Case BriefsSupreme Court

Supreme Court: The bench of Ashok Bhushan and R. Subhash Reddy*, JJ has held that the Limitation Act, 1963 is applicable to the arbitration proceedings under Section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006.

Here are the key points highlighted by the Court while reaching the aforementioned conclusion:

  • As per Section 15 of the said Act, where supplier supplies any goods or renders any services to any buyer, the buyer shall make payment on or before the agreed date between the parties in writing or where there is no agreement, before the appointed day.
  • Section 16 deals with date from which and rate of interest payable in the event of not making the payment.
  • The recovery mechanism for the amount due is covered by Sections 17 and 18 of the said Act.
  • If any party has a dispute with regard to amount due under Section 17, a reference is required to be made to the Micro and Small Enterprises Facilitation Council.
  • On such reference, the Council is empowered to conduct conciliation in the matter or seek assistance of any institution or centre providing alternate dispute resolution services by making a reference to such institution for conducting conciliation.
  • If the conciliation is not successful, as contemplated under Section 18(2) of the said Act, same stands terminated under Section 18(3) of the said Act.
  • Thereafter, the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of Arbitration and Conciliation Act, 1996 are made applicable as if the arbitration was in pursuance of arbitration agreement between the parties, under sub-section (1) of Section 7 of the 1996 Act. Applicability of Limitation Act, 1963 to the arbitrations is covered by Section 43 of the 1996 Act.
  • A reading of Section 43 itself makes it clear that the Limitation Act, 1963 shall apply to the arbitrations, as it applies to proceedings in court.
  • When the settlement with regard to a dispute between the parties is not arrived at under Section 18 of the 2006 Act, necessarily, the Micro and Small Enterprises Facilitation Council shall take up the dispute for arbitration under Section 18(3) of the 2006 Act or it may refer to institution or centre to provide alternate dispute resolution services and provisions of Arbitration and Conciliation Act 1996 are made applicable as if there was an agreement between the parties under sub-section (1) of Section 7 of the 1996 Act.

The Court, hence, concluded:

“In view of the express provision applying the provisions of the Limitation Act, 1963 to arbitrations as per Section 43 of the Arbitration and Conciliation Act, 1996, the Limitation Act, 1963 is applicable to the arbitration proceedings under Section 18(3) of the 2006 Act.”

[Silpi Industries v. Kerala State Road Transport Corporation, 2021 SCC OnLine SC 439, decided on 29.06.2021]

For appellants: Senior Advocates V. Giri, P.B. Suresh

For Kerala State Road Transport Corporation: Aishwarya Bhati, ASG

For Respondent: Basava Prabhu Patil

Op EdsOP. ED.

This article attempts to analyse and examine the applicability of the law of limitation to proceedings under the Arbitration and Conciliation Act, 1996, vis-à-vis two aspects in particular. The first of these aspects being the limitation as applicable to the initiation of arbitration, be it by reference to arbitration by the court or by filing an application of appointment of an arbitrator in court, and the second being the limitation as applicable to the substantive claims in arbitration.

The law of limitation and the statutory regime for applicability of limitation to arbitration

The law of limitation is essentially a statute in the civil law system, which prescribes a maximum period, after the happening of an event, in which legal action can be commenced. The happening of this event, is often called the cause of action, which means the bundle of facts which constitute to establish the infringement of right. In India, the law of limitation is governed by the Limitation Act, 1963 (hereinafter referred to as “the Limitation Act”), and Section 3 of the Limitation Act of bars the remedy of filing of suits, appeals and applications, after prescribed period of time.1 Thus, an action cannot be initiated by a party if the prescribed time has passed after accrual of cause of action on the basis of which the action has been initiated.

The law of limitation is based on the following maxim[1], vigilantibus non dormientibus jura subveniunt which means “laws serve the vigilant, not those who sleep.” Additionally, Halsbury’s Laws of England[2], states the objectives of the law of limitation as follows:

“The Courts have expressed at least three different reasons supporting the existence of statutes of limitation i.e.―

(a) that long dormant claims have more of cruelty than justice in them;

(b) that a defendant might have lost the evidence to dispute the State claim; and

(c) that persons with good causes of actions should pursue them with.”

Similarly, the Delhi High Court in Satender Kumar v. MCD[3] (Satender Kumar), while highlighting the objectives of law of limitation stated that due to long passage of time vital evidence which would be the defence of the opposite party is bound to get lost or misplaced. Therefore, seeking adjudication of claims preferred after long lapse of time would cause more injustice than justice.

Arbitration is not an exception to this principle, and the law of limitation also applies to it. Section 43(1) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Arbitration Act”)[4] states that “the Limitation Act, 1963 (36 of 1963), shall apply to arbitrations as it applies to proceedings in court”.

Applicability of the Limitation Act for initiation of arbitration

The question now arises as to when does the cause of action to initiate arbitration arise, and when does it stop. In this part, we go on to see the application of the law of limitation vis-à-vis initiation of arbitration. Broadly speaking arbitration can be initiated by means of three methods:

(i) By sending a notice of invocation to the other party within the meaning of Section 21 of the Arbitration Act. This is also the point of commencement of an arbitration proceeding.

(ii) By filing an application under Section 11 of the Arbitration Act. This section provides that a party can approach the Court for appointment of arbitrator, if both parties fail to appoint an arbitrator, either under an agreed procedure as per the agreement between the parties, or upon notice of invocation of arbitration.

(iii) By filing an application under Section 8 of the Arbitration Act. Section 8 empowers a party to apply, to a Court before which an action may have been brought in a case where an arbitration agreement exists, to refer the parties to arbitration. Therefore, in a case where an arbitration agreement exists between the parties, and one party has still brought a civil action before the court or judicial authority, the opposing party can approach the court by filing an application under Section 8 praying for the matter to be referred to arbitration.

The question now to be analysed is what the time period for initiation of arbitration is, and when does the limitation for this begin. One of the early judgments which sets the law in this regard is the judgment of Inder Singh Rekhi v. DDA[5] (“Inder Singh Rekhi”), the Court observed that:

“… in order to be entitled to an order of reference under Section 20 (Section 11 of the Arbitration Act, which was previously Section 20 of the Arbitration and Conciliation Act, 1940) it is necessary that there should be an arbitration agreement and secondly, difference must arise to which this agreement applies. The existence of a dispute is, therefore, essential for appointment of an arbitrator under Section 8 or a reference under Section 20 of the Act.”

The Court’s reading was in respect of Section 20 of the Arbitration and Conciliation Act, 1940 (hereinafter referred to as “the old Act”) which is essentially Section 11 of the Arbitration Act, and the element of dispute is contained in Section 21 of the Arbitration Act. Therefore, even under the Arbitration Act, in order to get a dispute referred under Section 11 of the Arbitration Act, the necessary ingredients are the existence of a dispute, and the second ingredient being the existence of an arbitration agreement.

The Court also went on to define that “A dispute arises where there is a claim and a denial and repudiation of the claim.”

Further, even R.S. Bachawat’s Law of Arbitration[6] defines the word dispute in following terms:

“…there can only be a dispute when a claim is asserted by one party and denied by the other on whatever grounds. Mere failure or inaction to pay does not lead to the inference of the existence of dispute. Dispute entails a positive element and assertion in denying, not merely inaction to accede to a claim or a request. Whether in a particular case a dispute has arisen or not has to be found out from the facts and circumstances of the case.”

The Court then went on to hold that the starting point for the cause of action for determining the limitation for a Section 20 petition or a Section 8 application would be the point from when the dispute arose, by observing that:

“4. In order to be entitled to ask for a reference under Section 20 of the Act there must not only be an entitlement to money but there must be a difference or dispute must arise. … when the assertion of the claim was made on 28-2-1983, and there was non-payment, the cause of action arose from that date.”

 The observation of the Supreme Court was in view of the applicability of Article 137 of the Limitation Act to a petition under Section 11 (Section 20) or a petition under Section 8. Article 137 is the article which applies to any petition which is filed in court, which reads “Three years from when the right to apply accrues”. Therefore clearly, the “right to apply” for a petition under Section 8 or Section 11 would accrue only once the dispute has accrued, and therefore the starting point for limitation of an application under Section 8 or Section 11 would be the accrual of the dispute.

Even before the judgment of Inder Singh Rekhi8, the Supreme Court of India had clarified that Article 137 (erstwhile Article 181) of the Limitation Act, 1963, would be applicable to petitions moved before the Court, even if they are moved under the Arbitration Act. This was the observation in Wazir Chand Mahajan v. Union of India9, which laid down that Article 181 of the old Limitation Act, 1908 would be applicable to applications filed under Section 20 of the old Act.

There could also be other instances where a dispute could arise. A dispute could also arise when one party gives a notice of invocation/appointment of arbitrator to the other party, and the other party either fails to do so, or fails to agree on an appointment10. The limitation would then start from that date, for the purpose of filing a petition under Section 11 or Section 8.

In view of the above discourse, it is evident, that the starting point of limitation for initiation of arbitration, is from the date when the dispute arose, and the stopping point is the giving of the notice of invocation, or the filing of the Section 11 or Section 8 petition.

Applicability of the Limitation Act to substantive claims in arbitration

The next question which arises is how to judge when the limitation for the substantive claim starts, and when does it stop. While in the previous section we discussed what is the right time period to initiate arbitration, we contrast this section by analysing the prescriptive time period for a substantive claim within the arbitration. Therefore, this section deals with the cause of action for a claim, and not the cause of action for an arbitration.

One such question arose for consideration in Panchu Gopal Bose v. Board of Trustees for Port of Calcutta11 (“Panchu Gopal”). In this case, the petitioner had made its claim for the first time in the year 1979. Thereafter no payment was forthcoming towards this claim. However, the petitioner thereafter failed to take any follow-up action, up until November 1989, that means well over 10 years. In November 1989 the petitioner sent a notice of invocation for appointment of arbitrator to the respondent, where after the respondent immediately refuted it.  In this case, the Court held that the cause of arbitration arises when the claimant becomes entitled to raise the question, that is, when the claimant acquires the right to require arbitration. The Court therefore observed that “the limitation would run from date when the cause of arbitration would have accrued, but for the agreement”. Therefore, the Court found that in this case the cause of arbitration had accrued back in 1979, when it became entitled to payment, and not in 1989 when the dispute arose. Therefore, the claim of payment was held to be hopelessly barred by limitation.

Similarly, even in J.C. Budhraja v. Orissa Mining Corpn. Ltd.12 (“J.C. Budhraja”), where it was the petitioner’s contention that the limitation for the claims would begin to run from the date on which the difference arose between the parties, the Court refuted the contention and observed to the contrary. In this case the Court took notice that the notice for invocation of arbitration was served on 4-06-1980, and it had to be seen whether on that date, the claims were barred. The Court then went on to observe that that claim arose on 14-4-1977 when the final bill was prepared, and not on 4-6-1980, when the notice invoking arbitration was sent.

The Delhi High Court, in Satender Kumar13 observed that limitation for filing a petition for appointment of an arbitrator would be different from the limitation for a claim and the accrual/arising of cause of action for a claim would vary as per the facts and circumstances of each case, and the nature of jural relationship between the parties. In this particular case, the Court held that Article 18 of the Limitation Act would be applicable, and the cause of action arose in that particular case upon completion of work. Similarly, in MCD v. Gurbachan Singh and Sons14 (“Gurbachan Singh”) it was observed that a claim pertaining to work completed in 1994 for which the claim was filed only in the year 2000, was barred by limitation, as the cause of action arose in the year 1994.

Therefore, what becomes apparent from this discourse is, that as far as the starting of limitation period for a substantive claim is concerned, the instance where the cause of action arises, depends on the facts and circumstances of each case, and is not merely the point where the dispute arises.

As far as the stopping of the period of limitation of a claim or a counterclaim is concerned, the Supreme Court’s judgment in State of Goa v. Praveen Enterprises15 makes the law very clear. In respect of claims in arbitration, the Court clarifies by a combined reading of Section 21 of the Arbitration Act, and Section 3 of the Limitation Act, 1963, the following aspects:

  1. A claim for which a notice invoking arbitration is given, the date of stopping of limitation, is the date when a notice invoking arbitration is given.
  2. In case of the claims, where there is no notice of invocation given, and they are added directly in the statement of claim, then the date of filing of the statement would be the relevant date when the limitation stops to run.
  3. In the case of a claim, for which neither a notice of invocation is given, nor they were contained in the original statement of claims, the relevant date for stopping of the limitation period would be, the date on which the amendment in the original statement of claims, incorporating this new claim is filed.
  4. In the case of a claim in the nature of a set-off, the same above rules being Rules 1, 2 and 3 would apply. That means the date of stopping of limitation would be the date when either the main claim is invoked, or filed in the statement of claims, or incorporated by way of an amendment, respectively.
  5. In the case of a counterclaim, ordinarily, the date when the counterclaim is filed would be the date relevant for determining the date of stopping of limitation period.
  6. However, in the case of a counterclaim, where before filing the counterclaim, the counter claimant has, by way of a separate notice of invocation, invoked the counterclaim, then that would be the date relevant for the stopping of the limitation period.

Court’s view on the difference between the period of limitation for a claim and for filing of a petition

The Courts in India have time and again reiterated that there is a marked difference between the limitation period for filing a petition under Section 11 or Section 8, and the limitation period for a claim to be raised in arbitration.

The Supreme Court has in J.C. Budhraja16 cautioned that “the period of limitation for filing a petition under Section 8(2) seeking appointment of an arbitrator cannot be confused with the period of limitation for making a claim”. In this case the Court had highlighted the error made by the arbitrator while confusing both issues.

In Union of India v. L.K. Ahuja and Co.17, an application was made to the Court for the appointment of arbitrator in year 1976 after the denial of the request by respondent in the same year. However, the claim which anticipated to be referred to the arbitration was pertaining to the work completed in the year 1972. The Supreme Court observed that:

“8. In view of the well-settled principles we are of the view that it will be entirely a wrong to mix up the two aspects, namely, whether there was any valid claim for reference under Section 20 of the Act and, secondly, whether the claim to be adjudicated by the arbitrator, was barred by lapse of time. The second is a matter which the arbitrator would decide unless, however, if on admitted facts a claim is found at the time of making an order under Section 20 of the Arbitration Act, to be barred by limitation.”

Apart from the key difference of the limitation period itself, the difference also exists in the stage when the limitation aspect of both issues can be looked into by a Court or an arbitrator. While the limitation period for filing a petition for appointment of an arbitrator or reference of disputes to arbitration is to be seen by the Court, the limitation aspect of the substantive claims is looked into by the Arbitral Tribunal and not the Court. The only exception to this rule is if the claims to be referred to arbitration are hopelessly barred by limitation, which is apparent from admitted facts and documents.

The Delhi High Court explained this distinction in Satender Kumar18, by observing:

 “The limitation for filing a petition, seeking reference of disputes to arbitration, is different than the period of limitation for the subject claims as such. Meaning thereby, that the petition may be within limitation because, it may be filed within three years of arising of disputes, however the main claims are time barred or not is an issue on merits to be decided in arbitration proceedings The second aspect, and which is in fact is the more important aspect, is that, if on admitted facts, the claims are clearly barred by limitation at the time of passing of the order under Section 20 of the Arbitration Act, 1940, then there need not be reference of the disputes to arbitration because there is no entitlement to money, and therefore a dispute or difference with respect to the same, once the same are clearly time barred.

Another instance where the Court refused to refer dead claims to arbitration is in Progressive Constructions Ltd. v. National Hydroelectric Power Corpn. Ltd.19, wherein it was been held that claims which are ex facie barred by limitation need not be referred for decision in the arbitration proceedings. Further, even in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.20, it has been held that dead claims (long barred) need not be referred to arbitration.

Since these judgments, there has been a slight evolution in law, in terms of the amendment brought in Section 1121, where the Court, while considering an application for appointment, now needs to confine itself to the question whether the arbitration agreement exists or not, and need not go into any other aspects. However, despite this marked change in law, it can still be argued, that in the case of dead claims, which are hopelessly barred by limitation, there is nothing to be referred to arbitration, and thus the Court may still refuse an appointment on this ground.

Conclusion

Applicability of the law of limitation to arbitration proceedings is much more similar to its applicability to a suit initiated under the Code of Civil Procedure, 1908. However, the difference arises with respect to the date on which the dispute arises and the date on which request for arbitration has been made to the respondent. As these dates decide the validity of application made to the court, with respect to the law of limitation.

Ultimately, the Courts are empowered to dismiss the application even if it is within time, in case where substantive claim is time barred on admitted facts. As, it would save the party from the cost of arbitration, especially in case where the arbitrator could erroneously hold the time-barred claim as claim within time, ultimately leading to a failure in being able to enforce such a claim.


Working with Adwitya Legal LLP as Partner, Arbitration and Dispute Resolution, e-mail: gunjan@adwlegal.co.in.

Author is grateful to Mr. Akash Kishore, who is currently interning with Adwitya Legal LLP, for his research inputs.

1 Provided under First Schedule to the Limitation Act, 1963.

[1] Vanka Radhamanohari v. Vanka Venkata Reddy, (1993) 3 SCC 4.

[2] Fifth Edn. (2008).

[3] 2010 SCC OnLine Del 424.

[4] S. 37 of the Arbitration Act, 1940.

[5] (1988) 2 SCC 338.

[6] Wadhwa and Co. (2005).

[8] (1988) 2 SCC 338.

[9] (1967) 1 SCR 303.

[10] State of Orissa  v. Damodar Das, (1996) 2 SCC 216.

[11] (1993) 4 SCC 338.

[12] (2008) 2 SCC 444.

[13] 2010 SCC OnLine Del 424.

[14] 2014 SCC OnLine Del 19.

[15] (2012) 12 SCC 581.

[16] (2008) 2 SCC 444.

[17] (1988) 3 SCC 76.

[18] 2010 SCC OnLine Del 424.

[19] 2009 SCC OnLine Del 2199.

[20] (2009) 1 SCC 267.

[21] By way of the Arbitration and Conciliation (Amendment) Act, 2015, S. 11(6-A) was inserted which reads, “The Supreme Court or, as the case may be, the High Court, while considering any application under sub-s. (4) or sub-s. (5) or sub-s. (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.”

Op EdsOP. ED.

I. INTRODUCTION

One of the most frequently raised objections during the course of arbitration proceedings pertain to the inadmissibility of unstamped documents. This objection can generally be raised before the arbitrator under Section 16[1] of the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”) which permits the arbitral tribunal to rule on its own jurisdiction including on the validity of the arbitration agreement.

With the decision of the Supreme Court in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd.[2], such objections have become even more frequent, coupled with the fact that the Court now is obligated to impound and send a document containing an arbitration clause for adjudication to the stamping authorities at the stage of Section 11[3] of the Arbitration Act, prior to appointing an arbitrator, if the document is unstamped or insufficiently stamped.

However, whether a document containing an arbitration clause (or any document for that matter) requires stamping or not becomes a little more complicated while dealing with documents such as tender documents where a particular tender is awarded to a contractor/sub-contractor who is expected to perform a particular component of work in a large project. Examples of such contract may include contracts setting up an industrial plant or a power plant, where a contract is awarded to a particular contractor to install pipelines as per the project specifications or to install drainage lines in an under construction building as per the specifications in a building contract. Such types of contracts are commonly called purchase orders, work orders or “works contract”. The question that arises is whether all such contracts can be termed as works contracts and if so, how are they supposed to be taxed/stamped?

Supposing a contractor is awarded a job to install pipelines or to carry out electrification in a major project with or without purchase and supply of any goods or material for the same, then can this type of job be termed as a works contract and is it thus required to be stamped? Are the supply and sale of goods in any form an essential ingredient of a works contract? And what are the tax implications on such work orders when it comes to stamping?

The purpose of this article is to examine these issues by examining the evolution of the law relating to works contracts and then ultimately examining the issue of levy of stamp duty on works contract under the Maharashtra Stamp Act, 1958[4] (“the Maharashtra Stamp Act” or “the said Act”). This article is divided into four parts. In this part, namely, Part I, the author has given his introduction to the article. In Part II, the author will examine the nature, meaning and scope of works contracts through various Supreme Court decisions. Part III of the article will examine when stamp duty can be levied on works contracts under the Maharashtra Stamp Act and in Part IV the author will conclude with concluding comments.

II. NATURE, SCOPE AND MEANING OF WORKS CONTRACTS

1.The most recent decision of the Supreme Court that authoritatively deals with this issue was handed out by the five-Judges Constitution Bench in Kone Elevators India (P) Ltd. State of Tamil Nadu[5] (Kone) delivered prior to the introduction of the GST regime. A reference was made to the Constitution Bench for its consideration on whether manufacture, supply and installation of lifts is to be treated as “sale” or “works contract”.[6]

2. The issue before the Constitution Bench was whether a contract for manufacture, supply and installation of lifts in a building is a “contract for sale of goods” or a “work contract”.[7] While in case of a contract for sale of goods, the State Legislature had the power to levy sales tax or Value Added Tax (VAT) on the entire sale consideration, in case of works contracts, “consideration payable or paid for the labour or service element would have to be excluded from the total consideration received” and sales tax or VAT would be charged on the balance amount.[8]

3. Dipak Misra, J. who delivered the majority judgment analysed the law laid down by the Supreme Court in two phases: (1) prior to the insertion of clause  (29-A) in Article 366 of the Constitution of India, 1950 (“the Constitution”) by the 46th Amendment in 1982 [Article 366(29-A)(b)][9]; and (2) after the 46th[10]

4. One of the decisions referred to in the majority judgment in Kone[11] was delivered in 1958 by a Constitution Bench of the Supreme Court in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.[12] (Dunkerley 1) that set the base of future decisions on the issue. In Dunkerly 1, the issue before the Court concerned a levy faced by an assessee in respect of goods sold in relation to a works contract (building contract) under the Madras General Sales Tax Act, 1939.[13] The Bench in Dunkerley 1 held that in a building contract which was one entire and indivisible contract, there was no sale of goods and it was not within the competence of the Provincial Legislature to impose tax on supply of materials used in such a contract.[14] The other decisions also referred to by the majority included decisions delivered in Carl Still GmbH v. State of Bihar,[15] State of Madras v. Richarson & Cruddas Ltd.,[16] State of Punjab v. Associated Hotels of India Ltd.[17]. All these judgments held that a works contract could not have been liable to be taxed under the State Sales Tax Laws and whether the contract was a works contract or a contract for sale of goods was dependent on the dominant intention as reflected from the terms and conditions of the contract.[18] The Court in Kone[19] observed that as the aforesaid decisions of the Supreme Court were delivered prior to the 46th Amendment, the State Legislatures did not have legislative competence to levy sales tax, Entry 54 List II of the Seventh Schedule to the Constitution on an indivisible contract of sales of goods which had component of labour and service and “it would not be possible for the assessing officer to dissect an indivisible contract to distinguish the sale of goods constituent and labour and service constituent”.[20]

5. To undo the aforesaid decisions, in 1983, Parliament amended the Constitution by the 46th Amendment by inserting clause (29-A) in the definition article of the Constitution, namely, Article 366. As per Article 366(29-A)(b) “tax on the sale or purchase of goods” includes “a tax on the transfer of property, in goods (whether as goods or in some other form) involved in the execution of a works contract” and “such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of goods by the person to whom such transfer, delivery or supply is made.”[21] The constitutional amendment was challenged before the Supreme Court who rejected the challenge in Builders’ Assn. of India v. Union of India (“Builders’ Assn.”).[22]

6. In Builders’ Assn. the Court observed that the object of clause (29-A) was to enlarge the scope of tax on sale and purchase of goods to include transfer, delivery or supply of goods.[23] The Court also opined that it was “open to States to segregate works contracts into two separate components or contracts by legal fiction, namely, contract for sale of goods involved in the works contract and for supply of labour and service.”[24] However, all such transfers, deliveries and supplies of goods are subject to the restrictions set out in clauses (1) to (3) of Article 286 of the Constitution[25] [clause (3) has since been omitted by the 101st Amendment to the Constitution[26] in September 2016]. This was once again reiterated by the Supreme Court in Gannon Dunkerley and Co. v. State of Rajasthan[27] (Gannon Dunkerley 2). In Gannon Dunkerley 2, the Court while referring to Builders’ Assn.[28] stated that as a result of the 46th Amendment, a single and indivisible contract has been altered by legal fiction into a contract which is divisible into one for sale of goods and the other for supply of labour and services thereby bringing such an indivisible contract on par with a contract containing two separate agreements.[29]

7. The majority in Kone[30] thereafter referred to the decision of the three-Judges Bench of the Supreme Court in Larsen and Toubro v. State of Karnataka[31] (“Larsen and Toubro”) that has explained the expression “whether as goods or in some other form”[32] used in parenthesis in clause 29-A(b). In Larsen and Toubro, the Court referred to the term “goods” used in Article 366(12) and held that the term is inclusive, has a broader meaning than merchandise and includes all materials, commodities and articles including chattels and movables. The Court then observed that “goods in some other form” in Article 366(29-A)(b) would thus mean “goods which have ceased to be chattels or movables or merchandise and become attached or embedded to earth. In other words, goods which have by incorporation become part of immovable property are deemed as goods.”[33] In Larsen and Toubro[34], the Court further held that the dominant intention of the contract was immaterial and regardless of the dominant intention of the contract, States had the power to levy sales tax on the materials used in a contract.[35]

8. Eventually, the majority in Kone[36] summarised the characteristics and scope of works contracts after the 46th Amendment which are:

“(i) the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services;

(ii) the concept of “dominant nature test” or, for that matter, the “degree of intention test” or “overwhelming component test” for treating a contract as a works contract is not applicable;

(iii) the term “works contract” as used in clause (29-A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and

(iv) once the characteristics of works contract are met with in a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract.”[37]

III. WHEN CAN STAMP DUTY BE LEVIED ON WORKS CONTACT UNDER THE MAHARASHTRA STAMP ACT?

 1. In the Maharashtra Stamp Act, under Section 30(f-a)[38] of the Act (that was inserted by an amendment in 2015[39]), the stamp duty for instruments of works contract as provided in Article 63 of Schedule I has to be paid by the person receiving the contract. Works Contract under Article 63 would mean, “a contract for works and labour or services involving transfer of property in goods (whether as goods or in some other form) in its execution and includes a sub-contract.”[40] Article 63 of the Act is couched in far broader terms than Article 366(29-A)(b) of the Constitution. It not only includes sub-contracts but also “labour or services involving transfer of property”. Close examination of Article 63 would show that stamp duty has to be paid on contracts for (i) both works and labour or services (ii) involving transfer of property (iii) in goods whether as goods or in some other form. These three conditions have to be satisfied in order for stamp duty to be levied.

2. Strictly for the purpose of this article, in order to analyse the issue further, it would be necessary to examine the meaning of certain words given in other statutes. While, it is true that the author would be committing a cardinal sin of statutory interpretation by referring to one statute to ascertain the meaning of an expression in another statute which is not pari materia to the former (see Bangalore Turf Club Ltd. v. Regional Director, Employees’ State Insurance Corp.[41]), the author is attempting this exercise purely for the academic purposes of this article and not otherwise. This is the only caveat.

3. The Maharashtra Stamp Act does not define “Works Contract”. However, the expression is defined under Section 2(119) of the Central Goods and Services Tax Act, 2017[42] (“the GST Act”) which reads thus,

works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;”

(emphasis supplied)

4. The commonality in both Article 63 of the Maharashtra Stamp Act and Section 2(119) of the GST Act is the expression “transfer of property in goods”.

5.Black’s Law Dictionary[43], defines the term “transfer” as under,

“TRANSFER, v. To convey or remove from one place, person, etc., to another; pass or hand over from one to another; specif., to make over the possession or control of (as, to transfer a title to land); sell or give.

TRANSFER, n. An act of the parties, or of the law, by which the title to property is conveyed from one person to another.”

(emphasis supplied)

6. “Transfer of property” though not defined in the Maharashtra Stamp Act or the GST Act, is defined in Section 5 of the Transfer of Property Act, 1882 which reads thus,

“ In the following sections “transfer of property” means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself, [or to himself] and one or more other living persons; and “to transfer property” is to perform such act.

In this section, “living person” includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals.”

(emphasis supplied)

 7. Therefore, from what is mentioned above, it is quite clear that for transfer to take place, there must be “conveyance”. The term conveyance is defined in Section 2(g) of the Maharashtra Stamp Act in the following manner:

(g) “ Conveyance ” includes,—

(i) a conveyance on sale,

(ii) every instrument,

(iii) every decree or final order of any civil court,

(iv) every order made by the High Court under Section 394 of the Companies Act, 1956 or every order made by the National Company Law Tribunal under Sections 230 to 234 of the Companies Act, 2013 or every confirmation issued by the Central Government under sub-section (3) of Section 233 of the Companies Act, 2013, in respect of the amalgamation, merger, demerger, arrangement or reconstruction of companies (including subsidiaries of parent company) ; and every order of  Reserve Bank of India under Section 44-A of the Banking Regulation Act, 1949 in respect of amalgamation or reconstruction of banking companies;  by which property, whether moveable or immoveable, or any estate or interest in any property is transferred to, or vested in, any other person, inter vivos and which is not otherwise specifically provided for by Schedule I ;

Explanation.—An instrument whereby a co-owner of any property transfers his interest to another co-owner of the property and which is not an instrument of partition, shall, for the purposes of this clause, be deemed to be an instrument by which property is transferred inter vivos ;

8. Conveyance is also defined under Section 2(10) of the Stamp Act, 1899:

“conveyance includes a conveyance on sale and every instrument by which property, whether moveable or immovable, is transferred inter vivos and which is not otherwise specifically provided for by schedule I” (emphasis supplied)

9. Both the definitions in the Maharashtra Stamp Act as well as the Stamp Act, 1899 are inclusive and not exhaustive. However, the root word “convey” is not defined in either of the Acts. Assistance may once again be made to Black’s Law Dictionary[44] which defines convey as,

“To pass or transmit the property from one another; to transfer property or the title to property by deed or instrument under seal. Used popularly in sense “assign,” “sale,” or “transfer.” ”

(emphasis supplied)

10. From what is stated above, it can be concluded that for the purpose of Article 63 of the Maharashtra Stamp Act,

a) a Works Contract would be a contract “for works and labour or services” and not only for works “or” only for labour or services. Both work and labour or work and services need to be included in the contract.

b) a Works Contract would attract stamp duty if the contract involves a transfer of property in goods.

and

c) the transfer of property in goods takes place through conveyance which involves a transfer of title in goods.

11. Therefore, in the author’s view, for the purpose of the Maharashtra Stamp Act, stamp duty can be levied under Article 63 only when a contract for works and labour or services involves a transfer of property and not otherwise. It will not apply for those contracts where solely labour services or other such services are availed.

12. To illustrate, supposing a contractor for a steal fabrication project hires a sub-contractor to lay pipelines for which the contractor will provide all material and the sub-contractor only has to lay and assemble the pipelines, then such a contract would not be a works contract as the sub-contractor does not transfer any property in goods. At the most, such a contract would be a Hiring Agreement or Agreement of Service under Article 34, Schedule I to the Maharashtra Stamp Act for which stamp duty of One Hundred Rupees would be levied under Article 5(B)[45] of the said Act. However, if in a given contract, responsibility is assigned to the sub-contractor to purchase the pipelines and material for the same and then lay such pipelines, this would certainly be a case which includes “labour or services involving transfer of property in goods, whether as goods or in some other form” and therefore the provisions of Article 63 would certainly be attracted.

IV. CONCLUDING COMMENTS

While the Supreme Court has eliminated much of the confusion surrounding the meaning of work orders, it would be advisable for the State Legislature to amend Article 63 of the Maharashtra Stamp Act with an explanation in the article clarifying that contracts solely involving labour or services that do not include transfer of property in goods are not works contract for the purpose of Article 63. Such an explanation/clarification would go a long way in minimising legal challenges to contracts on the grounds of insufficiency or non-payment of stamp duty.

*****************************

* The Author is a practicing Advocate at  Bombay High Court and  National Company Law Tribunal, Mumbai

[1] Section 16. Competence of arbitral tribunal to rule on its jurisdiction

[2] (2019) 9 SCC 209

[3] Section 11. Appointment of Arbitrators

[4] Maharashtra Stamp Act, 1958

[5] (2014) 7 SCC 1.

The majority judgment was delivered by Dipak Misra, J. for himself, R.M. Lodha C.J., A.K. Patnaik and S.J. Mukhopadhaya, JJ. The dissenting opinion was delivered by F.M. Ibrahim Kalifulla, J.

[6] Ibid p. 14 para 2. The order of reference is dated 13th February, 2008 in Kone Elevator (I)(P) Ltd. v. State of T.N., (2010) 14 SCC 788.

[7] Ibid, p. 14 para 3

[8] Ibid

[9] Article 366 (29-A) ―tax on the sale or purchase of goods includes—

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of goods by the person to whom such transfer, delivery or supply is made

[10] (2014) 7 SCC 1 at p. 21 para 18.

[11] (2014) 7 SCC 1

[12] AIR 1958 SC 560

[13] Ibid

[14] Ibid

[15] AIR 1961 SC 1615

[16] (1968) 21 STC 245 (SC)

[17] (1972) 1 SCC 472

[18] (2014) 7 SCC 1 at pp. 25, 26 para 31

[19] (2014) 7 SCC 1

[20] Ibid

[21] Supra Note 9.

[22] (1989) 2 SCC 645

[23] Ibid pp. 669-670 para 32

[24]  (2014) 7 SCC 1 at p. 27 para 34

[25] 286. Restrictions as to imposition of tax on the sale or purchase of goods.—

(1) No law of a State shall impose, or authorise the imposition of, a tax on the supply of goods or of services or both, where such supply takes place—

(a) outside the State; or

(b) in the course of the import of the goods or services or both into, or export of the goods or services or both out of, the territory of India.

(2) Parliament may by law formulate principles for determining when a supply of goods or of services or both in any of the ways mentioned in clause (1).

[26] Constitution (One Hundred and First Amendment) Act, 2016

[27] (1993) 1 SCC 364

[28] (1989) 2 SCC 645 

[29] (1993) 1 SCC 364  at p. 388 para 35

[30] (2014) 7 SCC 1

[31] (2014) 1 SCC 708

[32] Supra note 9.

[33] (1989) 2 SCC 645  at pp 744-745, para 56

[34] (2014) 1 SCC 708

[35] (1989) 2 SCC 645  at p. 746, para 60

[36] (2014) 7 SCC 1

[37] (2014) 7 SCC 1 at  p. 32 para 46

[38] Section 30. Duties by whom payable. —In the absence of an agreement to the contrary, the expense of providing the proper stamp shall be borne,—

(f-a) in case of instruments of works contract as provided in Article 63 of Schedule I, by the person receiving the contract

[39] Maharashtra Stamp (Amendment) Act, 2015, Maharashtra Act No. XX of 2015 dated 24th April, 2015

[40] 63. Works contract, that is to say, a contract for works and labour or services involving transfer of property in goods (whether as goods or in some other form) in its execution and includes a sub-contract,—

(a) where the amount or value set forth in such contract does not exceed rupees ten lakh – Five Hundred Rupees;

(b) where it exceed rupees ten lakh -five hundred rupees plus 0.1 per cent of the amount above rupees ten lakh subject to maximum of rupees twenty-five lakhs.

[41] (2014) 9 SCC 657

[42] Central Goods and Services Tax Act, 2017 

[43] Black’s Law Dictionary, Revised Fourth Edn., p. 1669

[44] Ibid, p. 402

[45] 5. Agreement or its records or Memorandum of an Agreement—

(B) if not otherwise provided for – One Hundred Rupees

Case BriefsHigh Courts

Kerala High Court: R. Narayana Pisharadi, J. dismissed a petition praying for quashing the criminal proceedings against the petitioner initiated under Section 482 of the Code of Criminal Procedure, 1973 when a simultaneous arbitration proceeding was going on against the petitioner in a civil court.

The petitioner was a surety for one, M.L. George, who had subscribed for four of the respondent company’s chitties and defaulted in paying a certain balance amount. As surety for George, the petitioner was supposed to pay the balance amount to the respondent company on his default. The petitioner failed to pay the amount owed by Mr George to the respondent company and hence a complaint was filed against the petitioner under Section 138 of the Negotiable Instruments Act, 1881.

The counsels for petitioner P.V. Kunhikrishnan and P.V. Anoop contended that the averments in the complaint do not constitute the ingredients of the offence punishable under Section 138 of the Negotiable Instruments Act, 1881. Further, it was contended that the initiation of the arbitration proceedings at the instance of the respondent affected the maintainability of the complaint filed against the petitioner for an offence punishable under the Negotiable Instruments Act, 1881.

The Court did not find any merit in the contentions of the petitioner and hence rejected the petitioner’s contentions. Reliance was placed on the case of Sri Krishna Agencies v. State of A.P., (2009) 1 SCC 69 where the Supreme Court, setting aside the order of the High Court for quashing proceedings under Section 138 of the Negotiable Instruments Act, 1881, on the grounds of simultaneous arbitration proceeding, held that disputes to arbitration could not be an effective substitute for a criminal prosecution when the disputed act is an offence. It must, however, be elementary that the two are based on the independent cause of action.

Hence, the Court consequently dismissed the petition and allowed both criminal and civil proceedings simultaneously against the petitioner. [Bindhu A.V. v. Sree Gokulam Chit And Finance Co. (P) Ltd., 2020 SCC OnLine Ker 198, decided on 17-01-2020]

Case BriefsHigh Courts

Bombay High Court: A.S. Chandurkar, J., clarified that a contract whereby an advocate asks for the fee based on the outcome of the arbitration proceedings, wherein he acted in the capacity of a “counsel” for the party and did not appear as an “advocate”, is valid.

It is pertinent to note that such contracts (generally called a contract for a contingent fee) are held to be opposed to public policy and hence void under Section 23 of the Contract Act, 1872 where such contract is entered into by an Advocate with his client.

In the present case, the respondent was a partnership firm engaged in providing consultancy services in arbitration matters. They entered into an agreement with the appellant as per which, they were to represent the appellant in an arbitration proceeding. As per the terms of the agreement, the respondent would be entitled to 1% of the award amount upto Rs 1 crore, and 1.5% thereof over Rs 1 crore. Based on the result of the arbitration proceedings, the respondent raised a claim for an amount of over Rs 1.28 crores. However, the appellant did not pay the amount and the respondent filed a recovery suit which was allowed by the trial court.

An important question before the High Court was — whether the agreement was hit by the provisions of Section 23 of the Contract Act, 1872?

D.V. Chavan, Advocate appearing for the appellant urged that the partner of the respondent firm who appeared in the arbitration proceeding was a qualified advocate, and thus he was precluded from seeking remuneration on the basis of the outcome of the proceedings in which he represented the appellant. Per contra, Yash Maheshwari, Advocate representing the respondent submitted that the partner concerned of the respondent firm was not a registered advocate under the Advocates Act, 1961.

The Court discussed the decision of ‘G’, a Senior Advocate of the Supreme Court, In re, AIR 1954 SC 557 and noted that in Paragraph 11 of that case, the Supreme Court observed that there was nothing morally wrong, nothing to shock the conscience, nothing against public policy and public morals in such a transaction “per se” when a legal practitioner is not concerned. Also, such agreements are legally enforceable when entered into between third parties.

Noting that the “aforesaid observations” though in the passing are in the nature of obiter dicta and hence binding on this Court.”, the High Court observed, “The aforesaid observations are clear that with regard to such an agreement in which a legal practitioner is not involved, the same would be legally enforceable. It is thus clear that an agreement of the aforesaid nature if entered into by an Advocate would be against public policy and the same may not be so when third parties are involved.”

As per the Court, there was no evidence to indicate that the partner of the respondent firm acted as an “Advocate while representing the appellant; in fact, he represented them only as their counsel, and the representation before the arbitrator could not be said to be a representation before the Court. It was held: “Mere fact that the said partner happened to be a law graduate by itself would not be sufficient to conclude that the agreement entered into by him for being entitled to remuneration based on the outcome of the arbitration proceedings would render that agreement contrary and opposed to public policy and hence void under Section 23 of the Act of 1872.”

On such view of the matter, along with the decision on other points which also went against the appellant, the Court dismissed the present appeal and confirmed the decree passed by the trial court. [Jayaswal Ashoka Infrastructure (P) Ltd. v. Pansare Lawad Sallagar, 2019 SCC OnLine Bom 578, decided on 07-03-2019]

Case BriefsHigh Courts

Jammu & Kashmir High Court: A Division Bench comprising of Sindhu Sharma, Dhiraj Singh Thakur, JJ., allowed an LPA filed against the order of the writ court whereby the court had remanded the matter back to the arbitrator/additional registrar, co-operative societies and directed him to conduct the arbitration as per the provisions of Arbitration and Conciliation Act after formulating proper issues.

The main issue that arose before the Court was whether the High Court had erred in passing the impugned order.

The Court observed that from a bare perusal of the award passed by the arbitrator, it can be concluded that it was a non-speaking order which did not specify about the liability of the respondent. The Court further observed that since the Cooperative Societies Act, 1989 is a self-sufficient law which provides for the procedure of conducting the arbitration. Lastly, the Court observed that there is no mandate on the part of the arbitrator to frame issues before adjudicating a dispute, however, he may do so for the sake of crystallizing the dispute.

The Court held that the order of the writ court should be modified to the extent that it directs the arbitration proceedings to be conducted under the Arbitration and Conciliation Act. The Court held that the arbitrator may conduct the proceedings under the Cooperative Societies Act, 1989. Resultantly, the Court partly allowed the appeal. [Citizens Co-operative Bank Ltd. v. Krishan Lal Choudhary,2018 SCC OnLine J&K 747, order dated 22-10-2018]

Case BriefsHigh Courts

Bombay High Court: A Division Bench comprising of B.R. Gavai and M.S. Karnik, JJ. dismissed a petition filed against the order of the Arbitrator whereby petitioner’s application challenging the arbitration proceedings was rejected.

In view of the agreement between the parties, arbitration proceedings were commenced with one R.S. Bhandurge as the sole arbitrator. However, after a period of one year, he discontinued and the present arbitrator came to be appointed as the sole arbitrator by the respondent. The petitioner filed an application that continuation of arbitration proceedings by the present arbitrator was not permissible in law. This application was rejected by the sole arbitrator. Aggrieved thereby, the petitioner preferred the instant petition.

The High Court perused the record and found that contentions raised on behalf of the petitioner were without substance. Reference was made to Supreme Court decision in SBP and Co. v. Patel Engineering Ltd., (2005) 8 SCC 618 wherein the Apex Court had held that once the arbitration proceedings have commenced, the parties will have to wait until the award is pronounced, unless a right of appeal is available at an earlier stage under Section 37 of the Arbitration and Conciliation Act, 1996. It was observed that the High Court while exercising power under Article 226 or 227 of the Constitution, cannot entertain any petition challenging an interlocutory order passed in arbitration proceedings. In light of the above, the petition was dismissed. [Suchitra Chavan v. Axis Bank Asset Sales Centre,2018 SCC OnLine Bom 2854, dated 10-09-2018]

Case BriefsHigh Courts

Delhi High Court: The Division Bench comprising S. Ravindra Bhat and Yogesh Khanna, JJ. set aside the decision of the Single Bench wherein it was that the Bangalore City Civil Court had no jurisdiction to hear the dispute related to arbitration between ISRO’s Antrix Corporation and Devas Multimedia.

An agreement was entered between Antrix Corporation and Devas Multimedia and further terminated unilaterally by Antrix due to ‘national security reasons.’ The agreement provided settlement of the dispute by arbitration and Devas accordingly pulled Antrix to International Court of Arbitration i.e. ‘ICC’. Antrix approached Bangalore Court to restrain Devas from proceeding with the arbitration and stop the International Court from going ahead with the matter. In 2015, the International Court ruling asked Antrix to pay USD 672 million to Devas for unlawful termination of the agreement. Subsequently, in September 2015, Devas moved to Delhi High Court for implementation of the arbitral award by seeking attachment of bank accounts of Antrix but the latter challenged its jurisdiction. Thereafter, it was held Antrix’s pleas in the court in Bangalore were not maintainable.

Antrix contended that under Section 9 of Arbitration and Conciliation once an application was made to a “court”, only that “court” would have jurisdiction over all subsequent applications made by either party under the Act, by virtue of Section 42. On the other hand, it was contended by Devas that Antrix had claimed substantially similar reliefs in its Section 11 petition before the Supreme Court which was dismissed, thereby leading to an issue estoppel. Allowing Antrix to re-agitate similar claims in a Section 9 petition before the City Civil Court would amount to forum shopping and an abuse of process of the courts.

However, contentions of Antrix were upheld against those of Devas. Section 42 precluded the jurisdiction and the Bangalore Court being first seized of Antrix’s petition would first decide Antrix’s initial plea against the arbitration proceedings. If it is found to be maintainable and bonafide, then Section 42 would be applicable, however, if not then that application would be treated as non-est and application in Delhi High Court would not be hit by Section 42. [Antrix Corpn. Ltd. v. Devas Multimedia Pvt. Ltd., 2018 SCC OnLine Del 9338, decided on 30-05-2018]