Delhi High Court Upholds Arbitral Award, Says SAIL Cannot Deduct CENVAT Credit Shortfall Without Contractual Clause

Reiterating that courts cannot rewrite commercial contracts while exercising jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996, the Delhi High Court has upheld an arbitral award directing Steel Authority of India Ltd (SAIL) to refund Rs. 1.40 crore deducted from a contractor's final bill over an alleged shortfall in Minimum Guaranteed CENVAT Credit (MGCC).

Justice Avneesh Jhingan held that interpretation of contractual clauses lies within the domain of the arbitral tribunal and a court under Section 34 cannot sit in appeal over a plausible view taken by the arbitrator.

“The award was passed after considering the relevant clauses of the contract. The interpretation by the arbitrator is not only plausible but in the absence of any clause providing for deduction on account of shortfall in MGCC, is the only interpretation possible,” the Court observed.

SAIL had entered into a contract dated June 1, 2007 with Primetals Technologies India Pvt Ltd for replacement of MG Sets at Bhilai Steel Plant. The total contract value was Rs. 44.93 crore. The contractor was required to pass on a minimum guaranteed CENVAT credit of Rs. 4.65 crore.

The final acceptance certificate was issued in May 2013. After completion of statutory formalities, final invoices were submitted on May 28, 2018. On July 10, 2018, SAIL released payment after deducting Rs. 1.40 crore towards an alleged shortfall in MGCC, apart from liquidated damages. The contractor invoked arbitration.

The arbitrator held that while the contract provided that excise duty would not be reimbursed in certain situations, it did not contain any clause permitting deduction of MGCC shortfall from the contract price. The deduction was therefore held impermissible, and a refund with interest and costs was awarded.

Before the High Court, SAIL contended that the claim was barred by limitation and that the contractor had waived its rights by not objecting to a 2014 notice and by furnishing a discharge affidavit.

Rejecting the limitation objection, the Court held that the cause of action arose only on July 10, 2018, when the actual deduction was made. “The respondent was not aggrieved by notice dated 17.05.2014 but by the deduction of the shortfall in MGCC from the final invoices. The cause of action arose on 10.07.2018 when the deduction was made,” it said.

The claim was also held to be within time in view of the Supreme Court's Covid-19 limitation extensions.

On waiver, the court held that a discharge certificate could not operate as estoppel in the absence of a conscious and informed relinquishment of rights. “For waiver of a right, the party waiving such right must have knowledge of the right and the waiver must be specific,” it observed, relying on Kalparaj Dharamshi v. Kotak Investment Advisors Ltd.

After taking a look at the financial structure of the contract, the Court noted that the gross contract price was Rs. 44.93 crore. After accounting for CENVAT credit, the net contract price stood at Rs. 40.27 crore. The shortfall in MGCC was not reimbursed to the contractor. By additionally deducting Rs. 1.40 crore from the net contract value, SAIL effectively sought to reduce the agreed contract price despite there being no contractual provision permitting such deduction.

“Albeit in the case in hand, less excise duty paid resulted in a shortfall in MGCC, but for this eventuality there is no clause in the contract providing for deduction of the amount for the shortfall in MGCC,” the Court said.

Finding no perversity, patent illegality or conflict with the public policy of India, the Court dismissed SAIL's petition