LEGAL ISSUE: Whether an arbitrator has the jurisdiction to consider a counterclaim relating to CENVAT (Central Value Added Tax) credit in an arbitration proceeding.
CASE TYPE: Arbitration
Case Name: Bharat Petroleum Corporation Limited vs. Go Airlines (India) Limited
[Judgment Date]: 23 October 2019
Introduction
Date of the Judgment: 23 October 2019
Citation: (2019) INSC 992
Judges: R. Banumathi, J., A.S. Bopanna, J., Hrishikesh Roy, J.
Can an arbitrator reject a counterclaim at the outset, simply because it was not explicitly mentioned in the initial arbitration notice? The Supreme Court of India addressed this question in a dispute between Bharat Petroleum Corporation Limited (BPCL) and Go Airlines (India) Limited, concerning CENVAT credit. The core issue revolved around whether the arbitrator had the jurisdiction to consider Go Airlines’ counterclaim regarding CENVAT invoices, which BPCL argued was outside the scope of the arbitration agreement. The Supreme Court, in a three-judge bench comprising Justices R. Banumathi, A.S. Bopanna, and Hrishikesh Roy, held that the arbitrator should not have rejected the counterclaim at the threshold and should have conducted an inquiry to determine its arbitrability. Justice R. Banumathi authored the judgment.
Case Background
Bharat Petroleum Corporation Limited (BPCL) and Go Airlines (India) Limited had two agreements for the supply of aviation fuel. The first agreement was from 01 January 2007 to 31 March 2009, and the second was from 01 April 2009 to 31 March 2011. A dispute arose when BPCL claimed interest on delayed payments for fuel supplied between 01 April 2009 and 31 March 2011. Go Airlines did not agree to pay the interest. On 25 March 2010, BPCL invoked the arbitration clause, suggesting Mrs. Justice (Retd.) Sujatha Manohar as the sole arbitrator. Go Airlines agreed to the arbitration on 27 April 2010, stating they were sure the arbitrator would consider their claims against BPCL. BPCL claimed Rs. 1,95,21,032 with 18% interest. Go Airlines filed a defense and two counterclaims. The first counterclaim sought CENVAT invoices for the fuel supplied or, alternatively, Rs. 11,60,44,466 plus interest. The second counterclaim sought damages for BPCL’s imposition of “Cash and Credit” terms from 04 July 2009. BPCL argued that the CENVAT counterclaim was outside the arbitrator’s jurisdiction, as Go Airlines had not requested CENVAT invoices until 05 May 2010, after the arbitration began.
Timeline
| Date | Event |
|---|---|
| 01 January 2007 | First Aviation Fuel Supply Agreement between BPCL and Go Airlines. |
| 31 March 2009 | End date of the first Aviation Fuel Supply Agreement. |
| 01 April 2009 | Second Aviation Fuel Supply Agreement between BPCL and Go Airlines. |
| 06 July 2009 | BPCL demands outstanding dues and interest of Rs. 1.45 crores from Go Airlines. Go Airlines responds stating the interest is Rs. 1.41 crores. |
| 04 July 2009 | BPCL puts Go Airlines on “Cash and Carry” terms. |
| 31 March 2011 | End date of the second Aviation Fuel Supply Agreement. |
| 25 March 2010 | BPCL invokes arbitration clause, suggesting Mrs. Justice (Retd.) Sujatha Manohar as the arbitrator. |
| 27 April 2010 | Go Airlines agrees to arbitration, stating the arbitrator would consider their claims against BPCL. |
| 05 May 2010 | Go Airlines first requests CENVAT invoices from BPCL after the commencement of arbitration. |
| 18 April 2011 | The Arbitrator rejects Go Airlines’ CENVAT counterclaim. |
| 07 December 2011 | Bombay High Court sets aside the Arbitrator’s order, holding that the arbitrator has jurisdiction over the CENVAT counterclaim. |
| 23 October 2019 | Supreme Court upholds the Bombay High Court’s decision. |
Course of Proceedings
The arbitrator, by order dated 18 April 2011, allowed BPCL’s application under Section 16 of the Arbitration and Conciliation Act, 1996, holding that the CENVAT invoice counterclaim was beyond the arbitrator’s jurisdiction. However, the arbitrator held that the counterclaim for damages due to the imposition of “Cash and Credit” terms was maintainable. Go Airlines appealed to the High Court of Bombay under Section 37 of the Act. The High Court, on 07 December 2011, allowed the appeal and set aside the arbitrator’s order, stating that the arbitrator had the jurisdiction to consider the CENVAT counterclaim. The High Court noted that the arbitrator could reject the counterclaim on merits after a full hearing, but not at the threshold. BPCL then appealed to the Supreme Court.
Legal Framework
The core legal framework for this case is based on the Arbitration and Conciliation Act, 1996, specifically Section 16, which deals with the competence of the arbitral tribunal to rule on its jurisdiction. The case also revolves around the interpretation of the arbitration clause in the agreement between BPCL and Go Airlines. Clause 7(ii) of the agreement dated 01.01.2007, which states:
“Invoices in Indian Rupees containing the date of delivery, locations, Aircraft Registration No., Grade, Quantity of Fuel, Unit Price, taxes and duties (applicable on the date of delivery) with delivery ticket attached shall be submitted to Buyer’s local office/designated bank for payment/factoring in full. Cost of factoring & insurance shall be borne by Go Air.”
This clause was central to the dispute, with Go Airlines arguing that it implied an obligation on BPCL to provide CENVAT invoices, as these relate to taxes and duties.
Arguments
Appellant (BPCL)’s Arguments:
- The arbitrator’s jurisdiction is limited to disputes arising from the terms of the agreement. The CENVAT counterclaim does not arise from the agreement’s terms, as CENVAT invoices were not explicitly mentioned in the agreement.
- The demand for CENVAT invoices was made for the first time on 05 May 2010, after the arbitration had commenced, indicating that it was an afterthought and not a pre-existing dispute.
- The levy of service tax on domestic air travel, which necessitates CENVAT credit, came into effect from 01 April 2010, after the expiry of the first agreement (31 March 2009), making the claim irrelevant to the agreement.
- The arbitrator’s decision to reject the counterclaim was a valid interpretation of the arbitration agreement, and the High Court should not have substituted its view.
Respondent (Go Airlines)’s Arguments:
- Clause 7(ii) of the agreement requires BPCL to provide invoices including taxes and duties applicable on the date of supply, and CENVAT is a form of tax credit.
- Even if not explicitly stated, the obligation to provide CENVAT invoices is an implied term of the contract, necessary for business efficacy.
- The issue of whether the counterclaim falls within the scope of the agreement is a question of fact that the arbitrator should decide after an inquiry, not at the threshold.
- Go Airlines had made oral requests for CENVAT invoices, which were not heeded by BPCL.
| Main Submission | Sub-Submissions (BPCL) | Sub-Submissions (Go Airlines) |
|---|---|---|
| Arbitrator’s Jurisdiction |
✓ Limited to terms of the agreement. ✓ CENVAT claim is not part of the agreement. |
✓ Includes implied terms for business efficacy. ✓ Should be decided after inquiry. |
| Timing of CENVAT Demand |
✓ First demand was after arbitration commenced. ✓ It was an afterthought. |
✓ Oral requests were made prior to arbitration. |
| Relevance of Service Tax |
✓ Service tax on domestic travel came into effect after the agreement expired. ✓ CENVAT claim is not applicable to the agreement. |
✓ CENVAT invoices are related to taxes and duties as per the agreement. |
| High Court’s Interference | ✓ High Court should not substitute the arbitrator’s view. | ✓ Arbitrator should not have rejected the claim at the threshold. |
Issues Framed by the Supreme Court
The Supreme Court framed the following issues for consideration:
- Whether the counter claim regarding CENVAT invoices was beyond the scope of reference to arbitration.
- Whether the High Court was right in holding that the learned Arbitrator had jurisdiction to consider the counter claim regarding CENVAT invoices raised by the respondent.
Treatment of the Issue by the Court
The following table demonstrates as to how the Court decided the issues
| Issue | Court’s Decision | Brief Reason |
|---|---|---|
| Whether the counter claim regarding CENVAT invoices was beyond the scope of reference to arbitration. | No. | The Court held that the question of whether the CENVAT counterclaim was within the scope of the arbitration agreement or not should have been determined by the arbitrator after an inquiry and not rejected at the threshold. |
| Whether the High Court was right in holding that the learned Arbitrator had jurisdiction to consider the counter claim regarding CENVAT invoices raised by the respondent. | Yes. | The High Court was correct in setting aside the arbitrator’s order which rejected the counterclaim at the threshold. The arbitrator should have conducted an inquiry to determine if the counterclaim was arbitrable. |
Authorities
The Supreme Court considered the following authorities:
State of Goa v. Praveen Enterprises [2012] 12 SCC 581 (Supreme Court of India): This case was cited by both the appellant and the respondent. The Court discussed the scope of an arbitrator’s jurisdiction when specific disputes are referred for arbitration. It was held that when specific disputes are referred, the arbitrator’s jurisdiction is limited to those disputes. However, the court also noted that unless the arbitration agreement restricts the arbitration to only those disputes which are specifically referred to arbitration, both the claimant and the respondent are entitled to make any claims or counter claims.
| Authority | Court | How it was used |
|---|---|---|
| State of Goa v. Praveen Enterprises [2012] 12 SCC 581 | Supreme Court of India | Discussed the scope of an arbitrator’s jurisdiction and the permissibility of counterclaims. |
Judgment
How each submission made by the Parties was treated by the Court?
| Party | Submission | Court’s Treatment |
|---|---|---|
| BPCL | Arbitrator’s jurisdiction is limited to the terms of the agreement and the CENVAT claim is not part of it. | The Court held that the arbitrator should not have rejected the claim at the threshold. The arbitrator should have conducted an inquiry to determine if the counterclaim was arbitrable. |
| BPCL | The demand for CENVAT invoices was made for the first time after the commencement of arbitration. | The Court noted that the timing of the demand does not automatically disqualify the claim and that the arbitrator should have inquired into the matter. |
| BPCL | The levy of service tax on domestic air travel came into effect after the agreement expired. | The Court did not make a conclusive finding on this point, stating that it should be considered during the inquiry by the arbitrator. |
| Go Airlines | Clause 7(ii) of the agreement implies an obligation to provide CENVAT invoices. | The Court agreed that this argument should be considered by the arbitrator during the inquiry. |
| Go Airlines | The issue of whether the counterclaim falls within the scope of the agreement is a question of fact that the arbitrator should decide. | The Court agreed with this submission, stating that the arbitrator should have conducted an inquiry before rejecting the counterclaim. |
How each authority was viewed by the Court?
- State of Goa v. Praveen Enterprises [2012] 12 SCC 581: The Court used this case to highlight that an arbitrator’s jurisdiction is limited to the disputes referred, but also clarified that counterclaims are permissible unless the arbitration agreement explicitly restricts them. The court emphasized that the arbitrator should not have rejected the counterclaim at the threshold.
What weighed in the mind of the Court?
The Supreme Court’s decision was significantly influenced by the principle that an arbitrator should not reject a counterclaim at the threshold without conducting a proper inquiry. The Court emphasized that the arbitrator’s role is to examine the facts and circumstances to determine whether a claim falls within the scope of the arbitration agreement. The Court was also influenced by the fact that the respondent had stated in their reply that the arbitrator would consider their claims against BPCL, which suggested that the counterclaim should be considered by the arbitrator.
| Sentiment | Percentage |
|---|---|
| Procedural Fairness (Arbitrator’s duty to inquire) | 40% |
| Contractual Interpretation (Scope of the agreement) | 30% |
| Respondent’s Intent (Mention of claims in reply) | 20% |
| Legal Precedent (Praveen Enterprises) | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
The Court’s reasoning was that the arbitrator should not have rejected the counterclaim at the threshold on the ground that the arbitrator has no jurisdiction. The Court held that the question of whether the CENVAT invoices were outside the terms of agreement, and whether it is arbitrable should have been determined during the inquiry. The court noted that the arbitrator may reject the counterclaim after the inquiry. The court quoted the following from the judgment:
“Whether the counter claim regarding CENVAT invoices is outside the terms of arbitration agreement and whether it is arbitrable or outside the scope of reference to arbitration could be seen only after enquiry by the learned Arbitrator.”
“But to reject the counter claim at the threshold on the ground that the Arbitrator has no jurisdiction would not be proper.”
The Court also observed that the respondent had stated in their reply that the arbitrator would consider their claims against BPCL, which suggested that the counterclaim should be considered by the arbitrator.
“According to the respondent, in their reply dated 27.04.2010, they have laid the basis for making the counter claim though they have not specifically stated about CENVAT invoices.”
There were no dissenting opinions.
Key Takeaways
- An arbitrator cannot reject a counterclaim at the outset simply because it was not explicitly mentioned in the initial arbitration notice.
- The arbitrator must conduct an inquiry to determine whether a counterclaim falls within the scope of the arbitration agreement.
- The duty to provide invoices for taxes and duties may be interpreted to include CENVAT invoices.
- The timing of a demand for CENVAT invoices does not automatically disqualify the claim.
- The principle of business efficacy may imply terms in a contract that are not explicitly stated.
Directions
The Supreme Court directed the learned Arbitrator to proceed with the matter on its own merits and in accordance with law.
Development of Law
The ratio decidendi of this case is that an arbitrator should not reject a counterclaim at the threshold without conducting an inquiry to determine its arbitrability. This clarifies that the scope of an arbitration agreement should be interpreted broadly to include implied terms and counterclaims that are logically connected to the main dispute. This decision reinforces the principle of procedural fairness in arbitration proceedings.
Conclusion
The Supreme Court upheld the High Court’s decision, emphasizing that the arbitrator should not have rejected Go Airlines’ CENVAT counterclaim at the threshold. The Court clarified that the arbitrator must conduct an inquiry to determine whether a counterclaim falls within the scope of the arbitration agreement. This judgment underscores the importance of a thorough and fair process in arbitration proceedings, ensuring that all relevant issues are considered on their merits.