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CASE NO.: Arbitration Petition  17 of 2006

PETITIONER: DHV BV

RESPONDENT: TAHAL CONSULTING ENGINEERS LTD. & ORS.

DATE OF JUDGMENT: 12/09/2007

BENCH: D.K. JAIN

JUDGMENT: JUDGMENT

O R D E R

D.K. JAIN, J.:

1.      This is a petition under Section 11(6) of the  Arbitration and Conciliation Act, 1996 (for short \021the Act\022)  for the appointment of an Arbitrator for adjudication of  the disputes which are stated to have arisen between the  parties. 2.      The petitioner M/s DHV Consultants BV (for short  \021DHV\022) is a foreign company registered in Netherlands,  providing consultancy and engineering group services in  aviation; spatial planning in environment, transportation  and water with expertise in water management and water  planning.  Respondent No.1 - M/s Tahal Consulting  Engineers Limited (hereinafter referred to as \021Tahal\022) is  also a consultant foreign company based in Israel and  respondent No.2 is the Water Resources Organisation,  PWD, Government of Tamil Nadu (hereinafter referred to  as \021TNPWD\022). 3.      The facts, relevant for the disposal of this petition,  are as follows:      On 1st December, 1997, an agreement (hereinafter  referred to as the \021main contract\022)  was signed between  Tahal and TNPWD, with DHV and two other concerns,  namely, Lahmeyer International of Germany and  Consulting Engineering Services (India) Ltd., as sub-  consultants, for providing management consultancy and  technical assistance services for the Tamil Nadu Water  Resources Consolidation Project. Subsequently, in  March, 1998, a further sub-consultancy agreement  (hereinafter referred to as the \021sub-contract\022) was signed  between Tahal and DHV for providing services in respect  of the main contract, scope whereof was defined in the  conditions of both the said agreements.   4.      As per clause 1.10 of the special conditions of the  main contract, TNPWD had agreed to bear the Income tax  liabilities on payments to be made by it to the consultant,  sub-consultants and their personnel. DHV was to receive  all the payments through Tahal, being the principal  consultant.  The contract was duly performed and DHV  received all payments in respect of the invoices raised by  them for the services rendered.  The last payment was  received some time in January, 2003 and the matter

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rested there. 5.      Some time in February, 2004, DHV received notices  from the Income Tax Department under Section 148 of  the Income Tax Act in respect of the assessment years  1997-98 to 2001-02, alleging non-payment of Income tax  on the remittances made by TNPWD in respect of the said  contract.  They were required to submit their returns of  income for the said assessment years.  Seemingly, DHV  objected to the said notices but later on submitted the  requisite returns of income, including therein the receipts  from TNPWD.  According to DHV, on receipt of the said  notices they learnt that the respondents had defaulted in  making payment of applicable taxes on the payments  made by TNPWD to Tahal, which resulted in the creation  of additional Income tax demand of Rs.30,40,149/-  which they were forced to pay to avoid penal  consequences. 6.      Having paid the said additional demand on 15th  March, 2005, DHV issued legal notices to Tahal and  TNPWD, asking them to settle the dispute amicably in  terms of clause 8.1 of the General Conditions of the main  contract, dated 1st December, 1997. However, both the  respondents denied their liability to reimburse the said  amount to DHV.  On refusal of the respondents to settle  the controversy, on 21st April, 2005, DHV issued yet  another notice to the respondents demanding reference of  the disputes to sole arbitration in terms of clause 8.2 of  the main contract.  Both the respondents refused to refer  the disputes to arbitration, necessitating the filing of the  present petition for the appointment of an Arbitrator. 7.      Both Tahal and TNPWD have filed counter affidavits  resisting the petition.  Tahal\022s objection is that : (i) the  main contract under which DHV had demanded  arbitration had expired almost four-five years prior to the  filing of the application and, therefore, there was no  existing arbitration agreement between the parties; (ii)  not being a technical matter, the alleged dispute did not  fall within the ambit of clause 8 of the General  Conditions of the Agreement (main contract) and (iii) at  no point of time Tahal was under any contractual  obligation relating to payment of taxes, such obligation  being solely and strictly that of TNPWD.  TNPWD opposes  the petition mainly on the ground that: (i) DHV being a  sub-consultant has no locus standi to invoke the  arbitration agreement qua them as no payment was  received by DHV directly from TNPWD; (ii) the claim of  DHV is barred by limitation inasmuch as the main  contract was over on 31st March, 2002 and (iii) there was  no cause of action to file the petition because whatever  Income tax was to be deducted on payments to Tahal -  the principal consultant, was duly deposited with the  State Bank of India and requisite details were filed with  the Income tax department. 8.      I have heard learned counsel for the parties.  As  noted above, the objection of the respondents to the  appointment of Arbitrator is mainly two-fold viz. (i) after  the completion of the main contract in March/April, 2002  and on final payment on 30th January, 2003, the  contract came to an end and, therefore, there was no  valid arbitration agreement in existence and (ii) the claim  of the DHV is stale and barred by limitation. 9.      In support of the proposition that the entire tax  obligation under the contract has been duly discharged,  learned counsel for the TNPWD invited my attention to  some correspondence with the Income tax authorities,

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wherein the rate at which Income tax was to be deducted  on payment under the contract has been indicated.   Learned counsel for the respondents further submitted  that in view of the decision of this Court in SBP & Co.  Vs. Patel Engineering Ltd. & Anr. , the issues raised  have to be adjudicated by me.  Learned counsel for the  DHV, on the other hand, contended that the controversy  regarding the tax liability in terms of clause 1.10 cannot  be said to be stale because it arose only when DHV  received notice from the Income tax department in  February, 2004, requiring them to pay Income tax on the  amounts received from TNPWD.  It is also submitted that  prior to the receipt of the said notices, DHV had no cause  to complain, having received full payments against the  invoices raised.  It is, thus, pleaded that the cause of  action to ask for settlement of their claim arose only in  the month of February, 2004.  Further, the stand of  learned counsel for the DHV is that issue of limitation is  not to be finally decided by me as the same is to be  conclusively decided by the Arbitrator under Section 16  of the Act. 10.     Thus, the question for consideration before me is :  (i) whether after the completion of the contract in  March/April 2002, there is still an enforceable arbitration  agreement between the parties and (ii) whether the claim  made by DHV is stale and barred by limitation? 11.     The controversy in regard to the nature of function  to be performed by the Chief Justice or his designate  under Section 11 of the Act has been set at rest by a  seven-Judge Bench decision of this Court in SBP\022s case  (supra).  It has been held, per majority, that the function  performed by the CJ or his nominee under the said  Section is a judicial function.  Defining as to what the CJ  or his designate is required to determine while dealing  with an application under Section 11 of the Act, P.K.  Balasubramanyan, J, speaking for the majority said: \02339. It is necessary to define what exactly  the Chief Justice, approached with an  application under Section 11 of the Act,  is to decide at that stage. Obviously, he  has to decide his own jurisdiction in the  sense, whether the party making the  motion has approached the right High  Court. He has to decide whether there is  an arbitration agreement, as defined in  the Act and whether the person who has  made the request before him, is a party to  such an agreement. It is necessary to  indicate that he can also decide the  question whether the claim was a dead  one; or a long barred claim that was  sought to be resurrected and whether the  parties have concluded the transaction by  recording satisfaction of their mutual  rights and obligations or by receiving the  final payment without objection. It may  not be possible at that stage, to decide  whether a live claim made, is one which  comes within the purview of the  arbitration clause. It will be appropriate  to leave that question to be decided by  the arbitral tribunal on taking evidence,  along with the merits of the claims  involved in the arbitration. The Chief  Justice has to decide whether the

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applicant has satisfied the conditions for  appointing an arbitrator under Section  11(6) of the Act. For the purpose of taking  a decision on these aspects, the Chief  Justice can either proceed on the basis of  affidavits and the documents produced or  take such evidence or get such evidence  recorded, as may be necessary. We think  that adoption of this procedure in the  context of the Act would best serve the  purpose sought to be achieved by the Act  of expediting the process of arbitration,  without too many approaches to the  court at various stages of the proceedings  before the Arbitral Tribunal.\024

12.     It is clear from the above extracted paragraph that  in order to set into motion the arbitral procedure, the CJ  or his designate has to decide the issues, if raised,  regarding territorial jurisdiction and existence of an  arbitration agreement between the parties.  In addition  thereto, he can also decide the question whether the  claim was a dead one in the sense that the parties have  already concluded the transaction by recording  satisfaction of their mutual rights and obligations or have  recorded satisfaction regarding their financial claims.   Nevertheless, the Court made it clear that at that stage it  may not be possible to decide whether a live claim made,  is one which comes within the purview of the arbitration  clause and this question should be left to be decided by  the arbitral tribunal on taking evidence. It is, therefore,  plain that purely for the purpose of deciding whether the  arbitral procedure is to be set into motion or not, the CJ  or his designate has to examine and record his  satisfaction that an arbitration agreement exists between  the parties and that in respect of the agreement a live  issue, to be decided between the parties, still exists.  On  being so satisfied, he may allow the application and  appoint an Arbitral Tribunal or a Sole Arbitrator, as the  case may be.  However, if he finds and is convinced that  the claim is a dead one or is patently barred by time, he  may hold so and decline the request for appointment of  an Arbitrator.  13.     Applying these principles on facts in hand, I am of  the opinion that the petition deserves to be allowed.  In  this context, it would be appropriate to refer to clause  1.10 of the special conditions of the contract forming part  of the main contract, to which all the parties herein are  signatories.  Insofar as it is relevant for our purpose, it  reads as under: \0231.10 ... xxx\005\005xxx.....xxx For Foreign Consultants/Personnel The Client warrants that the client shall  pay on behalf of the Consultants and the  Personnel any taxes, duties, fees, levies  and other impositions imposed, under the  Applicable Law, on the consultants and  the Personnel in respect of: (a)     any payments whatsoever made to  the Consultants, Sub-Consultants  and the Personnel of either of them  (other than Indian Nationals or  Foreign Nationals now permanently  residing in India), in connection with  the carrying out of the Services;

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(b)     any equipment, materials and  supplies brought into India by the  Consultants or Sub-consultants for  the purpose of carrying out the  Services and which after having  been bought into such territories  will be subsequently withdrawn  therefrom by them; (c)     any equipment imported for the  purpose of carrying out the Services  and paid for out of funds provided  by the client and which is treated as  property of the client. (d)     Any property brought into India by  the Consultants, any sub- consultants, the Personnel of either  of them (other than Indian nationals  or permanent residents of India), or  the eligible dependants of such  Personnel for their personal use and  which will subsequently be  withdrawn therefrom by them upon  their respective departure from  India, provided that: (1)     the consultants, sub-consultants  and personnel and their eligible  dependants, shall follow the usual  customs procedures of the  Government in importing property  into India; and (2)     If the consultants, sub-consultants  or personnel, or their eligible  dependants, do not withdraw but  dispose of any property in India  country upon which customs duties  and taxes have been exempted, the  consultants, sub-consultants or  personnel, as the case may be, (i)     shall bear all such customs duties  and taxes in conformity with the  regulations of the Government. (ii)    Shall reimburse them to the client if  they were paid by the client at the  time the property in question was  brought into the Government\022s  country.\024

14.     Under the said clause, TNPWD, as a client had  taken upon itself the obligation to pay on behalf of the  consultants, sub-consultants and the personnel any  taxes, dues, fees, etc. imposed under the applicable law.   At the same time, it is significant to note that as per  clause (d) thereof, not only there is an obligation to pay  taxes etc. in certain situations, reimbursement of some of  the amounts by the consultants to the client, which the  client was compelled to pay, is also postulated.   Obviously, such a situation may arise and this clause  would be enforceable even after the expiry of the contract  on completion of the services and on the payments  having been made.  Therefore, it cannot be laid as an  abstract proposition that whenever the contracted work  is completed, all the rights and obligations of the parties  under the contract, ipso facto, come to an end and the  arbitration agreement also perishes with the contract.   Each case is required to be considered on its own facts.  

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In the instant case, though it is true that all the  payments were to be made by TNPWD to the consultants,  namely, Tahal, but the obligation to pay taxes was also in  respect of the payments which were to be received by the  sub-consultants, namely, DHV in terms of sub-clause (a).   Similarly, DHV as well as Tahal was under an obligation  to reimburse to TNPWD the amount, if any, paid by them  in terms of the aforenoted clause. Thus, it was the  performance of the contract that had come to an end, but  the contract is still in existence insofar as the dispute  arising under clause 1.10 thereof is concerned.  I have,  therefore, no hesitation in rejecting the plea of learned  counsel for the TNPWD that DHV had no direct contract  with them insofar as the payments of taxes were  concerned, and, therefore, the dispute raised by them  could not fall within the ambit of arbitration agreement  between TNPWD \026 the client and Tahal \026 the consultant  or that on completion of the contract, the arbitration  clause in the main contract got extinct.   In my opinion,  therefore, an enforceable arbitration agreement exists  between the parties. 15.     Clause 8.2 of the main contract provides for the  right to arbitration and reads as follows:      \0238.2    Right to Arbitration Any dispute between the parties as to  matters arising pursuant to this contract  which cannot be settled amicably within  thirty (30) days after receipt by one Party  of the other Party\022s request for such  amicable settlement, may be submitted  by either Party for arbitration in  accordance with the following provisions: xxx\005xxx\005xxx\024

16.     The arbitration agreement is in clear terms and  brings within its ambit any dispute between the parties  as to matters arising pursuant to the main contract  which cannot be settled amicably.  Admittedly, the  liability to pay the taxes flows from the contract and not  otherwise.  Having found that it was obligatory upon  TNPWD to discharge the tax liability in respect of the  payments made to the sub-consultants and DHV being a  signatory to the main contract, I am of the opinion that  claim made by DHV in respect of the Income tax dues  would fall within the ambit of the arbitration agreement  between the parties. 17.     As regards the question as to whether the said  claim can be said to be stale in the sense that after the  last payment in January, 2003, none of the three parties  herein had any pending claims against each other insofar  as the payments under the main contract were  concerned, I am of the view that notwithstanding the fact  that payments against all the invoices raised by DHV  stood paid, in the light of the agreement between the  parties in terms of clause 1.10, subsequent creation of an  additional payment by the Income tax department in  respect of the payments made by TNPWD to DHV  through Tahal, has given rise to a live dispute requiring  settlement between the parties in terms of the arbitration  agreement.  For the view I have taken, it is axiomatic that  prima facie, the claim made by DHV is not barred by  limitation. 18.     For the aforesaid reasons the petition is allowed and  as prayed by learned counsel for the parties, instead of  constituting an Arbitral Tribunal, Justice P.K.

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Balasubramanyan, a former Judge of this Court, is  appointed as the Sole Arbitrator to adjudicate upon the  claims/disputes raised by DHV, subject to his consent  and such terms as he may deem fit and proper.  Needless  to add that the learned Arbitrator shall deal with the  matter uninfluenced by any observation in this order on  the rival stands of the parties. 19.     The Registry is directed to communicate this order  to the learned Arbitrator to enable him to enter upon the  Reference and decide the matter as expeditiously as  practicable.  The petition stands disposed of with no  order as to costs.