Can’t deduct tax shortfall from contractor dues: Cal HC upholds Rs 28.18 cr arbitral award against SAIL

Kolkata: Upholding an arbitral award of Rs 28,17,71,054 against Steel Authority of India Limited (SAIL), the Calcutta High Court ruled that an employer’s right to recover a tax-credit shortfall does not automatically permit deduction of that amount from certified contractor payments.

The court also said that any such power must be clearly conferred by the contract and cannot be implied.

A division bench of Justices Arijit Banerjee and Rai Chattopadhyay dismissed two appeals filed by the company and affirmed the findings of an international arbitral tribunal seated under the ICC Rules. The tribunal had directed payment of Rs 23,98,07,285 and Rs 4,19,63,769 to SMS India Pvt. Ltd., along with simple interest at seven per cent per annum from August 24, 2020.

The dispute arose from two lump-sum contracts executed for plant work at one of the company’s steel units.

The employer had withheld part of the contractor’s dues, alleging a shortfall in CENVAT and excise-duty credits that were originally guaranteed under the contract.

After the arbitral award, the company challenged it before the Commercial Court in Asansol under Section 34 of the Arbitration and Conciliation Act, 1996.

The petitions were dismissed in December 2023, leading to the present appeals before the High Court.

The bench observed that the phrase “shortfall shall not be reimbursed to the contractor” only restricts the contractor from seeking additional reimbursement for taxes not actually paid. It does not authorise the employer to adjust or set off any perceived shortfall against milestone payments certified for work already completed.

The judges added that tax rates and credit entitlements could vary with statutory changes, and the contract itself contained mechanisms for adjustment in such circumstances.

“Treating the guaranteed tax-credit figure as fixed would ignore commercial reality,” the bench remarked.

The tribunal had further awarded costs of US $285,000 and Rs 2.10 lakh. The High Court noted minor typographical inconsistencies in figures and clarified that there would be “no order as to costs” in disposing of the appeals.