OIL & NATURAL GAS CORPORATION LTD.versusATWOOD OCEANIC INTERNATIONAL, S.A.

                           [2008] 8 S.C.R. 430


A            OIL & NATURAL GAS CORPORATION LTD.
                                    v.
             ATWOOD OCEANIC INTERNATIONAL, S.A.
                 (Civil Appeal No.1218 of 2001)

                             MAY 13, 2008
B
     [TARUN CHATTERJEE AND DALVEER BHANDARl,JJ.]

           Arbitration Act 1940 - Agreement between ONGC and
     foreign company-contractor, for carrying out drilling operations
C    in offshore waters of India on 2. 03. 1983- By Notification, Gov-
     ernment of India extending Income Tax Act, 1961 to offshore
     areas with effect from 1.04.1983 - Claim for reimbursement
     by contractor of personal tax dues paid by it in respect of sala-
     ries earned by employees, for accounting year ending on
D    31.03.1983 and 31.03.1983 - Denied by ONGC - Dispute
     referred to arbitration - Disagreement between two arbitrators
     - Award by Umpire - Claim allowed holding that on account
     of change in income tax laws, contractor paid tax on behalf of
     its employees and as such contractor incurred increased costs
     - Challenge to - Single Judge of High Court holding that the
E    Notification was prospective and not retrospective, made award
     Rule of the Court - In appeal, Division Bench of High Court
     holding that the direction in Award pertaining to assessment
     year 1984-85 justified, however, direction pertaining to assess-
     ment year 1983-84 contrary to law. thus, direction regarding
F    payment of Rs 28,26,3591- for assessment year 1983-84 set
      aside - Decree modified to that extent - On appeal. held. In
     such cases scope for interference by this Court is limited -
      On pcr;,;sd! of materials on record. interference not called for
     - Terntorial Waters, Continental Shelf Exclusive Economic
G     Zone and other Maritime Zones Act, 1976.
          CIVILAPPELLATE JURISDICTION: Civil Appeal No 1218
     of 2001
          From the final Judgment and Order dated 8.2.2000 of the
rl                              430
              OIL & NATURAL GAS v. ATWOOD OCEANIC                      431
            INTERNATIONAL, S.A. [DALVEER BHANDARI, J.]

    High Court of Judicature at Bombay in Appeal No. 141 of 1995               A
    in Arbitration Petition No. 24 of 1990 in Arbitration Award No.
    15 of 1989

                                       WITH

          C.A. No. 1291 of 2001                                                B
         Vivek K. Tankha, K.R. Sasiprabhu and Bindu K. Nair for
;
    the Appellant.

         Shyam Dewan, Khooshnum R. Daviervala, Rajat Navet
    and Pradeep Kumar Bakshi for the Respondent.                               c
          The Judgment of the Court was delivered by

          DALVEER BHANDARI, J. These appeals are directed
    against the judgment of the High Court of judicature at Bombay de-
    livered in Appeal Nos.141 and 142of1995 dated 81h February, 200b.
                                                                               D
         Brief facts which are necessary to dispose of thesf.: ap-
    peals are recapitulated as under:
          On 2nd March, 1983, the appellant, Oil and Natural Gas Corpo-
    ration Limited entered into an Agreement with the respondent, Atwood
                                                                               E
    Oceanic International, S.A. for carrying out drilling operations in off-
    shore waters of India and for rendering other related services with
    regard to the drilling unit Sagar Pragati belonging to the appellant on
    the terms and conditions set forth in the said Agreement.

     , The said Agreement contained an Arbitration Clause 11.                  F
    The said Arbitration Clause 11 reads as under:-
          "Arbitration :

          If any dispute, difference or question shall at any time
          hereafter arise between the parties hereto or their                  G
          respective representative concerning anything herein
          contained or arising out of these presents or as to the
          rights, liabilities. or duties of the said parties hereunder
          and cannot be mutually resolved the same shall be referred
          to arbitration, proceedings of which shall be held at
                                                                               H
    432        SUPREME COURT REPORTS                    [2008] 8 S C.R.
                                                                            .•
A         (Bombay) India. Within thirty(30) days of the receipt of the
          notice of any dispute, each party shall appoint an arbitrator
          and such arbitrators shall ap~oint an Umpire before they
          enter upon the reference and not later than one month from
          the latest date of their respective appointments. If any of the
B         parties fail to appoint arbitrators within the specified period
          or should the two arbitrations fail to agree upon the selection
          of an Umpire within the stipulated period, the Hon'ble Chief
          Justice of the Supreme Court of India shall nominate the
          required arbitrator or the Umpire as the case may be, who
c         shall be a resident of India, but not a national of the country
          of neither of the parties. The decision of the arbitrators and
          failing an agreed decision by them, the decision of the
          Umpire shall be final and binding on the parties thereto.
          The arbitration proceedings shall be held in accordance
D         with the provisions of the Indian Arbitration Act, 1940 and
          the rules made thereunder as amended from time to time
          The arbitrator or the Umpire, as the case may be, shall
          decide by whom and in what proportion the arbitrators
          and Umpire's fees as well as the costs incurred in
E         arbitration shall borne.
          The arbitrators or the Umpire may, with the consent of the
          parties enlarge the time, from time, to make and publish
          their or his Award."
F          At the material time, when the agreement was entered into,
    the provisions of the Indian Income Tax Act, 1961 (hereinafter
    referred to as the "1961 Act') were not applicable beyond the
    territorial waters of India, i.e., beyond the limit of 12 nautical
    miles.
G
          On 31 51 March, 1983 the Government of India issued a
    notification in exercise of powers conferred by section 6(6)(a)
    and 7(7)(a) of the Territorial Waters, Continental Shelf, Exclu-
    sive Economic Zone, and other Maritime Zones Act, 1976 ex-
    tending the provisions of the 1961 Act to the Continental Shelf
H
                      OIL & NATURAL GAS v. ATWOOD OCEANIC                 433
                    INTERNATIONAL, SA [DALVEER BHANDARI, J.]
    ..,      and Exclusive Economic Zone of India with effect from 1s1 April,    A
             1983 with some modifications. It is not necessary to deal with
             those modifications because they are not relevant so far as the
             controversy involved in the instant case is concerned.
                   The respondent on 5th March, 1985 forwarded an invoice
             to the appellant claiming that pursuant to the notification dated B
             31st March, 1983 issued by the Government of India there was
        ..   a change in the law with regard to income tax which had re-
             suited in the employees of the respondent becoming liable for
'            income tax and consequently under the employment contract,
             the respondent had incurred additional liability for payment of     c
             personnel income tax which the respondent claimed under the
             terms of the contract had to be reimbursed. The appellant re-
             futed this claim by its reply dated 15th March, 1985 and took up
             the stand that the appellant was not liable to reimburse the per-
             sonnel tax dues due to change of law by way of extension of the D
    .        tax jurisdiction to offshore areas. On 22nd March, 1986 the re-
             spondent sought arbitration of the dispute between itself and
             the appellant on the aforesaid issues.
                  On 27th July, 1987, the dispute on the aforesaid issues
             was referred to arbitration of Mr. Justice D.V. Patel (Retd.) and   E
             Mr. Justice D.M. Rege (Retd.). On 2nd March, 1989, Mr. Justice
             D.V. Patel made a speaking award by which he rejected the
             claim of the respondent. The other learned arbitrator Mr.Justice
             D.M. Rege (Retd.) made a note of disagreement on 151h June,
    1        1989.                                                               F

                  In view of the disagreement between the two arbitrators,
             the dispute was referred to the arbitration of Mr. Justice
             Tulzapurkar (Retd.) as Umpire. The learned Umpire made his
             award on 13th October, 1989 by which the claims of the respon-
                                                                                 G
             dent were allowed .
    ..            The appellant aggrieved by the award of the Umpire chal-
             lenged the same before the learned Single Judge of the Bombay
             High Court. It was urged by the appellant that there was error
             apparent on the face of .the record. Reliance was placed on         H
    434       SUPREME COURT REPORTS                    [2008] 8 S.C.R


A   Clauses 5-A and 7 of the Agreement dated 2nd March, 1983.
    Clauses 5-A and 7 read as under:

          "Clause 5-A. Taxes.

               A.     Personnel -Any taxes assessed on employees
B                     of Contractor and based on income earned in
                      the performance of work for owner or otherwise
                      shall be the responsibility of the Contractor."

          Clause 7:

c                     "In the event there occur changes in the laws of
                      Government of India during the course of the
                      contract from those prevalent on 25.8.1982,
                      which result in increase decrease to the
                      Contractor's cost of carrying out its duties and
                      responsibilities under this Agreement, then the
D
                      increase/decrease in the cost shall be settled
                      and paid/recovered after mutual discussion."

         It was contended that in view of the above clauses, tax
  assessed on the employees of the contractor was the respon-
E sibility of the contractor/claimants. It is contended that in view of
  clause 5-A, the learned Umpire erred in awarding the amount
  by way of increased costs, particularly because the responsi-
  bility was that of the contractor. It was further contended that
  taxes assessable on the employees of a contractor and based
F on the income earned in the performance of work was one of
  the items. It cannot constitute increase in the cost of carrying
  out responsibilities/duties on the part of the claimants/contrac-
  tor under the Agreement. It was further contended that in view of
  clause 5-A of the Agreement, the appellant was not liable to pay
G the amounts on the ground of increased cost of the contract.
  The learned Single Judge observed as under
          "I do not see any merit in the said submissions advanced
          on behalf of ONGC The contractor has incurred increased
          costs for the accounting year ending 31st March. 1983
H         and 31st March. 1984. The Government of India issued



                                                                          '
         OIL & NATURAL GAS v. ATWOOD OCEANIC                    435
       INTERNATIONAL, S.A [DALVEER BHANDARI, .J]

     Notification on 31st March, 1983 which made the salaries          A
     earned by the expatriates taxable for the accounting year
     ending 31st March 1983 and 31st March, 1984.

     The judgment of this Court took the view that the said
     Notification was prospective and not retrospective. In the
     above circumstances, the Arbitrator came to the conclusion        8
     that since the Notification is dated 31st March, 1983, Clause
     7 of the said Agreement would apply. The learned Umpire
     came to the conclusion that the Notification constituted
     change in law of the Central Government during the course
     of the contract. The said change admittedly came into force       C
     after 25th August, 1982. In the above circumstances, on
     reading Clause 2 read with Clause 5 read with Clause 7 of
     the Agreement, the learned Umpire came to the conclusion
     that there was an increase in the contractors' cost under the
     Agreement on account of change in the income-tax Law              D
     and which resulted in the increase in the costs. The learned
     Umpire also came to the conclusion on the basis of the
     evidence on record that the claimant/contractor had agreed
     to pay the taxes assessable on the expatriates and in the
     circumstances, the claimant had incurred the increased            E
     costs, and, therefore, the taxes have been paid by the
     claimants and they are entitled to that extent to the increased
     cost. The learned Umpire agreed with the decision of one
     of the Arbitrators Shri D.M. Rege."

     After hearing learned counsel for the parties, the learned        F
Single Judge further observed as under:-

     "ln the present case, the dispute referred to the Umpire was
     a very narrow dispute viz. whether the contractor was entitled
     to be reimbursed for the increased cost borne by him on           G
     account of salaries of the expatriates being made eligible
     to income-tax pursuant to the Notification dated 31st March,
     1983. The learned Umpire, after construing the various
     provisions of Clause 2, 5A and Clause 7 of the Agreement
     has come to the conclusion that since the tax law has been
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    436       SUPREME COURT REPORTS                    [2008] 8 S.C.R

                                                                           l-
A         changed after 25th August. 1982 and since the contractor
          has paid the tax on behalf of its employees/expatriates, the
                                                                                •
          cost of contract had increased and to that extent under
          Clause 7 he was entitled to be reimbursed. There is no
          merit in the contention of ONGC that there was no increased
B         cost of carrying out the contract on account of taxes borne
          by the contractor on behalf of its employees/expatriates.

          For the foregoing reasons, there is no merit in the above
          Two Arbitration Petitions. Both the Arbitration Petitions
          are accordingly dismissed with costs. Consequently, the
c         impugned Award dated 13th October, 1989 is made Rule
          of this court. Decree in terms of the Award. Further, interest
          to be paid @ 12% per annum from the date of the Decree
          till payment on the respective principal amounts to be
          calculated in terms of the said Awards."
D
          The appellant aggrieved by the said judgment of the learned
    Single Judge preferred an appeal before the Division Bench of the
    Bombay High Court. The Division Bench heard the learned counsel
    for the parties at length and examined the material documents.

E         The Division Bench carefully perused the award of the
    Umpire and the judgment of the learned Single Judge and ob-
    served that the Umpire has taken one of the possible views on
    a fair reading of the contractual terms and this court cannot in-
    terfere with it. The court further observed that we perceive no
F   jurisdictional error committed by the learned Umpire.

          Before the rnvision Bench it was contended on behalf of
    the appellant that at least with regard to Assessment Year 1983-
    84. the direction in the award was clearly contrary to law and,
    therefore, it ought to be interfered with. The Division Bench found
G   substance in this argument. The Division Bench held as under:

          'Though in para 1 of the impugned Award. the Umpire              •
          granted the claims pertaining to the two Assessment years
          1983-84 and 1984-85 in para 2. he referred to the
          judgment of this court 1n Mcdermott International inc Vs
H
        OIL & NATURAL GAS v. ATWOOD OCEANIC                    437
      INTERNATIONAL, SA [DALVEER BHANDARI, J]
-)
     Union of India and Others, reported in 173 ITR 155 and A
     noticed that the said judgment had taken the view that the
     Notification dated 31.3.1983 making the Indian Income
     Tax Act applicable to personnel working within the
     Continental Shelf had no retrospective effect and that it
     would not apply to Assessment Year 1983-84 (accounting B
     year 1982-83). The Umpire thereafter proceeded to give
}    a direction that since the said decision was pending in
     Appeal before the Supreme Court and there was a
     possibility of the Respondent being able to recover refund
     of the income tax paid by it from the Income Tax c
     Department, the respondent while obtaining the decree
     from the appropriate Court, should give a written
     undertaking to the Court that in case it recovers a refund
     of the concerned amount of income tax it shall refund the
     said amount to the Appellant. The award states that this
                                                                  0
     direction was given at the instance of the respondent itself
     with a view to prevent the respondent from receiving the
     amount of income tax paid by it twice over, and for
     protection of the interest of the Appellant.
     Mr. Madon, learned Counsel for the respondent, contended         E
     that the directions with regard to the claims were only
     contained in para 1 of the award which gave no reasons
     in support of the said directions. Consequently, the entire
     award is a non-spe::iking award and is immune from scrutiny
     of the Court. He explained away the reasons contained in         F
     para 2 of the award as pertaining to the ancillary direction
     with regard to the undertaking to be given by the responuent
     and not with regard to the award itself. It is not possible to
     percept the contention that the award has to be read in
     compartments. In our view, both paragraphs 1 and 2 of the        G
     award have to be read in conjunction. When read in
     conjunction, it appears to us, the Umpire was alive to the
     fact that in Modermott International (supra) this Court had
     taken the view that the Notification dated 31.3.1983 had
     no retrospective effect and would not apply to Assessment
                                                                      H
    438        SUPREME COURT REPORTS                    [2008] 8 S.C.R.


A          Year 1983-84. If this was the law, then the respondent's
                                                                            '-
           employees were not liable for making payment of income
           tax during the year 1983-84 for income earned while
           carrying out work beyond the territorial waters of India.
           Consequently, there was no question of increased cost of
B          services within the meaning of Clause 7 of the Contract
           between the parties, or was there any scope for passing
           on a non-existing liability to the Appellant. At least to this
           extent, it appears to us that this contention must succeed."
           The Division Bench in the concluding para of the judgment
c observed that the learned Single Judge erred in not interfering
    with the direction contained in the award pertaining to assess-
    ment year 1983-84, but the conclusion of the learned Single
    Judge with regard to the direction pertaining to assessment year
    1984-85 is perfectly justified and needs no interference.
D
        The Division Bench partly allowed the appeal filed by the ap-
  pellant and set aside the direction contained in the Umpire's award
  with regard to the payment of Rs.28,26,359/- for the year ending
  31st March, 1983 (assessment year 1983-84) and uphold the rest
  of the judgment of the learned Single Judge. The Division Bench
E further directed that the decree is modified to the extent that there
  shall be a decree in accordance with the award only pertaining to
  assessment year 1984-85, together with interest as directed in
  the award and as granted by the learned Single Judge.

F       The appellant aggrieved by the said judgment preferred
  these appeals before this Court. The appellant reiterated the
  same argument before this court. The scope for interference by
  thi~ court is extremely limited in a case of this nature. We have
  careruily perused ~'"'' P.ntire material on record and analysed
  the impugned judgment In cur considered opinion, no interfer-
G
  ence is called for. The appeals being devoid of any merit are
  accordingly dismissed. In the facts and circumstances of the              •
  case, we direct the parties to bear their own costs.
    N.J.                                           Appeals dismissed.
H