Excise Duty Reimbursement Dispute in Arbitration Ruling

Introduction

In Oil and Natural Gas Corporation Ltd. v. JSIW Infrastructure Pvt. Ltd., FAO(OS)(COMM) 59/2024 & 60/2024, decided on 27 May 2025, the Delhi High Court dismissed ONGC’s appeal under Section 37 of the Arbitration and Conciliation Act, 1996, upholding the decision of a Single Judge setting aside arbitral awards that had denied reimbursement of excise duty. The case reaffirms the principle that unambiguous contractual terms must be given primacy, and arbitral awards which rewrite contracts or ignore clear provisions can be set aside for patent illegality.

1. Factual Background and Procedural History

ONGC awarded pipeline replacement contracts to JSIW Infrastructure Pvt. Ltd. in June 2008. The contracts were for a lump sum consideration inclusive of all taxes and duties, including excise duty.

Following initial negotiations, the parties amended Clause 3.4.1.5 of the General Conditions of Contract (GCC) to allow ONGC to reimburse excise duty paid by the manufacturer of line pipes to the tax authorities, where such duty was invoiced to JSIW.

However, when JSIW later procured line pipes domestically and submitted invoices for reimbursement of excise duty (which had been paid by the manufacturer, not directly by JSIW), ONGC rejected the claim, citing that only excise duty paid directly by JSIW to the tax authorities was reimbursable.

This dispute led to arbitration, where the Sole Arbitrator ruled against JSIW. JSIW successfully challenged the award under Section 34 of the Act. ONGC appealed that decision under Section 37.

2. Identification of Legal Issues

The Court addressed the following legal questions:

1. Whether the arbitral award suffered from patent illegality by disregarding an unambiguous clause of the contract.
2. Whether reliance on pre-contractual correspondence was permissible when the executed contract expressly excluded such reliance.
3. Whether the Arbitral Tribunal’s interpretation of Clause 3.4.1.5 could be upheld under Section 28(3) of the Arbitration Act.

3. Arguments of the Parties

ONGC (Appellant):

• Claimed the amendment to Clause 3.4.1.5 only permitted reimbursement for CVD on imported pipes, not for excise duty on domestically procured pipes.
• Argued that the Arbitrator rightly relied on the background negotiations, particularly the letter dated 27.08.2008, to interpret the amended clause.
• Emphasized that the Respondent had accepted contract terms that clearly required direct payment to authorities for reimbursement.
• Cited multiple precedents (e.g., McDermott International Inc., Bank of India v. K. Mohandas) to argue that contracts must be interpreted contextually, including surrounding circumstances.

JSIW (Respondent):

• Contended that the amended Clause 3.4.1.5 clearly allowed reimbursement of excise duty paid by the manufacturer and invoiced to JSIW.
• Argued that the Arbitrator improperly relied on pre-contractual negotiations despite Clause 1.2.5 of the GCC, which declared the written contract as the entire agreement.
• Maintained that ONGC’s refusal was hypertechnical and resulted in unjust enrichment.
• Cited precedents such as Indian Oil Corporation v. Shree Ganesh Petroleum and DMRC Ltd. v. DAMEPL to assert that arbitral awards ignoring unambiguous contract terms amount to patent illegality.

4. Court’s Analysis and Reasoning

The Division Bench, led by Justices Tejas Karia and Vibhu Bakhru, upheld the Single Judge’s decision under Section 34, holding:

• Scope of Review under Section 37: The appellate court’s jurisdiction under Section 37 is narrower than that of the Section 34 court and confined to ensuring that the Single Judge exercised jurisdiction properly under Section 34.
• Clause 3.4.1.5 was Unambiguous: The clause clearly allowed for reimbursement of excise duty invoiced to the contractor by the manufacturer. The Arbitrator’s reference to pre-contractual communications to contradict this plain language was impermissible.
• Entire Agreement Clause (Clause 1.2.5): This clause precluded reliance on prior negotiations or letters, like the one dated 27.08.2008. Thus, the Arbitrator’s interpretation undermined the agreed contractual structure.
• Patent Illegality Doctrine: Relying on Sal Udyog Pvt. Ltd., DMRC v. DAMEPL, and South East Asia Marine Engineering, the Court reiterated that ignoring clear contract terms amounts to a patent illegality, justifying judicial interference.
• No Justification for Narrow Interpretation: ONGC’s insistence on direct payment to authorities by JSIW was not supported by the final contract. The Arbitrator effectively rewrote the contract, which is beyond arbitral competence.

Accordingly, the Court dismissed ONGC’s appeals, affirming that the arbitral award was patently illegal and rightly set aside.

5. Final Conclusion and Holding

The Delhi High Court conclusively held:

• The arbitral awards rejecting reimbursement of excise duty were patently illegal.
• The Arbitrator’s reliance on prior negotiations violated the entire agreement clause.
• The Single Judge’s decision to set aside the awards under Section 34 was correct and within jurisdiction.
• The appeals under Section 37 were thus devoid of merit and stood dismissed.

FAQs:

1.Can an arbitral award be set aside for ignoring contract terms?

Yes. Courts can set aside awards under Section 34 of the Arbitration Act if the award is contrary to unambiguous contract terms, amounting to “patent illegality”.

2. What is the role of pre-contract negotiations in interpreting contracts?

If the contract contains an “entire agreement” clause, courts and arbitrators cannot rely on prior negotiations or correspondence to interpret contract terms.

3. What constitutes “patent illegality” in arbitration awards?

Patent illegality includes decisions that ignore explicit contractual provisions, misapply law, or adopt interpretations that are irrational or perverse.

4. Can courts review arbitral findings under Section 37 of the Arbitration Act?

Yes, but only to assess if the Section 34 court stayed within its scope. Section 37 appeals do not allow a full merits review of the arbitral award.

5. Is indirect payment of excise duty eligible for reimbursement under contracts?
If a contract expressly allows reimbursement of excise duty invoiced to the contractor by the manufacturer, direct payment to tax authorities is not necessary.

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