as named in Tamil Nadu) on minor minerals - Held that:- The award accepted that revision in royalty rates in respect of minor minerals by Government of Karnataka being subsequent to the contract would be covered under the expression ‘future events’ in clause 32.1 entitling the respondent to .....

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same submission, which view was affirmed by the High Court as stated hereinabove.

We have gone through the record and considered rival submissions. The view that as a result of upward variation in the rates of royalty pursuant to subsequent legislation, the matter would be covered by clause 32.1 is certainly a plausible view. While quoting the initial rates and prices, it would not have been in contemplation of a party as to the framework of any revision in rates of royalty at a futur .....

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BR> Cost escalation based on the agreed Price Adjustment Formulae - Compensation for additional cost resulting from a subsequent legislation - Held that:- We are inclined to agree with the contention of the claimant that the provision for cost escalation based on the agreed Price Adjustment Formulae and the Compensation for additional cost resulting from a subsequent legislation are two separate & specific stipulations, and the claimant is entitled to be compensated for any additional cost caus .....

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in a separate category. In other words, the contention that stands accepted was, that the escalation in price premised on fluctuation in market value of the inputs stands on one footing, while the additional cost resulting form the impact of any statute, decree, ordinance, law etc as referred to in sub-clause 70.8 stands on the other. Resultantly the governing clauses in the instant case were held not to be sub-clauses 70.1 to 70.7 but the substantive part of sub-clause 70.8. The award also cons .....

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the letter dated 03.09.2003 to the Economic Advisor. In the backdrop of the law laid down by this court, the construction of the terms of the contract by the Arbitral Tribunal is completely consistent with the principles laid down by this court. Upon construing the terms and the material on record it concluded that the instant matter would be covered by substantive part of Sub-Clause 70.8 of COPA. It also noted that NHAI itself was of such opinion.

The view so taken by the Arbitral Tr .....

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ment lacked power to levy and collect such royalty prior to the notification dated 03.02.2000 whereby ordinary earth was brought under the definition of minor mineral, such ground may certainly entitle a party to lay requisite challenge before an appropriate forum.

However, for the purposes of the contract such levy being an existing levy must be deemed to have been part of the rates or prices quoted. By notification dated 20.03.2001, the same rate was maintained and as such there was .....

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3.2001 created liability for the first time. The Arbitral Tribunal went beyond the scope of the contract and it clearly exceeded its jurisdiction. We, therefore, set aside the award insofar as it allows Claim No. 8. Consequently, the appeal stands allowed - CIVIL APPEAL NO. 9799 OF 2010 WITH - Dated:- 24-4-2015 - Dipak Misra & Uday Umesh Lalit JJ. Civil Appeal No.9908/2011, Civil Appeal No. 9909/2011 Civil Appeal No.2488/2012, Civil Appeal No. 7066/2011 Civil .....

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13. A. Civil Appeal Nos. 9799 of 2010, 9908/2011, 9909/2011, 2488/2012, 7066/2011, 3150/2012, 686/2013, 4069/2013, 5162/2012 and 5661/2014, 10586/14, Civil Appeal @ from SLP © 10014/2013 and Civil Appeal @ from SLP © 10701 of 2013: 2. All these appeals by special leave raise identical questions and as such are being dealt with and considered by this common judgment. The learned counsel for the parties agreed that Civil Appeal No.9799 of 2010 be taken and was accor .....

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as named in Tamil Nadu) on minor minerals. This additional royalty was imposed by the State of Tamil Nadu w.e.f. 01.11.2002. It is the plea of the appellant that the additional amount of fee was not liable to be paid to the respondent in view of certain clauses in the contract which provided for a formula of escalation, while according to the respondent the full amount had to be compensated. 5. A contact was awarded to the respondent by the appellant on 17.10.2001 for execution of wo .....

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13.4. All duties, taxes and other levies payable by the Contractor under the Contract, or for any other cause, as of the date 28 days prior to the deadline for submission of bids, shall be included in the rates and prices and the total bid price submitted by the bidder, and the evaluation and comparison of bids by the Employer shall be made accordingly. 6. The aforesaid stipulation dealt with the impact and inclusion of duties, taxes and other levies, as of the date 28 days pri .....

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wing clauses 70.1 to 70.8. Sub-Clause 70.1 : Price Adjustment The amount payable to the Contractor and valued at base rates and prices pursuant to Sub-Clause 60.1 hereof shall be adjusted in respect of the rise or fall in the indexed cost of labour, Contractor s equipment, Plant materials and other inputs to the Work, by the addition or subtraction of the amounts determined by the formulae prescribed in this Clause. Sub-Clause 70.2: Other Changes in Cost To the e .....

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ricants in accordance with the following principles and procedures as per formulae given below. The amount certified in each payment certificate shall be adjusted by applying, the respective price increase or decrease. a) Price adjustment shall apply for work carried out within the stipulated time or extensions granted by the Employer and shall not apply for work carried out beyond the stipulated time. Price adjustment for reasons attributable to the Contractor, shall be paid in accor .....

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This will exclude cost of work an items for which rates were fixed under variation Clauses (51 and 52) for which the escalation will be regulated as mutually agreed at the time of fixation of rate. To the extent that full compensation for any rise or fall in indexed costs to the Contractor is not covered by the provisions of this or other Clauses in the Contract, the unit rates and prices included in the Contract shall be deemed to be include amount to cover the contingency of such o .....

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ifically provided in Sub-Clause 70.5 hereinafter. The adjustment will be made according to the formula given below: V2=R1x (I-Io) x G Io Where, V2= Variation in price on account of general variation of prices of all materials other than specifically provided in Sub-Clause 70.5 hereinafter. Io = Base Cost Index corresponding to the Wholesale Price in India (for all commodities) for the price under consideration (Base 1993-94=100) released by .....

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. R1= Value of the work done during the period under consideration and payable in non-convertible Indian Rupee Currency at the base rates and prices as applicable under the Contact. C) Variation of Price -POL ……………….. …………………. D) Price Adjustment for plant and Equipment …………….. ……&h .....

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ount ………………. ……………….. I) Adjustment after Completion ……………… …………….. Sub-Clause 70.4: Sources of Indices The sources of indices shall be those as mentioned in Sub-clause 70.3 of Section III Volume I of the Bid documents. Sub-Clause 70.5: Increase or De .....

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s indicated in Schedule 2 of Section VII of the Bidding Documents. (ii) a) Adjustments to the Contract Price for Bitumen ………….. …………… b) Adjustment to the Contract Price for Cement and Steel: ………………………. …………………….. Sub-Clause 70.6: Limit of P .....

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te, Ordinance, Decree or other Law or any regulation or by-law of any local or other duly constituted authority or the introduction of any such State Statute, Ordinance, Decree, Law, regulation or by-law in India or States of India which causes additional or reduced cost to the Contractor, other than under the preceding Sub-Clauses of this clauses in the execution of the contract, such additional or reduced cost shall, after due consultation with the Employer and the Contractor, be determined by .....

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by issuing a notification under Section 15 of the Mines and Minerals (Regulation & Development) Act, 1957 (hereinafter referred to as 1957 Act), increased the seigniorage fee (which is synonymous with Royalty charges in other States) on stone, sand and earth to the tune of nearly 30% with effect from 1st November, 2002, i.e. after about one year from commencement of the Work. The respondent requested for Price Adjustment consequent to the increase in rates of Royalty under Sub-Clause 70.8 of .....

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acts with identical conditions requests for payment of increased royalty under Sub-Clause 70.8 were accepted and appropriate payments were made. However, during the course of audit, the payment made by the NHAI towards increase in Royalty charges was considered to be irregular by the Government auditors on the ground that no such separate payment was required to be made under Sub-clause 70.8 of COPA as payment was already made under the Price Adjustment formula for price increase. In the circums .....

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p> 011-25074200 Ext.2617 DWARKA, NEW DELHI-110045 E-mail: abordia@nhai.org D.O. NO.NHAI/11033/GM/2003-04 September 3, 2003 Dear Shri Nigam Sub: Wholesale Price Index 1. NHAI was set up by the National Highways Authority of India Act, 1988 to develop, maintain and manage the national highways and any other highways vested in, or entrusted to, it by the Government. 2. Incidental to this function, for the constructio .....

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equence to any Legislation is provided as under: (a) Sub-Clause 70.8 Subsequent Legislation. ………………… …………………. 3. We are enclosing herewith a copy of the extracts of the Contract document detailing the above provisos vide para 70.1 to 70.8. 4. The issue for which clarification is required is the difference in opinion in the interpretation of the .....

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including those with purely local impact, such as Entry tax, Octroi and Royalty. 5. It is felt that if CAG interpretation is accepted for implementation, the entire clause Subsequent Legislation will be hit and made entirely redundant as a tool to cover price risk. 6. CAG s office has raised objection in a specific case, details of which are narrated here below: …………………………… &h .....

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e basket of items listed for the consideration of WPI. 8. CAG considered these reimbursements irregular for the reason that all such imposts would have had their effect/would have been already factored into WPI and WPI based indexation benefits were granted and given for all these very items under clauses 70.1 to 70.7 by way of the formula based price adjustments. Affording the benefit under Subsequent Legislation would amount to a double benefit. Hence they would automatically fail t .....

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ut WPI. (b) The WPI based compensation for price changes will create an imbalanced structure between two contractors, one operating within the locality subject to a local impost and another in an adjoining area outside such an impost, if CAG auditors opinion is accepted. How can the WPI mechanism be used by NHAI to create an equitable structure? You may recall that the Chairman NHAI Shri Santosh Nautiyal had spoken to you about this matter. Kind Regards,

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p> Fax:23793502 UDYOG BHAWAN, Economic Advisor to NEW DELHI-110001 the Government of India 27th November, 2003 D.O. No. Ec.Ad 11(1)/2003/WPD Dear Shri Bordia, Kindly refer to your D.O. Letter No.NHAI/11033/GM/2003-04 dated the September 3, 2004, seeking clarifications on constituents of prices utilized for compilation of Wholesale Price Index. I may mention in this respect that in case of Minerals, ex-mine prices are used for comp .....

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ax. Since none of the items mentioned in your letter, namely, Earth, Morram, Aggregate and Sand are included in the Commodity Basket of WPI, it is not possible to supply the Wholesale Price Indices of these items. However, the WPI for ALL, COMMODITIES and MINERALS from December 1995 to July 2001 are being enclosed for your appropriate use. With regards, Yours sincerely, Sd/- (Shrawan Nigam) Shri Anand Bordia, Member (Fi .....

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Seigniorage fee) on minerals i.e. aggregate, sand and earth (the items in issue) along with interest @ 12 per cent per annum compounded monthly on the sums found due from the date they became due till realization. 11. The Arbitral Tribunal comprising of three experienced Engineers who had retired from Govt. service Departments above the rank of Chief Engineer framed the following questions for determination: 1) Whether the increase in the rates of Royalty has caused additio .....

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gniorage fee pursuant to change in legislation and that the said increase in the rates had not been taken into account in the indexing of any inputs to the price adjustment formula in general materials and therefore the respondent would be entitled to be paid the additional cost incurred by. It was held as under: 21. We have thoroughly gone through the entire evidence adduced by the parties and gone through the relevant Contract provisions. We have also judiciously considered the riva .....

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ment Formulae in accordance with the provisions of Sub-Clauses 70.1 to 70.7. 22. The other question now required to be answered by us is whether the additional cost because of change in the rates of Seigniorage fee has been taken into account in the indexing of any inputs to the Price Adjustment Formulae supra. We have examined the basket of materials whose cost variation is input in the estimation of the WPI. The minor minerals like earth, sand and aggregate used in highway construct .....

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usion is further reinforced by the fact that the WPI is a single index applicable uniformly in all the states, the increase in Seigniorage fee can and does vary from state to state, depending upon the policies of the respective State Governments. Further, whereas the contact provisions relating to Price Adjustment as per Sub-Clauses 70.2 to 70.7 supra do not assure full compensation for rise or fall in prices, the additional cost on account of a subsequent legislation is stipulated to be paid in .....

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Tribunal rejected the contention of the respondent that it was unnecessary for it to prove actual incurring of such additional cost. The contention that the respondent would be entitled to the difference in the royalty payable on the material by a theoretical calculation based on the agreed quantities, even without proving that any such additional cost had been actually incurred was rejected. On the issue whether the respondent had produced any evidence to substantiate its claim that any such a .....

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was observed that the Arbitral Tribunal had found that the minerals in question did not find place in the basket of materials for working out the wholesale price index i.e. WPI, that the WPI would be applicable uniformly in all the States while the increase in Seigniorage Fee varied from State to State. It was concluded that the view taken by the Tribunal did not call for any interference. In the appeal, namely, FAO(OS) No.216 of 2007 preferred by the appellant, it was submitted that the interpr .....

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e WPI did not include minor minerals like earth, sand and aggregate used in heavy construction works, the additional cost of those specific materials did not include the full impact of the subsequent change in legislation. The arbitrators noted that the WPI was a single index applicable uniformly in all the States while the increase in Seigniorage fee varied from State to State depending upon the policies of the respective State Governments. The arbitrators also held that while the contractual p .....

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:p> Such being the position, simply because the interpretation placed by the arbitrators has not favoured one or the other party can be no reason for the Court to interfere under Section 34 of the Act with the award made on any such interpretation. It is fairly well settled by a long line of decisions rendered by the Supreme Court that a Court dealing with a petition under Section 34 of the Arbitration and Conciliation Act, 1996 does not sit in an appeal over the arbitral award.

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d the sum that the respondent was entitled to on account of increase in the rates at ₹ 43,06,810/- and awarded interest @ 12% p.a. from the date of publication till realization. By order dated 15.11.2010 this Court directed the appellant to deposit sum of ₹ 46 lakhs, being the amount so quantified. The amount has since then been deposited and stands invested in a fixed deposit. 14. Mr. Parag P. Tripathi learned Senior Advocate assisted by Ms. Monisha Handa, learned Advocat .....

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question were taken into account specifically while arriving at such Index. It was submitted that the award correctly observed in para 22 that WPI is to an extent likely to indicate the rise or fall in the prices of these other minerals also though minor minerals in question did not specifically find place in the commodity basket taken into account while determining WPI. The reason why Arbitral Tribunal was not inclined to accept that the full impact of the additional cost of these materials be .....

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Sub Clause 70.8 and the award so given in disregard of the terms of the contract stands vitiated being against public policy. Reference was placed on the decisions of this Court in McDormott International Inc. v. Burn Standard Co. Ltd. (2006) 11 SCC 181, ONGC Ltd. V. Western Geco International Ltd. (2014) 9 SCC 263 and ONGC Ltd. v. Saw Pipes (2003) 5 SCC 705. 15. Mr. George Thomas, learned Advocate appearing for the respondent in the lead case and some companion matters submitted tha .....

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arned Senior Advocate appearing for respondent in Civil Appeal No.4069 of 2013 and other companion matters, additionally submitted that but for the audit objection, the appellant itself was of the opinion that this additional payment was admissible separately. Reliance was placed on the letter dated 03.09.2003 addressed by the appellant to the Economic Advisor. Mr. Shyam Divan learned Senior Advocate appearing for respondent in Civil Appeal No.9909 of 2011 submitted that both parties .....

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Contract while making its assessment and failed to consider the impact of sub clauses 70.1 to 70.3 (B) and exclusion in sub clause 70.8, the law on the point needs to be briefly adverted to. In Mc Dermott International Vs. Burn Standard Co. Ltd. (Supra) this Court held as under:- 112. It is trite that the terms of the contract can be express or implied. The conduct of the parties would also be a relevant factor in the matter of construction of a contract. The construction o .....

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itrator to determine, even if it gives rise to determination of a question of law. (See Pure Helium India (P) Ltd. v. ONGC [(2003) 8 SCC 593] and D.D. Sharma v. Union of India [(2004) 5 SCC 325]). 113. Once, thus, it is held that the arbitrator had the jurisdiction, no further question shall be raised and the court will not exercise its jurisdiction unless it is found that there exists any bar on the face of the award. 17. In Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram S .....

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pted by the arbitrator. 18. In Sumitomo Heavy Industries Ltd.. v. ONGC (2010) 11 SCC 296, it was held the Court held: 43. ... The umpire has considered the fact situation and placed a construction on the clauses of the agreement which according to him was the correct one. One may at the highest say that one would have preferred another construction of Clause 17.3 but that cannot make the award in any way perverse. Nor can one substitute one's own view in such a situati .....

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idering the material before him and after interpreting the provisions of the agreement. If he does so, the decision of the umpire has to be accepted as final and binding. 19. In a recent decision in Associate Builders Vs. DDA (2015) 3 SCC 49 while discussing the public policy of India contained in Section 34(2) (b) (ii) of the Arbitration Act, 1996 this Court dealt with each of the heads contained in Saw Pipes Judgment (Supra) in the light of three distinct and fundamenta .....

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erstood in the sense that such illegality must go to the root of the matter and cannot be of a trivial nature.This again is a really a contravention of Section 28(1)(a) of the Act, which reads as under: 28. Rules applicable to substance of dispute.- (1) Where the place of arbitration is situated in India,- (a) in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance .....

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applicable to substance of dispute.- (1) - (2) * * * (3) In all case, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction. This last contravention must be understood with a caveat. An arbitral tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean .....

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al before him and after interpreting the provisions of the contract. The court while considering challenge to an arbitral award does not sit in appeal over the findings and decisions unless the arbitrator construes the contract in such a way that no fair minded or reasonable person could do. 21. We now turn to the reasoning given by the Arbitral Tribunal in paras 21 to 23 of the award, as quoted above. The award considers the impact of sub-clauses 70.1 to 70.7 and agrees with the cont .....

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to in sub-clause 70.8 stands on the other. Resultantly the governing clauses in the instant case were held not to be sub-clauses 70.1 to 70.7 but the substantive part of sub-clause 70.8. The award also considered whether minor minerals in question were or were not included in the basket of materials whose cost variation was taken into account as an input while arriving at WPI. It also considered that the WPI is an index applicable uniformly in all states while the increase in Seigniorage Fee wou .....

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cord it concluded that the instant matter would be covered by substantive part of Sub-Clause 70.8 of COPA. It also noted that NHAI itself was of such opinion. The view so taken by the Arbitral Tribunal after considering the material on record and the terms of the contract is certainly a possible view, to say the least. We do not see any reason to interfere. The Division Bench in our considered view, was completely right and justified in dismissing the challenge. 22. We, the .....

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llant which had entered into contacts with respondents in each appeal and the issue involved is identical that is to say the entitlement of the concerned respondents to the additional amount payable as a result of upward revision in royalty payable in respect of minor minerals pursuant to subsequent legislation. The clauses in question are identical and in all these matters the High Court, whose orders are appealed against, had relied upon the judgment of the Division Bench of the High Court of .....

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:p> 25. This appeal challenges the judgment and order dated 27.04.2012 passed by the High Court of Delhi at New Delhi in OMP 497 of 2006. Unlike all the aforesaid cases, the clauses in question are not identical and hence this matter is being dealt with separately. 26. The appellant awarded contract dated 30.08.2001 to the respondent for the work of six laning of NH-7 from KM 539 to KM 556 in the State of Karnataka, Contract Package No. NS-24/KN. Clause 13.3 of the contract .....

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dance with the provisions of Clause 47 of the Conditions of Contract. Clause 32.1 of the contract pertaining to Early Warning was as under: 32.1 The contractor is to warn the Engineer at the earliest opportunity of specific likely events or circumstances that may adversely affect the quality of work, increase the Contract Price or delay the execution of works. The Engineer may require the Contractor to provide an estimate of the expected effect of the future even or circum .....

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s quoted by the Contractor shall be deemed to be inclusive of the sales and the other taxes the Contractor will have to pay for the performance of this Contract. The Employer will perform such duties in regard to the deduction of such taxes at sources as per applicable law. Clause 47 of the contract pertained to Price Adjustment and is set out hereinbelow: 47 Price Adjustment This clause is applicable only for those projects with completion period of more that one year.

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he stipulated time for reasons attributable to the contractor. b)…. c) Following expressions and meanings are assigned to the work done during each month: R= Total value of work done during the month. It would include the value of materials on which secured advance has been granted, if any, during the month less the value of materials in respect of which the secured advance has been recovered, if any during the month. It will exclude value for works execut .....

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e parties were: (i) With respect to a claim for reimbursement as a result of imposition of fresh Cess with effect from 29.01.2004 i.e. after the formal agreement was executed in 2001. The claim was subject matter of Arbitral Award dated 13.11.2006 which was affirmed by Single Judge and later by the Division Bench of the High Court vide judgments dated 02.07.2008 and 17.08.2009 respectively. The decision was accepted and the appellant paid to the respondent sum of ₹ 28,49,503 of .....

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lls within the ambit of Clause 32.1 of the contract. The appellant submitted that in terms of express provision in sub-clause 45.1, it was incumbent upon the contractor to cover any such eventuality in respect of increase in taxes in the contract price itself at the time of bidding. Further, there being no subsequent legislation clause in the contract, the parties were clear that no additional cost would be awarded in case of rise of royalty due to change in legislation. The Arbitral Tribunal by .....

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e covered under the expression future events in clause 32.1 entitling the respondent to raise a claim. It was observed that there was no dispute between the parties that royalty was not included in WPI and that in other contracts the reimbursement towards additional costs incurred as a result of subsequent legislation was granted by relying on Sub Clause 70.8 or similar clauses. The High Court while affirming the view of the Arbitral Tribunal additionally relied upon the fact that claim as regar .....

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ntemplation of a party as to the framework of any revision in rates of royalty at a future date. Clause 32.1 can be said to have covered such eventualities. We, therefore, see no any error in the assessment and approach of the Arbitral Tribunal. The High Court, in our view, was right in dismissing the challenge. Consequently, this appeal fails and is dismissed. The decretal amount deposited and invested in a fixed deposit, pursuant to orders of this Court, was ordered to be released on furnishin .....

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of Hapur Bypass at Ghaziabad, U.P. Clause 28.2 of the contract entered into between the parties pertained to royalties, which was as under:- Royalties 28.2 Except where otherwise stated, the Contractor shall pay all tonnage and other royalties, rent and other payments or compensation, if any, for getting stone, sand, gravel, clay or other materials required for Works. Clauses 70.1, 70.2 and 70.8 of Conditions of Particular Application (COPA) were identical as found in Civil .....

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e respondent deposited the requisite sum and wrote to the appellant to give appropriate benefit. The Government of India declared ordinary earth as minor mineral by issuing Notification dated 03.02.2000 as per Section 3 of 1957 Act. 33. The disputes between the parties were referred to the Arbitral Tribunal. We are concerned in the present appeal with Claim No.8 which was for refund of Royalty on ordinary earth amounting to ₹ 70,65,039/- which was claimed on the ground that it w .....

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Any levy and collection prior to 03.02.2000 was without any legal sanction and therefore liable to be disregarded and since the liability was validly created after the contract was entered into, the matter was covered under Clause 70.8 of COPA. 34. The award dated 09.01.2012 thus accepted Claim No.8 in its entirety. This award was challenged by the appellant by filing OMP No.480 of 2012 in the High Court of Delhi, which was dismissed by a Single Judge of the High Court vide his order .....

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Senior Advocate submitted that the royalty, at the time the contract was entered into, was payable at the rate of ₹ 4 per cent and the notification dated 20.03.2001 of the Government of UP maintained the same rate. The reasoning that prior to 03.02.2000 the State Government lacked competence and as such valid impact occurred for the first time vide notification dated 20.03.2001, in her submission was flawed and beyond the scope of the jurisdiction of the Arbitral Tribunal. On the other ha .....

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l duties, taxes and other levies payable by the contractor under the contract as of the date 28th days prior to the deadline for submission of bid shall be included in the rates and prices and the total bid price submitted by the bidder. The State Government, as a matter of fact, was levying royalty on ordinary earth and this situation was obtaining on such date. If the State Government lacked power to levy and collect such royalty prior to the notification dated 03.02.2000 whereby o .....

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