IMPACT OF COVID-19 ON INDIAN COMMERCIAL CONTRACTS

IMPACT OF COVID-19 ON INDIAN COMMERCIAL CONTRACTS

Madhu Sweta & Shivangi Khanna

Updated on 18/03/2020

 

The outbreak of COVID-19, the pathogen causing coronavirus has been widely reported and the suffering consequences still continue. Countries around the world have imposed mass travel bans, temporary lockdowns and extremely restricted human movement. The World Health Organisation has declared the outbreak as a pandemic. Domestic and transnational trade has come to an unprecedented standstill. It has led to a crippling effect on the domestic market and its network of supply chain. The lethal virus already has the legal industry in wrangles. Recently, even the Supreme Court of India had invoked its plenary powers under Article 142 of the Constitution to extend the ‘limitation period’ (by way of suspension) in all cases against the usual timeline as enumerated under the Limitation Act, 1963.

 

There has been adverse impact on the world economy. Such a negative impact has affected the domestic market chain at its core. The immediate results were supply-chain disruptions, ‘unintentional’ and imminent delay in performance and carrying out of the ‘contractual’ obligations. From construction contracts to manufacturing and supply agreements, the variety of contracts which are likely to be affected by the spread of COVID-19 is undoubtedly humongous. Additionally, this new impossibility brings out challenges against land acquisition, financing of big projects and delay in engineering and technological research and advancements. Counterparties, including suppliers and professional service lenders (e.g. Independent Consultants & Accountants) may seek to avoid immediate performance, by citing delay or non-performance borne out of an unexpected event. Parties may cite this pandemic as a ground for opting re-negotiation of price and terms of the contract.

 

At this unfortunate state of affairs, parties to commercial contracts and legal experts, nationally and internationally are continuously reviewing and assessing their contractual provisions for seeking suitable rights and obligations, specifically on the potential routes for discharging the commercial arrangement or contract, particularly force majeure. It squarely forms a defense against the grunt norm of pacta sunt servanda (latin for “agreements must be kept”).

 

FORCE MAJEURE & INDIAN CONTRACTUAL JURISPRUDENCE

Although the word ‘force majeure’ is absent in its skeletal form in Indian law, its doctrine can be traced from Section 56 of the Indian Contract Act, 1872 (‘the Act’). A force majeure provision in a commercial arrangement is an express provision of circumstances in which performance under the contract will be excused or suspended temporarily.[1] The expression force majeure is borne out from the “Code Napoleon” and has a wider meaning than “act of God”, though it may be unclear if this includes all “causes you cannot prevent”.[2]  Section 56 of the Act, allows for temporary discharge of obligations on grounds of impossibility in the instance of any untoward event or change in circumstance that is totally dehors the “very foundation”[3] upon which the parties entered their agreement. The sine qua non for invoking such a clause is (a) an existence of a valid contract between the parties; (b) the contract is yet to be performed (during the period of temporary struggle for which force majeure is sought for); (c) the contract after it is entered into becomes impossible to perform due to fact or law.

 

The underlying principle with respect to a Force majeure event is that, upon the occurrence of an event or circumstance that is not reasonably within the control of a party and is unavoidable, and which prevents or delays that party from performing some or all of its contractual obligations, that party will be relieved from its contractual obligations/ liability. As a result of invocation of Force majeure, the performance of the contract is not merely suspended but the affected party is expected to continue to perform its obligations to the extent not prevented by an event of force majeure. The party claiming force majeure is under an obligation to prove that it has taken all reasonable endeavors to avoid or mitigate the force majeure event and its effects. This being subjective standard, differs from case to case and therefore needs to be interpreted accordingly. In some contracts, if the period of force majeure is prolonged, parties may be permitted to terminate the contract depending on the practical difficulties being faced by them.

 

There have been occasions where the parties to the contract have pleaded different situations/ events to be included in ‘Force Majeure’. For instance, in 2016 when the Government of India, without any prior notice declared demonetisation of certain Indian Currency notes, this had a stressful effect on the various sectors including construction and the realty sector which majorly involved cash transactions. Consequently, the parties to contract raised dispute claiming cost/ termination of contract treating demonetization as a force majeure event. The Central Electricity Regulation Committee (CERC) recently held “demonetization” as a valid threshold to invoke the force majeure clause(‘FMC’)  that was entered upon by the party. However, the same goes well against the decision of the Hon’ble Supreme Court in Energy Watchdog v. CERC, where the scope of FMC was construed to be strictly narrow.[4] Therein, a new dimension to the interpretation of force majeure event and its widening scope was recognized in India.[5]

 

PANDEMIC & FORCE MAJEURE

The global impact of the outbreak has caused an alarming case of extreme disruptions of commercial activities and day-to-day business transactions. It is imperative to record that, there has been a consequential lockdown and suspension orders by various governments vide specific ordinances and general government orders. Therefore, it is completely fair to state that the consequences of the pandemic have the effect of a rigid interference.

 

The scope and extend of a FMC in the event of such a pandemic has to be assessed on the “definition of force majeure” under the parties’ agreement, as well as on the jurisprudence pertaining to the terms ‘extraordinary events’ and ‘circumstances beyond the reasonable control and expectation of the parties’.  However, it is also essential that even if the FMC within the agreement is inclusive of the terms epidemics and pandemics, the party affected has to generally prove its interference with the performance of the contractual portion.

 

In the present scenario arising due to the COVID -19 pandemic, the Government of India has also taken steps to safeguard the interest of parties in commercial contracts. The Ministry of Finance, Government of India vide an office memorandum dated 19.02.2020 recently clarified with respect to ‘Manual for Procurement of Goods, 2017’, and declared that in the event of any disruption in the supply chains due to spread of corona virus, such situation will be covered in the FMC in the contract. It is further clarified that such a situation should be considered as a natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure.[6] The said Manual is issued by the Ministry of Finance for various Ministries/Departments which have been delegated powers to make their own arrangements for procurement of goods under the Delegation of Financial Power Rules, which have to be exercised in conformity with the ‘Procurement Guidelines’.

 

Recently on FMC, the Ministry of Finance vide notification dated 13.05.2020  clarified that parties to the contract can invoke FMC for all construction/works contracts, goods and services contracts and PPP contracts with Government Agencies and in such event, the date for completion of contractual obligations which had to be completed on or after 20.02.2020 shall stand extended for a period not less than three months and not more than six months without imposition of any cost or penalty on the contractor/concessionaire. The Concession period in PPP – contracts ending on or after 20.02.2020 shall also be extended by not less than three and not more than six months. The period of extension, i.e. from 3-6 months, may be decided from case to case based on the specific circumstances and the period for which performance was affected by the force majeure events. The invocation of FMC would be valid only in a situation where the parties to the contract were not in default of the contractual obligations as on 19.02.2020. It is categorically stated that invocation of FMC does not absolve all non-performances of a party to the contract, but only in respect of such non-performance which are attributable to a lockdown situation or  restrictions imposed under any Act or executive order of the Government/s on account of COVID-19 pandemic.[7]

 

Similar initiative was taken by the Ministry of New & Renewable Energy with respect to ‘solar project developers’. The Ministry vide an Office memorandum dated 20.03.2020, recently  declared that whoever miss contractual obligation deadlines on account of COVID -19, can invoke the  FMC to avoid any financial penalties.[8]

 

Such initiative by the Government of India is a big reprise in such tough times. At the same time, even in the presence of such evidenced events, the question of force majeure and its application to a particular contract would have to be looked individually all over again at the stage of litigation or arbitration. There must be ample proof to show that there were no alternative means or method for performing the party’s obligations under the contract.

 

SAFEGUARDS IN COMMERCIAL CONTRACTS

 

In the light of this current pandemic, few safeguards to be resorted in commercial contracts are:-

  1. Re-assess and review the contract in which the FMC exists and analyze the relevant factors and incidents mentioned to initiate the ‘rule to excuse’.
  2. Ensure ‘all’ or ‘any’ notification procedure as prescribed in the conditions of the contract. Comply strictly with the conventional ‘notice’ formalities.
  3. Mutually (along with the other parties to the contract) analyze the impact of the outbreak of COVID-19 on the contract and its performance.
  4. Initiate a chance to perform the contract in a possible alternative way; a failure will safely rule out a future ‘defense’ with respect to an alternative method of performance.
  5. Collect evidences to accord non-performance of the obligation to the sole force majeure event, in the current scenario, the pandemic.
  6. Keep a strict record of the various notifications and orders by government and administrative bodies. The same may be evidenced during the litigation/arbitration stage.

 

All records with respect to unavoidable additional expenditure incurred must be maintained.

 

[1] Pollock and Mulla, Indian Contract and Specific Relief Acts; Dhanrajamal Gobindram v. Shamji Kalidas & Co., AIR 1961 SC 1285.

[2] Elzekiel Abraham Gubray Vs Ramjusroy Golabroy, AIR 1921 Cal 305:33 CLJ 151:63 IC 267 (DB).  

[3] Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310.

[4]  Energy Watchdog & Ors. v. Central Electricity Regulatory Commission & Ors., ((2017) 14 SCC 80).

[5] M/s. Krishna Wind Farms v. Solar Energy Corporation of India Ltd. Order in Petition No. 27/MP/2018.

 

[6] Office Memorandum No. F.18/4/2020-PPD, Ministry of Finance dated 19.02.2020.

[7] Office Memorandum No. F. 18/4/2020-PPD, Ministry of Finance dated 13.05.2020.

[8] No. 283/18/2020-GRID SOLAR, Ministry of New & Renewable Energy (MNRE).

 

 

DELHI HIGH COURT TAKES SUO MOTO COGNIZANCE AND DIRECTS INTERIM ORDERS TO CONTINUE TILL 15.06.2020

DELHI HIGH COURT TAKES SUO MOTO COGNIZANCE AND DIRECTS INTERIM ORDERS TO CONTINUE TILL 15.06.2020

Madhu Sweta & Shivangi Khanna

Updated on 19/05/2020

 

Due to the increase in COVID-19 cases in India, the Indian Government announced a total lockdown of 21 days with effect from 25.03.2020. The Hon’ble Delhi High Court observed that due to the lock down, advocates and litigants have not been in a position to appear in the matters, including those where stay/bails/paroles have been granted. Considering the gravity of the situation and hardship which may be caused to the litigants, the Hon’ble Delhi High Court took suo-moto cognizance of the issue on 25.03.2020 and passed certain directions extending interim orders till 15.05.2020. In continuation of the said order the Hon’ble High Court held that all the interim orders passed by the High court and subordinate courts to continue till 15.06.2020 in view of lockdown and limited functioning of court. The High Court clarified that all the matters pending before it and courts subordinate to it, wherein interim orders issued were subsisting as on 15.05.2020 and expired or about to expire thereafter, the same shall stand automatically extended till 15.06.2020 or until further orders, except where any orders to the contrary have been passed by the Hon’ble Supreme Court of India in any particular matter, during the intervening period. The said order ends the dilemma amongst the litigants and the legal fraternity. The Court further clarified that in case any hardship is caused due the extension of interim order, of an extreme nature to a party to such proceeding, they are at liberty to seek appropriate relief.

THE FATE OF AUTOMATIC STAY ON SECTION 34 PETITIONS FILED POST AMENDMENT

THE FATE OF AUTOMATIC STAY ON SECTION 34 PETITIONS FILED POST AMENDMENT

Madhu Sweta


22/08/2017 [socialsharesinghania]

INTRODUCTION

The Division bench[1] of the Delhi High Court (“HC”) in a batch of Petitions titled, “Ardee Infrastructure Pvt. Ltd. v. Ms. Anuradha Bhatia & Ardee Infrastructure Pvt. Ltd. v. Yashpal & Sons”[2] augments more ambiguity to the already existing controversy with regard to the applicability of the amended provisions viz. Section 34 and Section 36 of the Arbitration and Conciliation (Amendment) Act, 2015 (“The Amendment Act”).

The HC observed that all petitions filed under Section 34 of the Arbitration and Conciliation Act, 1996 (“The Act”) prior to the amendment i.e. 23.10.2015, would be considered under the unamended provisions of the 1996 Act and consequently, the contesting party would be entitled to automatic stay of enforcement of the award till the disposal of the said petitions.

The Bench keeping Section 26 of The Amendment Act as the axis of the dispute, not only discusses the applicability of the amended Section 34 and Section 36(2), 36(3) of The Amendment Act, but also hinges out the much awaited interpretation of Section 26 of The Amendment Act in regard to arbitral and court proceedings. It thus pivots a clear interpretation of the amended section, thereby adding to the spectrum of conflicting decisions.

FACTUAL BACKGROUND:

An Arbitration notice was sent on 07.06.2011 by the Respondents. The statement of claim was filed in February 2013 and an interim award was made on 10.07.2014. The final award was made by the Arbitral tribunal on 13.10.2015. The batch petitions challenging the award under Section 34 was however filed on 04.01.2016.

On 31.05.2016, learned Single Judge of the HC passed an order directing the Appellants to deposit Rs. 2.70 crores without prejudice to the rights and contentions of the parties. It was further directed that failure to make such a deposit would result in dismissal of objections filed by the Appellant under Section 34 of The Act whereas successful deposit of the said amount would amount to issuance of notice to the Respondents regarding the objections filed by the Appellants under Section 34.

The Appellants contended that their petitions under Section 34 of The Act shall be governed by the unamended provisions and they shall thus have the right to an automatic stay on the award upon filing the said petitions. Whereas the Respondents argued that the amended provisions shall apply thereby denying an automatic stay to the Appellants and requiring them to deposit Rs.2.70 crores as ordered by the Court.

ARGUMENTS BY THE APPELLANT:

  1. The Act gives a vested right in the form of an automatic stay on the enforcement of an award to a party filing an objection under Section 34. However, The Amendment Act, by virtue of Section 36(2) and Section 36(3) takes away such right.
  2. Section 26 of The Amendment Act[3] does not express any intention of retrospective operation; and therefore the amended provisions of Sections 34 and 36 would have a prospective operation and would not be applicable to the present case. In such scenario, Section 6 of the General Clauses Act, 1897[4] would be applicable which states that the repeal of an enactment would not affect any right accrued or acquired under the previous enactment, unless a different intention appears in the repealing act.

ARGUMENTS BY THE RESPONDENTS:

  1. The legislature in the first half of Section 26 of The Amendment Act has deliberately used the phrase “to arbitral proceedings” instead of “in relation to arbitral proceedings” to limit its scope so that it cannot be expanded to include post arbitration proceedings (including court proceedings).
  2. Section 6 of the General Clauses Act ought not to be resorted because of the use of the restrictive phrase in Section 26 of The Amendment Act. Section 6 does not apply to the present case as the legislature deliberately kept “post-arbitral proceedings” outside the application of the first part of Section 26 of The Amendment Act.
  3. Hence, automatic stay can only be viewed as an interim relief and not a right and such relief is not completely taken away but made subject to an order of the Court upon application.

ISSUES:

Whether there is/was any difference in the expressions “to the arbitral proceedings” and “in relation to arbitral proceedings” appearing in the two parts of Section 26 of The Amendment Act?

JUDGMENT:

The HC observed that if a narrow view of the expression “to the arbitral proceedings” is to be taken, then Section 26 of the Amendment Act is silent on those categories of cases where the arbitral proceedings were commenced prior to 23.10.2015 and where the award was made prior to 23.10.2015, but where either a petition under Section 34 was under contemplation or was already pending on 23.10.2015.

If the applicability of the amendments to both parts of Section 26 is treated differently, it would lead to serious inconsistencies especially in the interplay between Section 9 and 17, where the court proceedings (in relation to arbitral proceedings which commenced before the amendment) would be under Section 9 of the new Amendment Act and the arbitral proceedings (which commenced before the Amendment) would have to be under the old regime (including Section 17).

The Court further classified all arbitral proceedings which commenced in accordance with Section 21, prior to 23.10.2015 into three categories:

  1. where the arbitral proceedings had commenced prior to 23.10.2015 and were pending before an arbitral tribunal on 23.10.2015;
  2. where the arbitral proceedings had commenced prior to 23.10.2015 and the award was also made prior to 23.10.2015, but the petition under Section 34 seeking the setting aside of the award was made after 23.10.2015;
  3. Where the arbitral proceedings had commenced prior to 23.10.2015 and not only the award was made prior to 23.10.2015, but the petition under Section 34 had also been instituted before court prior to 23.10.2015.

With respect to these categories the HC opined that if the first part of Section 26 would only deal with the first category of cases i.e. before arbitral tribunals and not to court proceedings, then nothing in Section 26 of the Amending Act shall pertain to the second or third category of cases.

Thus, if the expression ‘to arbitral proceedings’ used in the first limb of Section 26 is given the same expansive meaning as the expression ‘in relation to arbitration proceedings’ as appearing in the second limb of Section 26, then, the matter becomes very simple and does not result in any anomaly. It would certainly not be the intention of the legislature to have the arbitral tribunal and the courts apply different standard in relation to the same proceedings.

HC while relying on the observations of the Supreme Court in Thyssen Stahlunion Gmbh v. Steel Authority of India Limited[5] held with regard to automatic stay that all aspects of enforceability of an award entail an accrued right both; in the person in whose favour the award is made and against whom the award is pronounced and henceforward, an automatic stay on the award upon filing of petition under Section 34 of The Act was an accrued right in favour of the Appellants. Thus, all the arbitral proceedings (the entire gamut, including the court proceedings in relation to proceedings before the arbitral tribunal), which commenced in accordance with the provisions of Section 21 of the said Act prior to 23.10.2015, would be governed, subject to an agreement between the parties to the contrary, by the unamended provisions and, all those in terms of the second part of Section 26, which commenced on or after 23.10.2015 would be governed by the amended provisions.

Analysis:

Although this decision comes as a refreshing respite for some, it adds to the prevailing confusion infused by the contradictory decisions of various High Courts with regard to the application of the provisions of Section 26 & Section 36 of The Amendment Act, wherein it was opined that ‘arbitral proceedings’ do not include ‘court proceedings’ and thus, the amendments would apply to court proceedings but not to arbitral proceedings. These decisions are discussed as follows:

  1. The Division Bench of Kolkata High Court in Sri Tufan Chatterjee v. Sri Rangan Dhar[6], held that even the pending court proceedings relating to arbitration, which were pending as on date when the amendments were notified, must be governed by The Amendment Act and not the unamended one.
  2. The Madras High Court in the matter of New Tirupur Area Development Corporation Ltd. v. M/s Hindustan Construction Co. Ltd[7], decided against the use of provisions contained in The Amendment Act to court proceedings, for such arbitrations which commenced prior to amendments being notified.
  3. Bombay High Court, adding to the confusion, held in the matters of Rendezvous Sports World v. BCCI[8] that amendments brought to Section 36 of The Act are procedural in nature and further balances the rights of both parties and ordered the BCCI to file an application seeking stay against enforcement of arbitral awards under challenge. This decision is pending adjudication before the Supreme Court of India now.
  4. Although, The Delhi High Court had previously also taken a view contradictory to that of the Bombay High Court and in consonance with the current judgment in the case of Ministry of Defence, Government of India v. Cenrex SP. Z.O.O. & Ors[9], The Court while relying upon Section 6 of the General Clauses Act, came to a conclusion that an Act (or an Ordinance for that matter) cannot have retrospective operation unless so provided in the Act and any vested right in such Act/ provision cannot be deemed to be taken away by means of the amending or the repealing Act.
  5. Amidst the opposing views of different High Courts across the realm, if the ratio of the present case in hand is accepted and followed, then the mere intention and purpose behind the amendment of Section 36 of The Act is lost. Although the present decision may seem plausible enough, but the conflict between these wide-ranging observations and judgments across the nation has to be settled by the Supreme Court at the earliest, giving such polemic it’s logical and peaceful conclusion.

(The author would like to thank Kanika Tandon, Associate of the firm for the valuable assistance in researching for this article.)

[1] Comprising of Hon’ble Mr. Justice BD Ahmed and Hon’ble Mr. Justice Ashutosh Kumar[2] FAO(OS) no. 221/2016 and FAO(OS) No.222/2016, judgment delivered on 06.01.2017[3]Section 26, Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of Section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.[4] Section 6, Effect of repeal. Where this Act, or any 1 [Central Act] or Regulation made after the commencement of this Act, repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not?

(a) revive anything not in force or existing at the time at which the repeal takes effect; or

(b) affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder; or

(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed; or

(d) affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any enactment so repealed; or

(e) Affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid, and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such penalty, forfeiture or punishment may be imposed as if the repealing Act or Regulation had not been passed.

[5] 1999 (9) SCC 334[6] AIR (2016) Cal 213[7] Application No. 7674 of 2015 in O.P. No. 931 of 2015[8] 2016 SCC Online Bom 255.[9] 2016 (1) Arb LR

CONTRIBUTIONS MADE BY EMPLOYER TOWARD SOCIAL SECURITY FUNDS ARE NOT A TAXABLE PERQUISITE

CONTRIBUTIONS MADE BY EMPLOYER TOWARD SOCIAL SECURITY FUNDS ARE NOT A TAXABLE PERQUISITE

Madhu Sweta


22/08/2017 [socialsharesinghania]

The Hon’ble High Court of Delhi recently decided the issue of taxability of social security, pension and medical contributions made by the employer company on behalf of the employee. The issue was decided disposing of a series of connected appeals on the same issue vide a common judgment in the case of Yoshio Kubo Vs Commissioner of Income Tax (ITA 441/2003).

ISSUE

Whether contributions made by a foreign employer towards foreign social security schemes, on behalf of an employee seconded to work in India, are in the nature of perquisites and liable to be included in taxable salary under Section 17(1) of the Income Tax Act, 1961?

COMMON BACKGROUND OF FACTS:

The employees (assessees) of foreign employers were seconded to work in Indian subsidiaries or in the Indian operations of the foreign company. The employers made contributions towards the social security benefits of the employees in accordance with the laws and regulations of their respective countries. The Revenue contended that all such contributions were for the benefit of the employees and vested in them. What is determinative is the purpose or objective of the expenditure. Hence, it is taxable income of the employees under Section 17(1) by classifying them as perquisites. The employees on the other hand, contended that the contributions do not ‘vest’ in them at the time of payment and that the monetary benefits accrue only at the time the payments are withdrawn hence, the contributions are not taxable.

The Assessing Officer has treated the contribution made by the Employers as a ‘perquisite’ and thereby, adding it to the salary as taxable. This was challenged before the Income Tax Appellate Tribunal (ITAT) who allowed the employees’ appeals and held that the social security and pension fund contributions are not taxable. Hence, the Revenue had come in appeal before the Delhi High Court.

ARGUMENTS ADVANCED BY THE REVENUE

The Revenue contended that the contributions made are in the nature of perquisites and are to be included in taxable salary under Section 17(1) of the Income Tax Act, 1961. This is evident from the definition of the term ‘perquisite’ to mean any payment made for the benefit of the employee. Thus, the contributions vest in the employees irrespective of the time when it was to be paid.

The Income Tax Act, 1961 distinctly differentiates between approved and unapproved funds. Section 17(2)(v) of the Act exempts certain specific funds from being included as perquisites. Hence, contributions to the remaining unapproved funds, “….to effect, an assurance on the life of the employees or to effect a contract for an annuity” are perquisites, and forms part of taxable salary.

The Revenue submitted that the ITAT’s reliance on the decision of Hon’ble Supreme Court of India in Commissioner of Income Tax vs. L.W. Russel AIR 1965 AIR SC 49 (hereinafter referred to as ‘L.W.Russel’) was misplaced. The judgment in the case of L.W.Russel cannot be considered as binding in view of the change in the wordings of the 1961 statute and that the test adopted in L.W.Russel of ‘whether the payment ‘vests’ in the employee’ cannot be given undue importance.

Since, there is no uncertainty of the right of the employees to enjoy the ultimate benefits, the contributions made shall vest in them immediately, even though the occasion or event for their enjoyment may have been postponed.

ARGUMENTS ADVANCED BY THE ASSESSEES

The employees submitted that the social security payments were involuntary payments (made as per law or the policy of the foreign company) and did not confer any benefit in praesenti to the employees. It was emphasized that the benefits arising from the social security contributions made by the employers actually accrue when the funds are withdrawn or disbursed at the time of retirement and no monetary or indirect benefit to the employees was achieved in the financial year under consideration. Despite their objection, the Revenue had failed to establish from the record or through supporting material that any benefit or advantage, either pecuniary or capable of expression in monetary terms accrued during the year in question, and thus the contributions made were not vested in the employees.

It was submitted that even if the contribution is made to an unapproved fund, the employer’s contribution is taxable in the hands of the employee as profit in lieu of salary under section 17(3)(ii) of the Act only when the same is either due to or received by the assesses.

It was further submitted that the findings of the Supreme Court in L.W.Russel are squarely applicable to the present appeals as in L.W.Russel also, the issue was regarding taxability of the employer’s contributions towards premium payable by the employee. It was stated that the Revenue’s contention that Sections 15 & 17 of the Income Tax Act, 1961 are differently worded from Section 7(1) of the old Income Tax Act, 1922 have no merit. Both Section 17 of the 1961 Act and Section 7 of the old Act specify that payments to unrecognized funds are taxable when they are due to the assessees and hence, the judgment in the case of L.W.Russel, which has been followed and upheld by various Courts, is binding even in context of the 1961 Act.

CONCLUSION:

The Hon’ble High Court of Delhi negated the argument of the Revenue that the contribution is vested in the assessees at the time of making the payment. In the cases under appeal, the amounts standing to the credit of the pension fund account or social security would remain invested till the assessees withdraws the same or is entitled to receive the same. In this context, the Court considered the finding of the Apex Court in L.W. Russel where it was held that ‘One cannot be said to allow a perquisite to an employee if the employee has no right to the same’. The Hon’ble High Court held that the judgment of L.W.Russel is applicable to the facts of the present case.

The Court also relied upon the findings in CIT vs Lala Shri Dhar (1972) 84 NR 192 (Del) and CIT vs Mehar Singh Sampuran Singh Chawla (1973) 90 ITR 219(Del). In the aforesaid judgments, the High Court held that the contributions made by the employer towards a fund established for the welfare of the employees would not be deemed to be a perquisite in the hands of the employees concerned as they do not acquire a vested right in the sum contributed by the employer.

The Hon’ble Delhi High Court considered the construction of Sections 17(2)(v) of the 1961 Act and Section 7(1) of the Indian Income Tax Act, 1922 and held that there is no material change in the new Act as contended by the Revenue. It was observed that Section 7(1) of the old Act excluded from the definition of ‘perquisite’ payments into schemes described under Schedules IXA and IXB. Similarly, Section 17(2)(v) also excludes payments to ‘a recognized provident fund or in an approved superannuation fund or a Deposit-linked Insurance Fund established under section 3G of the Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948 (46 of 1948), or, as the case may be, section 6C of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952)’ from the definition of ‘perquisite’.

Therefore, the Court held that the amounts paid by employers to pension, or social security funds, or for medical benefits, are not perquisites as defined under Section 17(1)(v) and therefore, are not taxable in the hands of the employee

BLACKLISTING OF CONTRACTORS BY THE GOVERNMENT AND PUBLIC SECTOR UNDERTAKINGS

BLACKLISTING OF CONTRACTORS BY THE GOVERNMENT AND PUBLIC SECTOR UNDERTAKINGS

Madhu Sweta


22/08/2017 [socialsharesinghania]

A contractual relationship necessarily implies consensus of two minds, and a private citizen is free to contract, with any person of his choice. This right by definition is inherent in every person capable of entering into a contract and where a person has the right to make a contract, he also has a concomitant right not to make a contract. The right to refuse to contract does not vest with the Government, its instrumentalities, or Public Sector Undertakings in the same manner as it vests with a common Undertakings citizen. The Government’s right to contract flows from Article 298 of the Constitution. Hence, the parallel right not to contract also rests with the Government who can choose to blacklist any particular person or member of the public. However, this decision has to be taken by the Government reasonably and in accordance with the principles of natural justice. The traditional view that the executive is not answerable in the matter of exercising of prerogative power has long been discarded.

The development of law on this issue began with the full bench decision in the case of V. Punnen Thomas vs State of Kerala . The Petitioner claimed that the decision of deleting the name of the appellant from the list of qualified contractors, in effect, amounts to blacklisting which has serious civil consequences and hence, merits an opportunity of being heard. The majority opinion of the Kerala High Court held that the term ‘civil consequences’ does not imply merely consequences which the person concerned finds unfavourable, but infact means that there must be the possibility of an invasion of some civil rights of that person. It was further held that the principle of audi alteram partem could not be applied in such cases as it could lead to hampering of the administration by widening the scope for judicial interference. However, Justice Mathew in the dissenting opinion held that an act of debarring a public entity or member, for a set number of years, without any notice or opportunity to be heard is against all notions of fairness in a democratic government and cannot be sustained. Interestingly, the dissenting view of Justice Mathew is now the law as the majority view stands overruled by the Supreme Court in the Eurasian case.

In the landmark judgment of Eurasian Equipment & Chemicals Ltd. vs State of West Bengal , the Supreme Court laid down the law for notice to be given before blacklisting. The Petitioner Company who was engaged in the purchase and export of Cinchona had alleged that their tenders were being rejected by the State Government, despite being the highest in most cases. It was contended that this act of the State Government was discriminatory and against the principles of fairness. The State Government submitted that due to charges of malpractice and misconduct, the State Government had resolved not to deal with the Petitioner-company till the charges were cleared. The State Government further submitted that the rights granted under Articles 14, 19 and 21 of the Constitution cannot be used to compel the Government to negotiate or enter into a contract and the Government was free to contract with companies in whom it had “trust for integrity”. The Hon’ble Supreme Court held that the blacklisting order involves serious civil consequences, as in effect it casts a slur on the reputation of the Company. The Court held that the Government being a Government of laws and not of men is bound to act in conformity with the principles of natural justice when interacting with members of the public. An order of blacklisting creates a disability for the concerned person. The fact that a disability is created by the order of blacklisting indicates that the relevant authority is to have an objective satisfaction. Fundamentals of fair play require that the person concerned should be given an opportunity to represent his case before he is put on the blacklist.

Again, in the case of Raghunath Thakur vs State of Bihar , where the State Government had blacklisted the Petitioner without any notice or an opportunity to be heard, it was contended by the State that there was no specific requirement in any rule that a notice had to be given to the Petitioner before a blacklisting order. The Supreme Court held that even if the rules do not specify so, it is an implied principle of law that an order having civil consequences should be passed only after following the principles of natural justice. The blacklisting order in respect of business ventures has serious implications upon the future business of the concerned person and merits an opportunity of being heard and making representations against the order.

The law stands settled that an order of blacklisting attracts the principle of audi alteram partem, but does this duty of the State include any other facet or aspect of the principles of natural justice. In Grosons Phamaceuticals (P) Ltd. vs the State of Uttar Pradesh, the company had been blacklisted by the State Government after issuing a show cause notice. The company submitted that the principles of natural justice require that the show cause notice ought to have been supplied with all materials which formed the basis for issuing show cause notice. The Supreme Court held that it is true that an order blacklisting an approved contractor results in civil consequences and in such a situation in the absence of statutory rules, the only requirement of law while passing such an order was to observe the principle of audi alteram partem which is one of the facets of the principles of natural justice. The contention that it was incumbent upon the respondent to have supplied the material on the basis of which the charges against the appellant were based, was not the requirement of the principle of audi alteram partem. There was sufficient requirement of law that an opportunity of ‘show-cause’ was given to the appellant before it was blacklisted.

In all the cases cited above, the decision to blacklist was taken due to charges of fraudulent or corrupt practices by the affected parties. However, recently the Supreme Court has ruled that an order of blacklisting is sustainable even if it is for dereliction of legal obligation by the concerned person or company. In the case of Patel Engineering Ltd. vs Union of India, the Petitioner-contractor was declared the highest bidder for a development development operation and maintenance project of National Highways Authority of India (NHAI). NHAI called upon the Petitioner to confirm its acceptance who declined stating its inability to confirm the acceptance as, on a subsequent look, the bid was found to be commercially unviable. NHAI sent a show cause notice and after receiving the reply from the Petitioner, blacklisted the company from participating and bidding for future projects for one year. The Supreme Court held that the absence of a contract provision providing for blacklisting is not determinative of NHAI’s authority to blacklist a bidder. The power of NHAI to enter into a contract or not to enter into a contract flows from Section 3 of the National Highways Authority Act which is similar to Article 298 of the Constitution. NHAI being a statutory corporation is bound by the constitutional limitations which binds the State in dealing with members of the public. The Court held that the Petitioner had been given an opportunity of being heard by way of a show cause notice. There is no requirement for the State to give a personal or oral hearing before taking a decision of blacklisting and hence no violation of any principles of natural justice had occurred in the matter to warrant interference by the Court.

Recently, the Calcutta High Court has clarified on the validity of a show cause notice or blacklisting order in cases where an arbitration agreement exists between the parties. In the case of Haldia Bulk Terminal Private limited vs. Board of Trustees for the Port of Kolkata, the Petitioner challenged the show cause notice for blacklisting issued by the Respondent. The Petitioner’s stand was that the show cause notice is covered by the arbitration agreement between them. It would be unfair for the Petitioner to be blacklisted before the arbitral reference is concluded. The Respondent contended that an order to blacklist the Petitioner will only affect the future contracts and is de hors the contract and the arbitration agreement. The High Court held that the mere existence of an arbitration agreement does not preclude the Petitioner from blacklisting the Respondent. The existence of recourse to arbitration or even recourse to civil action cannot prevent an employer from blacklisting the contractor on the basis of the employer’s perception of the contractor’s performance qua the contract. However, the show cause notice for blacklisting and subsequently blacklisting can be challenged on the grounds of arbitrariness and mala fides.

The authority of the State to blacklist a person is a necessary concomitant to the executive power of the State to carry on the trade or the business and making of contracts for any purpose, etc. There need not be any statutory grant of such power. The only legal limitation upon the exercise of such an authority is that the State is to act fairly and rationally without in any way being arbitrary.