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CASE NO.: Arbitration Petition  1 of 2006

PETITIONER: SEDCO FOREX INTERNATIONAL DRILLING INC

RESPONDENT: THE OIL & NATURAL GAS CORPORATION LTD

DATE OF JUDGMENT: 20/04/2006

BENCH: S.H. KAPADIA

JUDGMENT: JUDGMENT O R D E R

       Applicant is a foreign company incorporated in  Panama.  It is engaged in providing rigs on charter- higher basis for offshore drilling.

       In April, 1988, the rig was brought into India.   It operated in territorial waters, continental shelf  and other maritime zones.

       Under the contract dated 23.8.1988, ONGC  (non-applicant) is liable to reimburse the applicant  for customs duty paid on import of rig.  This is  under clause 15.5 of the contract. Under this  clause, ONGC is liable to reimburse/pay all  customs duty payable on the rig.   

       In July 1999, the customs department issued  a show-cause notice to the applicant and to the  non-applicant, in which it alleged that customs  procedure had not been followed for the initial entry  of rig in 1988.

       By order dated 27.1.2000, the commissioner of  customs held that the import of the rig had taken  place in 1988 and on several occasions thereafter  and that the duty was payable on the rig in respect  of its movement to a designated platform in 1988.

       Aggrieved by the adjudication order, the  applicant herein preferred an appeal to the  Customs, Excise and Service Tax Tribunal (for short  "the tribunal").  By order dated 2.2.2001, the  tribunal came to the conclusion that the duty was  payable on the import in 1988 on a value of US$ 13  million; that, in the absence of an essentiality  certificate, the applicant was not entitled to  exemption under notification no.516/86.  However,  the tribunal permitted the applicant herein to  pursue its claim for the essentiality certificate.   Applicant had imported the rig without filing of the  bill of entry.

       Suffice it to state that in February 2001, the  applicant made payment of the customs duty  amounting to Rs.26,67,94,320/-.  This was in  accordance with the order of the tribunal.

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       On the strength of the essentiality certificate,  the applicant applied for refund of the customs duty  paid by the assessee.  However, by order dated  1st/4th February, 2002, the additional commissioner  of customs rejected the claim for refund.   

       On 11.2.2002, the applicant called upon the  ONGC to reimburse the applicant with the said  amount of Rs.26,67,94,320/-. ONGC responded by  letters dated 20.3.2002 and 13.6.2002 denying its  liability to reimburse the customs duty paid.

       Ultimately, vide letter dated 31.3.3003, the  applicant herein invoked the arbitration clause 28.0  and suggested that the dispute be referred to  arbitration.  By the said letter, the applicant  appointed its nominee on the Arbitral Tribunal and  called upon the ONGC to appoint its nominee, so  that both the arbitrators could jointly appoint a  third arbitrator.

       It is not necessary, at this stage, to go into the  chequered history of the earlier round of litigation  and the circumstances under which the non- applicant did not agree to the continuance of the  proceedings before the duly constituted Arbitral  Tribunal.  Suffice it to state, that the applicant had  called upon the non-applicant to appoint its  nominee to the Arbitral Tribunal, failing which it  has been constrained to move this application for  appointment of an arbitrator to the Arbitral  Tribunal to decide the disputes referred to  arbitration under the 1988 contract by applicant  vide its letter dated 31.3.2003.         By way of counter affidavit, the ONGC has  inter alia contended that the applicant is estopped  from moving this arbitration application because  ONGC had issued the essentiality certificate to  enable the applicant to seek refund of the customs  duty already paid;  that, the certificate was issued  as far back as 21.12.2001 and that the same was  handed over to the applicant to enable them to avail  of the exemption as provided under notification  no.516/86 dated 30.12.1986, as amended from  time to time.  ONGC contends by its counter  affidavit that non-utilization of the essentiality  certificate is a matter between the applicant and the  customs department in which ONGC has no role to  play.  At this stage, it may be stated that till today,  the respondent has not received the revalidated  essentiality certificate from the office of the Director  General of Hydrocarbons, New Delhi.  In the  circumstances, ONGC has denied the demand of the  applicant for arbitration.

       On the factual aspect, my attention is invited  to the judgment of the Division Bench of the  Bombay High Court dated 22.3.2006 in writ petition  No.481/2001 filed by the applicant herein against  the customs department in the matter of  computation of duty paid on the value of the rig as  it existed in 1988.  This writ petition was essentially  on the working out of the liability.  By the said  judgment, the High Court has directed the customs

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department to compute the duty liability to the  assessee in terms of para 48 of the judgment of the  tribunal.  By the said judgment, the additional  commissioner of customs is directed to assess the  duty liable as per the order of the tribunal dated  2.2.2001 treating the import of the rig in 1988  having the value of US$ 13 million.  By the said  judgment, the High Court left it open to the  applicant to claim its entitlement under the  essentiality certificate before the additional  commissioner of customs, who is directed to pass  appropriate orders in that regard.  Till today, the  decision of the additional commissioner is awaited.         On the above facts, it is argued on behalf of  the non-applicant that the matter is pre-mature,  particularly, when the additional commissioner of  customs has not pronounced its decision on the  entitlement of the applicant under the essentiality  certificate and, therefore, invocation of the  arbitration clause by the applicant was pre-mature  and consequently, the application under section  11(4) of the Arbitration & Conciliation Act, 1996 is  not maintainable.

       In the present case, the applicant has paid  customs duty amounting to Rs.26,67,94,320/- as  far back as February 2001.  It seeks reimbursement  of the duty paid in terms of the contract. The  applicant has invoked the arbitration clause as far  back as 31.3.2003.  The accrual of liability, as a  concept, is different from quantification of the  liability.  In the present case, the liability to pay  customs duty has accrued.  In the circumstances, it  cannot be said that the application under section  11(4) of the Arbitration & Conciliation Act, 1996 is  pre-mature.          Accordingly, Hon’ble Mrs. Justice Sujata V.  Manohar (retired) and Hon’ble Mr. Justice V. N.  Khare (former CJI) are appointed as Arbitrators to  decide all disputes and differences between the  parties.  The two arbitrators shall appoint an  umpire in terms of clause 28.0 of the contract.

       Learned arbitrators may fix their own terms  and conditions as to their remuneration.

       As far as fixing of date of hearing is concerned,  liberty is given to the parties to approach the  arbitrators, who will decide the due date according  to their convenience.

       The arbitration petition is accordingly disposed  of.