The Delhi High Court has dismissed the arbitration petition filed by Dhampur Sugar Mills Ltd. challenging the Arbitral Award dated Aug 21, 2015 in its commercial dispute with Indian Oil Corporation Ltd. (IOCL) over the supply of Indigenous Anhydrous Ethanol, holding that the Arbitrator’s treatment of the reciprocal Clause 3 as a liquidated damages provision and a reasonable pre-estimate of loss under Section 74 of the Indian Contract Act was a plausible commercial construction that did not warrant interference under the limited jurisdiction of Section 34.
The Court upheld the Arbitrator’s finding that the Petitioner could not unilaterally suspend ethanol supplies merely because IOCL had delayed furnishing statutory Form-C declarations, in the absence of any express contractual clause permitting such suspension, and noted that the Petitioner had failed to avail the statutory remedy of seeking extension under Rule 12(7) of the Central Sales Tax Rules. The Court further held that a seventeen-month delay in publication of the award, while undesirable, was not by itself a ground for setting it aside, and that the challenge based on Clause 16(g) of the arbitration agreement could not be introduced for the first time through rejoinder after the expiry of limitation under Section 34(3).
The High Court also affirmed that the absence of an express contractual clause permitting suspension of supply means a supplier cannot unilaterally halt performance merely because statutory Form-C declarations are delayed, even if it faces genuine commercial hardship from higher tax exposure.
A Single Judge Bench of Justice Om Prakash Shukla observed that the Sole Arbitrator had accepted that there was indeed delay on the part of IOCL in furnishing Form-C declarations, and that the Petitioner did have a genuine commercial grievance given the exposure to a higher tax rate. However, the Arbitrator separately examined the provisional assessment orders and noted that the tax proceedings also involved matters relating to the Input Tax Credit claimed by the Petitioner and the manner in which returns had been filed, meaning the assessment could not be attributed solely to IOCL’s delay.
The Arbitrator further held that the Petitioner had an available statutory remedy under the proviso to Rule 12(7) of the Central Sales Tax (Registration and Turnover) Rules, 1957, to seek extension for production of Form-C, which it did not avail. Critically, the Arbitrator found that there was no express term in the agreements permitting the Petitioner to suspend supplies on account of delayed Form-C, and that the Petitioner could not unilaterally make an indemnity a condition precedent for further performance. On Clause 3, the Arbitrator treated it as a liquidated damages provision and a reasonable pre-estimate by the parties for loss arising from failure to meet the 90% commitment, noting the 10% tolerance built into the clause, added the Bench.
The Court also noted that arguments before the Arbitrator concluded on March 13, 2014 while the award was published on Aug 21, 2015, resulting in a delay of approximately seventeen months, with the Arbitrator having entered upon the reference on Aug 19, 2013, making the award two days beyond the two-year period contemplated under Clause 16(g) of the arbitration agreement. The Court further observed that the references to DSDPL and another dispute in parts of the award, and the treatment of certain correspondence, were undesirable but did not establish that the Arbitrator had lost continuity with the matter.
Briefly, the dispute arose out of multiple supply agreements entered into between the parties during 2007 and 2010 for the supply of Indigenous Anhydrous Ethanol by the Petitioner (a manufacturer based in Uttar Pradesh) to the Respondent for its locations in Delhi, Haryana, Rajasthan, Punjab and later Uttarakhand. Two principal controversies were at the heart of the matter. The first related to the alleged delay on the part of IOCL in furnishing statutory Form-C declarations in respect of interstate sales, which exposed the Petitioner to a higher tax rate of approximately 32.5% under the U.P. VAT Act. The second related to the recovery of damages by IOCL under Clause 3 of the agreements, which contained a reciprocal “Take or Pay/Supply or Pay” provision requiring both parties to maintain a minimum performance level of 90% of the contracted quantity, subject to a 10% permissible variation.
The Petitioner stopped further dispatches of ethanol in August 2008 after IOCL failed to provide the Form-C declarations or an indemnity covering the differential tax liability. IOCL disputed the right of the Petitioner to suspend supplies and, by letter dated Feb 15, 2010, demanded Rs. 31.60 lakhs for short supply during 2008-09 and 2009-10, subsequently adjusting these amounts from payments due under the later Uttarakhand agreement dated Oct 11, 2010. Before the Sole Arbitrator, the Petitioner raised claims for differential trade tax, interest, penalty and litigation expenses, and challenged the deductions made by IOCL, while also invoking the reciprocal part of Clause 3 against IOCL for alleged failure to uplift the contracted quantity. The Sole Arbitrator rejected all claims of the Petitioner and upheld the deductions.
