INTRODUCTION
The Hon’ble Supreme Court of India (hereafter referred to as “the SC”) while dismissing the appeal in Delta Distillers Limited v. United
Spirits Limited and another and discussing the scope of Section 27 of the
Arbitration and Conciliation Act, 1996 (hereafter referred to as “the act”) have held as under:
It cannot be ignored
that the Arbitral Tribunal is required to make an award on the merits of the claim
placed before it. For that purpose, if any evidence becomes necessary, the
Tribunal ought to have the power to get the evidence, and it is for this
purpose only that this enabling section has been provided.
BRIEF FACTS
United
Spirits (hereafter referred to as “US”),
a company which owns certain brands of Indian Made Foreign Liquor (hereafter
referred to as “IMFL”) entered into
an agreement dated March 25, 1997 (hereafter referred to as “the agreement”) with Delta Distillers (hereafter
referred to as “DD”), a company
carrying on the business of distilling and bottling of IMFL wherein DD agreed
to manufacture and supply to US, IMFL of such brands and quantity, as would be
specified from time to time.
Under the
terms of the agreement, the contract price at which DD was to sell IMFL to US,
was exclusive of sales tax and other taxes, and US was required to bear the
same.
Sometimes in
2001-2002, certain disputes arose between the parties. One of the dispute being
with regard to the outstanding amount payable at the foot of the running
account between them.
US claimed
that amongst others, amounts to the tune of Rupees One crore twenty two lacs
thirty thousand six hundred and ninety two (INR. 1,22,30,692.00) and Rupees
Seventy lacs twenty three thousand one hundred seven and fifty two paise (INR. 70,23,107.52) were due and payable by
DD to US, whereas DD maintained that an amount of Rupees Thirty nine lacs
thirty seven thousand nine hundred and ninety three (INR. 39,37,993.00) was
payable by US to DD.
US claimed
that DD had obtained set-off / refund on the sales tax paid on packaging
material from the Sales Tax Department, and such set-off / refund operated to
reduce the sales tax liability of DD, which was ultimately being borne by the US.
US
therefore, claimed that it was entitled to the benefit of the said set-off / refund,
and accordingly debited DD for the amount of set-off/refund.
This dispute
was referred to Arbitration and Hon'ble Mr. Justice D.M. Rege was appointed as
the sole arbitrator, who resigned as an arbitrator, and the proceedings
continued before another arbitrator Hon'ble Mrs. Justice Sujata Manohar.
US served a
notice upon DD on March 17, 2007, calling upon DD to provide for inspection and
to produce the following documents before the learned Arbitrator:
a) All sales tax returns filed by the DD
with the sales tax authorities for the assessment years 1995-1996 to 2001-2002;
b) All sales tax assessment orders
passed with regard to DD for the above-mentioned period, and all appellate
orders, if any passed in any appellate proceedings arising out of the same;
c) The objection, if any, filed by DD
against the Notice in Form 40, and proposed order at pages 123 & 124 of
Volume VI of the documents filed in the arbitration, the order, if any, passed
thereon, and the appellate proceedings, if any, therein; and
d) The letter dated May 26, 2000
mentioned in the letter at page 32 of Volume III of the documents filed in the
arbitration.
Thereafter, DD
vide their reply dated March 21, 2008, protested and objected to the production
of these documents, since according to DD the same were being sought at a late
stage when the proceeding had reached the stage of cross-examination of witnesses
of US and thus US was not entitled to inspection of any documents at this
belated stage.
Inasmuch as DD
declined to give inspection / and produce the document as sought for, US made
an application on March 26, 2007 before the learned Arbitrator, and in
paragraph No. 5 thereof, sought a direction to produce the documents mentioned
at Sl. Nos. (a) to (c) in the notice dated March 17, 2007.
The Ld. Arbitrator
by her order dated March 27, 2007 allowed the application only to the extent of
the assessment orders relating to the period 1995-1996 to 2001-2002 and the
appellate orders mentioned in paragraph 5(b). The prayer for producing the
sales tax returns mentioned in paragraph 5(a) was not entertained. Similarly,
the prayer to produce the documents as sought in paragraph 5(c) was not
entertained.
DD being
dissatisfied with the order made certain allegations against the Ld.
Arbitrator, who resigned from the said proceeding. The parties therefore,
appointed an Arbitral Tribunal consisting of three Judges, Hon'ble Mr. Justice
M. Jagannadha Rao (Presiding Arbitrator) and Hon'ble Mr. Justice S.N. Variava,
and Hon'ble Mr. Justice M.S. Rane.
On
reconstitution of the Arbitral Tribunal US pointed out that the order passed by
the earlier Arbitrator dated March 27, 2007 had not been complied with and the
tribunal, called upon DD to state their position on an affidavit.
The Chairman
of DD filed an affidavit before the Tribunal on September 16, 2011 stating that
DD would not produce the sales tax assessment orders and specifically stated
that the Sales Tax Returns are highly confidential and hence the same cannot be
subject matter to be produced before this Hon'ble Tribunal especially when,
sales tax set off is already quantified by the Claimants and the same is
forming a part of their claim in the present arbitration proceedings.
In view of
the affidavit of the Chairman of DD, the tribunal noted that DD though being in
possession of the concerned documents was refusing to produce them, even after it
had been directed to do so. Thus the tribunal by its order dated September 16,
2011 held that the earlier order dated March 27, 2007 passed by the previous
arbitrator could not be reviewed by it as the tribunal did not have any
jurisdiction to do so.
The
Tribunal, therefore, permitted US to apply to the court under Section 27 of the
Arbitration and Conciliation Act, 1996 (hereafter referred to as “the act”) to seek production of the
sales tax assessment order for the period 1995-1996 to 2001-2002, including any
appellate orders in support thereof.
Pursuant to
the permission granted by the Tribunal, US filed Arbitration Petition before
the Single Judge of Bombay High Court invoking the powers of the Court under
Section 27 of the Act of 1996, seeking a direction from the court ordering DD to
produce the necessary assessment orders and appellate orders.
DD opposed
the said Arbitration Petition by submitting that US’s demand pertains to
records for the period 1995-1996 to 2001-02 and that the same were very old
records and as such are not available with DD as they cannot be traced.
The Ld.
Judge therefore, allowed the said petition invoking Section 27 of the Act of
1996, and directed DD herein to produce the documents sought for by US.
Being
aggrieved by the judgment and order of the Hon’ble High Court of Bombay DD
preferred the present SLP.
LEGAL ISSUES
Whether the
order which was sought by US against DD under Section 27 of the Act, was not
within the competence of the court?
Whether the Arbitral Tribunal
should have drawn an adverse inference against the DD under Order 11 and Rule
21 of Code of Civil Procedure for non-production of the documents, the
production of which was sought by US?
Whether the documents
which were being sought were confidential documents, and in view of the
provision contained in Section 71 of the Maharashtra Value Added Tax 2002, and
the order compelling the DD to produce such documents could not have been
passed?
ARGUMENTS ADVANCED
DD contended
that Section 27 of the 1996 act does provide for moving an application to seek the
assistance of the court and as far as the appearance of a party in pursuance to
a notice of arbitrator is concerned, there is a specific provision for
proceeding in the event of default of a party under Section 25.
Further DD contended that the assessment orders were confidential documents, and
Section 71 of the Maharashtra Value Added Tax, 2002 and its pre-cursor Section
64 of the Bombay Sales Tax Act, did not permit production of these documents,
and a direction as sought could not have been granted.
Further DD
submitted that if the necessary documents are not produced, at the highest an
adverse inference may be drawn against DD.
ANALYSIS OF PAST PRECEDENT
Union of India v. Bhatia Tanning Industries [AIR 1986 Delhi 195]
The Division
Bench of the High Court of Delhi held that Section 42 of the Arbitration and
Conciliation Act, 1940 provides for service of notice by a party or arbitrator on
a party before he proceeds to hear the case, and Section 43 permits the
arbitrator to call a third person as well as a party as a witness, and the
section was not confined only to calling third persons as witnesses.
Tulsiram Sanganaria and Anr. v. Srimati Anni Rai and Ors. [1971 (1) SCC 284]
A three
Judges bench of the SC while interpreting Section 54(1) of the Income Tax Act,
1922 have held that the said provision created a bar on the production of the
documents mentioned therein by the officials and other servants of the Income
Tax Department, and made it obligatory on them to treat as confidential the
records and documents mentioned therein, but the Assessee or his
representative-in-interest could produce assessment orders as evidence, and
such evidence was admissible.
DECISION OF THE COURT
The SC while taking note of the fact that, when UB first made an application for production
of the assessment orders, the defense taken by DD in their affidavit dated September
16, 2011 was that those documents were confidential documents, and could not be
directed to be produced. However, ten months thereafter, DD in their second
affidavit filed in the High Court, contended that the said documents were not
available have held as under:
The term
'any person' appearing under Section 27(2) (c) is wide enough to cover not
merely the witnesses, but also the parties to the proceeding. It is undoubtedly
clear that if a party fails to appear before the Arbitral Tribunal, the
Tribunal can proceed ex-parte, as provided under Section 25(c).
At the same
time, it cannot be ignored that the Tribunal is required to make an award on
the merits of the claim placed before it. For that purpose, if any evidence
becomes necessary, the Tribunal ought to have the power to get the evidence,
and it is for this purpose only that this enabling section has been provided.
The
quantification done by UB, in support of the claim, had been done on a
theoretical basis and a hypothetical calculation should not be resorted to when
actual Sales Tax Assessments are available, which would show as to whether the
quantum of set-off allowed and claimed was in fact justified or not.
CONCLUSION
The SC by
this decision has cleared muddied waters by dismissing the appeal filed by DD
and upholding the judgment passed by the Hon’ble High Court at Bombay by categorically
stating that if any evidence becomes necessary, the arbitral tribunal ought to
have the power to get the evidence, and it is for this purpose only that this
enabling section has been provided for in the 1996 act.
The SC while
discussing the powers of the arbitral tribunal also highlighted that the arbitral
tribunal may draw an adverse inference against one of the parties to
arbitration if it feels that the party has failed to comply with or adhere to
its order during the course of the Arbitral proceedings.
Most
striking takeaway of this judgment remains that the SC has rightfully held that
a party should not resort to a hypothetical calculation when actual documents establishing the claim are available with the other party, which would rightfully show whether the claim was justified or not.
