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Sumitomo Heavy Industries Ltd. v. Oil Gas Commission of India (1995)

Sumitomo Heavy Industries Ltd. v. Oil Gas Commission of India (1995)
Table of Contents



Sumitomo Heavy Industries Ltd. (Claimants)


Oil & Natural Gas Commission of India (Respondents)


by THE RT. HON. SIR MICHAEL KERR (Acting as Umpire)



1.1. The Claimants (hereinafter "SHI") are a Company established under the laws of Japan.

1.2. The Respondents (hereinafter "ONGC") as an Indian statutory corporation, established under the Oil & Natural Gas Commission Act 1959 (Act 43 of 1959) of India.

1.3. By a contract dated 7th September 1983 (hereinafter "The Contract" or "The Head Contract") SHI (described in the Contract as "Contractor") agreed to install and commission on a turnkey basis, as Phase 2 of a Platform Complex at a site of the Respondents (described in the Contract as. "Company") known as the Bombay High South Offshore Site about 100 miles north-west of Bombay ("the SH Complex") one SHD Well-Cum-Production Platform Dec, two Flare Tripods and Flare Bridges, one SBM System and some interconnecting submarine pipelines ("the Works"). The installation and commissioning of the Works was to include and .cover detailed design and engineering, procurement, fabrication, inspection, testing and pre-commissioning, load-out, sea fastening, tow-out, installation at Offshore Site and Commissioning, and any other work necessary for the final completion of the Works.

1.4 Clause 17.1. of the Contract provided as follows :


17.1 Application laws

All questions, disputes or differences arising under, out of or in connection with this Contract, shall be subject to the laws of India." 

1.5 Clause 17.2 of the Contract provided as follows :

17.2 Arbitration

If any dispute, difference or question shall at any time hereafter arise between the parties hereto or their respective representatives' or assigns in respect of the construction of these presents or concerning anything herein contained or arising out of these presents or as to the rights, liabilities or duties of the said parties hereunder which cannot be mutually resolved by the parties, the same shall be referred to arbitration, the proceedings of which shall he held at London, U.K. within 30 days of the receipt of the notice of intention of appointing arbitrators each party shall appoint, an arbitrator of its own choice and inform the-other party. Before entering upon the arbitration, the two arbitrators shall appoint an umpire. In case the parties fail to appoint its arbitrator within 30 days from the receipt of a notice from the other party in this behalf or if any dispute in selection of umpire, the president of International Chamber of Commerce, Paris, shall appoint the arbitrator and/or the umpire as the case may be.

The decision of the arbitrators and failing to an agreed decision by them, the decision of the umpire shall be final and binding on the parties.


The arbitration proceedings shall be held in accordance with the provision of International Chamber of Commerce and the rules made thereunder as amended from time to time. The arbitration proceedings shall be conducted in English language.

The arbitrators or the umpire, as the case may be, shall decide, by whom and in what proportion the arbitrators or umpires fees as well as the cost incurred in arbitration shall be borne.

The arbitrators or the umpire may, with the consent of the parties, enlarge the time, from time to time, to make and publish their or his award."

1.6. Disputes subsequently arose between the parties out of the Contract whereby SHI claimed certain sums from ONGC for which ONGC denied liability.

1.7. On or about 6 March 1991 Ince & Co., as SHI's Solicitors, served a Notice of Arbitration on ONGC and sent a Request for Arbitration to the International Chamber of Commerce ("ICC").

1.8. On or about II March 1991 Ince & Qo. appointed Mr. Robert A. MdcCrindle QC as Arbitrator on behalf of SHI.

1.9. On or about II May 1991 Messrs Desai & Diwanji (hereinafter 'D & D'). ONGCs lawyers in Bombay, appointed Mr. Justice Chandrashekhar (retired) as Arbitrator on behalf of ONGC.

1.10. The said Arbitrators are hereinafter referred to collectively as "The Tribunal".


1.11. On some date thereafter, as subsequently confirmed to the parties by Mr. MacCrindle on behalf of the Tribunal, the Tribunal appointed me, The Rt. Hon. Sir Michael Kerr, as Umpire pursuant to Clause 17.2 of the Contract.

1.12. On or about 27 January 1992 the Secretariat of the ICC wrote to the parties' lawyers to the effect that, since the ICC Rules do not provide for Umpires, and since the parties were unable to agree upon the status of the Umpire in the context of the ICC Rules, the arbitration would not be able to proceed under the auspices of the ICC.

1.13. On or about 16 March 1992 the Tribunal ordered that I should be invited to sit with the Arbitrators at all future hearings as Umpire in Order to avoid the risk of duplication of the hearings. On or about I April 1992 D & D wrote to the Tribunal on behalf of ONGC, refusing to agreed that I be invited to sit with the Arbitrators, despite the Tribunal's Order.

1.14. On or about 20 October 1992 a Preliminary hearing took place in London before the Tribunal at which SHI were represented by Ince & Co. and Mr. Cordara Q.C. as Counsel, and ONGC By D & D and by Mr. B. Datta, Senior Advocate, as Counsel. While admitting that a dispute had arisen within the terms of Clause 17.2 of the Contract, it was submitted on behalf of ONGC that the Arbitrators had not been duly appointed and that the arbitration could accordingly not proceed. The Tribunal rejected this submission and gave reasons for doing so.


On or about 30 October 1992 Ince. & Co. served SHI's Statement of Claim as directed by the Tribunal.

1.15. On or about 16 December 1992 ONGC petitioned the High Court in Bombay for an injunction to restrain SHI from taking any further steps in the arbitration. Mr. Justice Jhunjlunwala declined to grant any relief and adjourned ONGC's Petition.

1.16. On or about 24 December 1992 Ince & Co. on behalf of SHI applied to the Commercial Court in London for leave to issue and serve on ONGC in India an Originating Summons seeking an Order under Section 5 of the English Arbitration Act 1979 to confirm the powers of the Tribunal to proceed with the arbitration in default of service of a Defence by ONGC. On or about 29 December 1992 the Hon. Mr. Justice Laws granted leave to SHI to issue and serve this Summons.

1.17. On or about 19 January 1993 D & D applied to the High Court in Bombay on behalf of ONGC for an Order that the arbitration be stayed pending the hearing and disposal of ONGC's Petition and for an injunction restraining SHI for proceeding with their Originating Summons in London.

1.18. On or about 22. January 1993 Mr. Justice Vyas of the Bombay High Court declined to grant any of the relief sought by ONGC.

1.19. On or about 26 January 1993 SHLs Originating Summons was heard by Mr. Justice Cressell in the Commercial Court without ONGC having communicated with the Court or being represented, and he 


made certain orders defining the power of the Tribunal pursuant to Section 5 of the 1979 Act.

1.20. On or about 27 January 1993 D & D served ONGC´s Defence in the Arbitration.

1.21. On or about 28 January 1993 ONGC gave notice of an appeal from the Order of Mr. Justice Vyas.

1.22. On or about 1 I February 1993 ONGCs appeal was heard by the Hon. Chief Justice and the Hon. Justice Tipnis in the Bombay High Court, and the appeal was dismissed.

1.23. SHI's Reply had meanwhile been served on or about 11 February, and on or about 20 February, 1993 the pleadings in the arbitration were deemed to be closed in accordance with the Order for Directions made by the Tribunal on or about 20 October 1992.

1.24. On or about 8 March 1993 a summons was issued on behalf of ONGC in .the Commercial Court to set aside the orders made under-Section 5 of the 1979 Act and for other relief.

1.25. Between about 10 and 14 May 1993 ONGCs applications pursuant to the'said summons were head by Mr. Justice Potter in the Commercial Court. On or about 23 July 1993 the dismissed the Summons and ONGCs applications. He decided, among other matters, that the procedural law of the arbitration was English law and that the refusal of the ICC to continue to act in relation to the arbitration did not


frustrate the reference. His Judgement is reported in (1994) 1 Lloyds Rep. 45.

1.26. Meanwhile, on or about 8 June 1993, a second hearing for directions was held before the Tribunal in London at which both parties were represented. The Tribunal thereupon made certain orders relating to discovery and evidence.

1.27. Between about 25 November 1993 and 5 March 1994 lists of documents and various witness statements were exchanged and other matters dealt with pursuant to a further order of the Tribunal made on or about 11 February 1994. On behalf of ONGC D & D maintained their refusal to permit the Umpire to sit with the Tribunal, and Ince & Co. reserved SHLs position as to costs in the event of disagreement between the arbitrators and the consequent need to re-hear the arbitration.

1.28. On or about 7 March 1994 the substantive hearing of the arbitration before the Tribunal began with the Umpire at Trinity House, London, and continued for 10 days. Both parties-were again represented by the same Solicitors and Counsel. Among others witnesses, Mr. Harish Salve, Senior Advocate and Chartered Accountant gave evidence on Indian law on behalf of SHI. In the course of the hearing the Tribunal made various orders concerning the conduct and future course of the arbitration, as well as orders relating to the evidence of witnesses, and adjourned the hearing until June 1994.


1.29. On or about 13 June 1994 the hearing before the Tribunal in London res'umed and continued for a further 5 days. Among other witnesses, Mr. Salve gave further evidence, and on this occasion Mr. LLP. Ranina, Senior Advocate and Chartered Accountant, was called as a witness on Indian law on behalf of ONGC.

1.30. Following the conclusion of the hearing, on or about 4 July 1994 Mr. Chandrashekhar issued a Statement of Reasons rejecting SHLs claim. On or about IS July 1994 Mr. MacCrindle issued Reasons stating why he would have wished to make an award in favour of SHI. On or about the following day the Arbitrators issued a joint Notice of Disagreement. I thereupon entered upon the reference as Umpire.

1.31. After various communications between the parties and myself, a hearing for directions took place before me in London on 3 October 1994 at which both parties were again represented by the same solicitors and counsel, and on the following day I issued an Order for Directions the contents of which had in substance been agreed between the parties and myself during the hearing. It was ordered, ambng other matters, that neither party would seek to adduce any further evidence, whether written on oral, and that the hearing before me would proceed and the transcripts of the earlier hearings before the arbitrators. Various other directions were given, and on behalf of ONGC it was made clear that their reservations as to the validity of the reference continued to be maintained. D & D subsequently made 


it clear that ONGC also maintained all other matters previously raised in the course of this arbitration, and on 10 February 1995 I confirmed this position in relation to both parties. By my Order of 4 October 1994, the date of the hearing before me was fixed by agreement to begin on 8 May 1995 with an estimated duration of a maximum of 10 working days.

1.32. There followed a great deal of correspondence between the parties, all or most of it copies to me, about the preparations for this hearing and in particular the arrangement of the necessary documents. I gave various directions and guidance in connection with these matters in numerous letters between November 1994 and April 1995. During this period, and with the consent of both parties, the beginning of the hearing was postponed to Monday, 15 May 1995. In preparation for it, and pursuant to my directions I was helpfully supplied with Skeleton Arguments summarising the parties respective cases, and with a Chronology.

1.33. At the hearing before me the representatipn on the side of SHI was the same as before, but on this occasion ONGC were represented by Mr. M.K. Banerji, Senior Advocate and Attorney General of India, leading Mr! Datta as well as Mr. G.K. Benerji, all again instructed by D & D. Among others present on behalf of the parties, Mr. Salve and Mr. Ranina again assisted their respective clients.


1.34. On this occasion no further reference was made on behalf of ONGC to any jurisdictional issue concerning the arbitration, and there were-no further objections or reservations concerning the continuation and conclusion of the arbitration or in relation to its binding nature. The submissions on both sides were confirmed to the substantive merits. It was made clear that the reservations referred to in 1.31 above were concerned solely with certain proceedings in the Indian Courts of which I have no knowledge. There was also no disagreement on any evidential issues and no need for me to give any procedural rulings in the course of the hearing.

1.35. The hearing continued for 10 working days and conclude on 26 May 1995. Mr. Cordara opened for about 4 Vi days, reviewing the whole of the earlier material in so far as it was relevant. Mr. M.K. Benerji. assisted by his Juniors, then made his submissions for about 3 Vi days and Mr. Cordara replied for about 1 1/2 days, with opportunities for Mr," Benerji to intervene informally. He then replied about half a day to Mr. Cordara, raising a new point on the appropriate currency in whiclr damages (if any) would be recoverable, to which Mr. Cordara briefly replied. The hearing was then running out of time, but the parties had still been unable to agree on issues of quantum and on any interest which SHI might be able to recover as part of their damages (if any), despite my requests that they should do so. Mr. Datta also said at the last moment that he wishes to reargue a point on limitation 


which had not previously been mentioned to me. I accordingly ordered that these matters should be covered in sequential written submissions within a time-table covering the following three weeks.Thereafter I received final written submissions from the parties on these aspects.

(There then followed references to various parties of the Contract which do not matter for present purposes, to parts of the Bid Package, and finally to SHI's Bid, but "for reference only").

1.36. For the purpose of making this Award I have carefully considered the whole of the foregoing material adduced on behalf of the parties, both orally and in writing, before, during and after the close of the hearing. In the course of the hearing both parties also made reference'to the view expressed by Mr. Chandrashekhar and Mr. MacCrindle in their Reasons as referred to 1.30 above, and for the sake of completeness I will also briefly refer to these Reasons herein.

1.37. With the exception of statements containing conclusions of law, all the contents of this Award are to be treated as findings of fact.


2.1.1. The essence of SHI's claim can be stated quite shortly. The Contract between ONGC and SHI was "tax protected", as is common place in contracts of this nature, and it also contained a provision - Clause 17.3 - which was designed to protect SHI against any economic effects of any changes in Indian Law after the close of their Bid. The bid had been submitted by SHI naming MacDermott International Inc. (hereinafter "MII"), Panamanian company with its head office in Belgium, as the mam sub-contractor with the express approval of [...]


2.1.4. The issues accordingly turn on two broad aspects. First, on the complex history of Mil's liability to income tax at different stages under the relevant. Indian tax laws. Secondly, on an analysis of SHI's consequential rights, if any, against ONGC on the true construction of Clause 17.3 in the context of the Contract as a whole and of the surrounding circumstances at the time of its conclusion. In the latter connection, however, both parties made some reference to ONGC's Bid Package and SHI's Bid, and it is therefore necessary to make some brief references to these documents.


2.2.1. ONGC issued its Bid Package in July 1982 with a closing date of I October 1982 which was subsequently extended to I I October 1982. On or prior to this date SHI deposited its Bid, which was subsequently accepted in the form of the Contract referred to below.

2.2.2. The Bid Package and the Bid, as well as subsequently the Contract and Subcontract, contained may references to the components of the SH Complex (as described in 13 above) as "facilities" which were to be provided and installed. This term becomes important in the context of the tax laws referred to in Section 3 below. For instance, after referring to the "Existing Facilities" in Bombay High North and Bombay High South, the Bid Package described the components of Phase 2 of the South H (SH) Complex as further "Facilities" which [...]


might become payable by MII. This provision, which referred to MII as "Contractor" and SHI as "Customer" was in the following terms : "Any foreign (i.e. non-U.S.A.) taxes incurred by Contractor and Contractor's employees and which are imposed by or payable to any foreign governmental authority, whether by way of withholding, assessment or otherwise, for work performed hereunder shall be borne by Customer. Any such taxes which are paid directly by Contractor, shall be reimbursed by Customer."

As will be seen hereafter, what became Clause 23 in the Head Contract and thus subsequently also in the Subcontract, was ¡n different terms, but the substance was the same.

2.2.5. I then turn to the Contract and Subcontract against this background.


2.3.1. The Contract was signed on 7 September 1983, but it recited that it had become effective as from 14 April 1983 when ONGC had accepted SHI's bid. It was for a lumpsum of Japanese Yen 10,823.237,000 stated at the hearing to be equivalent to about US $ 50 million. Pursuant to a requirement of the Bid Package, this lump sum had included an allowance for Indian income tax.

2.3.2. Its constructional and engineering content is for present purposes sufficiently indicated in 1.3 above. However, although SHI's claim was based primarily on Clause 17.3 and secondarily on Clause 5.11.7 of the General Conditions which cover somewhat similar ground, as 


pointed out. on behalf of ONGC these provisions must of course be seen in their context. To do justice to their arguments it is therefore necessary to set out many other Clauses as well.

2.3.3. The General Conditions to which attention has been drawn by either or both the parties were as follows :


1.1.6. "Works" means all things, matters, structures and facilities to be engineered, designed, procured, fabricated, sea fastened, loaded out, towed-out, installed, inspected, tested, pre-commissioned and commissioned, made good and guaranteed by Contractor for the Company, including all incidental and temporary works as specified in the Contract specifications and drawings.

1.2.3 Should there by any conflicts, discrepancy or inconsistency between or amongst these contract conditions and other documents/drawings....  of the Contract then interpretation shall be based on following priorities so as to comply with the requirement of the Contract.

(There then followed references to various parties of the Contract which do not matter for present purposes, to parts of the Bid Package, and finally to SHI's Bid, but "for reference only").



3.1. Assignment

The Contractor shall not, except with the previous consent in writing of the Company, transfer or assign their obligations or interest in the Coniract or any part (hereof in any manner whatsoever.

3.2. Conditions for Subcontracting

Concerning the works and facilities covered by the Contract having to be executed and commissioned on turnkey basis by the Contractor, the following conditions shall apply as regards subcontracting of any portion of the Work entrusted to the Contractor.


In case of plant, equipment and allied requirement to be procured, installed and commissioned on the platform structure for the purpose of receiving, processing, pumping, compressing etc. and also any other facilities to be provided thereon, the Contractor shall, subject to the limitations imposed on him with regard to the makes/manufacturer of certain plant and equipment specifically stipulated to be procured against this Contract, be free to sublet the work to the manufacturers/ authorised agents of the respective plant and equipment for procurement of the necessary supplies. In respect of those stipulated items referred to above, the Contractor shall not arrange alternative makes other than those agreed already for procurement without the prior written consent of the Company.



With regards to design, engineering, fabrication, erection, inspection, testing and commissioning of the Jacket/Platforms and other facilities as also the inspection, installation, testing and commissioning of the plant, equipment and allied facilities to be provided on the platforms, the Contractor may sublet any portion of the Work entrusted to them, only with the prior written consent of the Company.


Subcontracting as mentioned herein shall not relieve the Contractor of his obligations and responsibilities under this Contract.

The extent of which the Contractor may sub-contract part of the Works shall be as stated in the Contractor and/or as subsequently discussed mutually and agreed to by the Company. Such agreement by the Company shall be binding on the Contractor.

Any such assignment/subcontracting shall not absolve the Contractor from any of his obligations and responsibilities under this Contract.

5.11. Law/Regulations

5.11.7. In the event of any change or amendment of any law, rule or regulations of any Government or Public Body or Company of the Republic of India which becomes effective after the date of the Tender and which results in any increased costs exceeded US $ 100.000 in the aggregate to Contractor or any delays in completion of


the Works, Contractor shall be indemnified for any such costs by Company and the completion schedule shall be extended as required.

8.6. Certificate of Completion & Acceptance of the Work

9.1 Guarantee Conditions

(These were standard conditions, unnecessary to set out, providing for a Certificate for Completion of the Works to be issued'by ONGC, followed by detailed provisions as to SHI's obligations during the subsequent 12 months Guarantee Period. There then followed provisions concerning the Discharge Certificate on which ONGC relied, as follows.)


13.2. Payment Procedure

(A Group of sub-clauses follows this heading, which explains their nature, viz. they deal with the prescribed administrative procedures concerning the payment of invoices during the progress of the works and the consequences of any breaches of these procedures, The following two were referred to in the course of the hearing.)

13.2.3.The Company shall arrange remittance to the Contractor of the undisputed amount of all Work covered by the Scope of Work under the Contract as well as for an)' extra capital work and Change Orders ordered by the Company for which invoices are submitted by the Contractor and approved by the Company. In the event that payment of the undisputed amounts of the invoices is not received by the


Contractor within 30 days of submittal of the invoice by the Contractor, interest shall accrue on all amounts due at the rate of 1.25% per month.

13.2.7. The Company shall not be responsible/obligated for making any payments or any other related obligations under this Contract to the Contractor's Subcontractor/Vendors. The Contractor shall be fully liable and responsible for meeting all such obligations and all payments to be made to its Subcontractors/Vendors and any other third party engaged by the Contractor in any way connected with the discharge of the Contractor's obligation under the Contract and in any manner whatsoever.

13.3. Performance of Contract/Discharge Certificate

13.3.1. The Contract shall not be considered as completed until a Discharge Certificate has been signed by the Company's Representative on bejialf of the Company and delivered to the Contractor stating that the Works have been completed in accordance with the Contract.

13.3.2. The Discharge Certificate shall be issued by the Company's Representative (28) twenty eight days after the expiration of the Guarantee Period (or if different Guarantee Periods become applicable to different parts of the Works then, without prejudice to the Company's Representative's rights, upon the expiration of the latest of those periods) or as soon thereafter as any Works ordered during that period have been completed in accordance with the Contract.


13.3.4. Neither the Company nor the Contractor shall be liable to the other for any matter or thing arising out of or in connection with the contract or the doing of the Works unless the party asserting the liability has given the other party written notice of its claim before the issue of the last Discharge Certificate under this Clause.

13.3.5. Notwithstanding the issue of the Discharge Certificate the Contractor and the Company shall (Subject to Sub-clause 13.3.4) remain liable for the fulfillment of any obligation incurred under the provisions of the Contract before the issue of Discharge Certificate which remains unperformed at the time the certificate in question is issued, and for the purposes of determining the nature and extent of any said obligation the Contractor shall be deemed to remain in force between the parties.


17.1. Applicable Laws

See paragraph 1.4 and 1.5. above.

17.2. Arbitration

17.3. Change of Law

Should there be, after the date of bid closing a change in any legal provision of the Republic of India or of any political subdivision thereof or should there be a change in the interpretation of the said legal provision by the Supreme Court of India and/or enforcement of any such legal provision by the Republic of India or any political 22

subdivision thereof which affects economically the position of. the Contractor; than the Company shall compensate Contractor for' all necessary and reasonable extra cost caused by such a change.

23.0. Duties and Taxes

Indian Customs Duties, if any, levied upon fabricated structures, subassemblies and equipment and all components which are to be incorporated in the Works under the contract shall be borne by the Company. The Company shall bear all Indian income taxes levied or imposed on the Contractor under the Contract, on account of its or their offshore personnel while working at offshore or on account of payments received by Contractor from the Company for work done under the contract. Notwithstanding the foregoing, the Company shall have no obligation whatsoever in respect of the Contractor's onshore employees whether ihey may be expatriate or nationals."


27.2. The Company shall in no event be responsible for or liable to the contractor or its Subcontractors for consequential damages suffered by the Contractor or its Subcontractors including without limitation, business interruption or loss of profits, whether such liability is based or claimed to be based upon (i) any breach by the Company of its obligations under the Contract or (ii) any negligent act or omission on the part of the Company or any of its employees, agents or appointed representative in connection with the performance of the Work."



2.4.1. In the same way as the Head Contract (see 1.3 above), this also referred to the Subcontract as being "on as turnkey, basis" and described the general scope of the Work as follows :

"In general the Work to be carried out under Phase 2 of the Bombay High "SH" Complex can be described as follows:


The installation of drilling/production facilities on the SHD platform


The fabrication, transportation and installation of two tripod platforms which support flare bridges with flare stack connected to the SHD production facilities.


Installation of two (2) flare bridges.


The Installation of an SBM System to be used with the early production system.


Removal of a temporary deck and transportation to Bombay Port or MDL NHAVA yard.


The installation of pipelines for gathering and transportation of oil and gas."

2.4.2. The price to be paid by SHI to MII for the Subcontract was a lump sum price of US $ 15,154,300 payable outside India. Although the Scope of Work included the fabrication transportation and installation of the main parts of the platform and other facilities, this amount was only about 30% in terms of money of the price of the Head Contract.


The reason, as can be seen from the later provisions, is that the Subcontract included substantially no obligations on the part of Mil as regards the procurement or supply of materials, in particular of the necessary steel work. With the exception of consumables such as grouting for joining pipelines and welding rods, which were to be charged as labour, the materials to be provided by MII amounted to only about 0.1 % of the Subcontract price. This aspect plays some part in one of ONGC submissions concerning Mil's position under the relevant Indian tax laws. The Subcontract provided that all materials necessary for the fabrication of the Subcontract Works were to be delivered by SHI to MII on terms of CIE Dubai free port. There was no provision in the Subcontract which had the effect of transferring the property in any of the materials from SHI to MII.

2.4.3. It is unnecessary to. set out any further provisions from the Subcontract save to say that it incorporated all the relevant General Conditions of the Head Contract on a back-to-back basis. These included a particular Clause 5.1 1.7, though without any reference to US $ 100,000 Clause 23 dealing with tax protection, and also Clause 17.3.

2.4.4. As a link between the Contract and the Subcontract, in addition to the matters already referred to in 2.2.4 above, it should also be mentioned that part of the Contract Price Schedule, incorporated into the [...]



3.2.1 For present purpose, the relevant provisions of the 1961 Act were then as follows : 

Section 5

Scope of total income

(2) Subject to the provisions of the Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which -


is received or is deemed to be received in India in such year by or on behalf of such person; or


Accrues or arises or is deemed to accrue or arise to him in India during such year.

Section 9

Income deemed to accrue or arise in India

(a) The following incomes shall be deemed to accrue or arise in India-


all income accruing or arising, whether directly or indirectly, through or from any business connection in India


-for the purpose of this clause-

(a) In the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of [...]


3.2.3. However, these factors only applied, and tax was only payable, if any assessee had been in receipt of income under Sections 5, 9 or 28 during any relevant year of assessment. As explained hereafter, this was not so in the case of MII, who had made losses. However, their situation then changed dramatically with the introduction of Section 44BB imo the Act as discussed below.

3.2.4. Before coming to this, it is convenient to mention one other provision of the Act, although introduced later, which dealt specifically with tax protected contracts by providing that any tax paid thereunder would, as regards the payer, be regarded as a cost and not a part of his income. This provision was Section 10 (6B) which was introduced by the Finance Act 1988 with effect from 1 April 1988, in the following terms so far as relevant :

10. Incomes not included in total income

In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included-

(6B). Where in the case of a non-resident (not being a Company) or of a foreign company deriving income .... from .... an Indian concern ..., the tax on such income is payable by .... the Indian concern .... the tax so paid,"

The full text of the provision may not be directly applicable in the present case. However, as seen hereafter, its substance is relevant


to one of the arguments put forward by ONGC in relation to Clause 17.3. of the Contract.

3.3. SECTION 44 BB

3.3.1. This was introduced by the Finance Act, 1987 passed in May 1987 and. was backdated retrospectively to I April 1983, the date when the Notification had come into force. It had originally applied to residents as well as non-residents, but was subsequently limited to the latter because it had been found to cause unintended hardship to the resident tax payers."

see the Memorandum explaining the provisions of the Finance Bill 1988 (170 ITR).

3.3.2. Its material terms were as follows :

"44BB Special provision for computing profits and gains in connection with the business of exploration etc. of mineral oils.


Notwithstanding anything to the contrary contained in Section 28 to 41 and Sections 43 and 43 A, (in the case of an assessee being a non-resident) engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils, a sum equal to ten per cent of the aggregate of the amounts specified in sub-section (2) shall be deemed to be the profits and gains of such business


chargeable to tax under the head 4 profit and gains of business or profession.

(2) The amounts referred to in sub-section 


shall be the following, namely :-


the amount paid or payable (whether in or out of India) to the assessee or to any person on his behalf on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of, mineral oils in India;



the amount received or deemed to be received in India by or on behalf of the asscsstQ on account of the provision of services and facilities in connection with, or supply of plant and machinery on hire used or to be used in the prospecting for, or extraction or production of, mineral oils outside India.

Explanation - For the purpose of this section -


"plant" includes ships, aircrafts, vehicles, drilling units, scientific apparatus and equipment, used for the purposes of the said business;


"mineral oil" includes petroleum and natural gas.


3.4.1. Shortly after the enactment of Section 44 BB, an instruction was issued by the Foreign Tax Division of the Department of Revenue in the Ministry of Finance, which was referred to throughout as the "Circular". It is not clear whether the final version or merely a draft was in evidence; thus it was merely added "Instruction No .... " and dated "the .... July, 1987", and in some places the text appeared to be corrupt. Since ONGC relied strongly on this Circular it is necessary to set out nearly all of it, although in my view it was of no more than administrative relevant in relation to the present issues.

3.4.2. It was addressed to all Commissioner of Income-tax under the heading :

"Taxability of foreign contractors engaged in the business of exploration and exploitation of Oil and Natural Gas in India Guidelines of for (sic) computation of income.


The question of taxability of the income of non-resident contractors engaged by resident organisation like ONGC carrying on the business of oil exploration and production in India, for the executation of turnkey projects involving work to be carried out in India as well as outside India, for a lump sum consideration, has been examined by the C.B.D.T., in consultation with the Ministry of Law. [...]



It has been seen that most of the agreements entered into by these non-resident contractors relate to fabrication and installation of various facilities like off-shore platforms and pipelines, terminals, treatment plants on-shoe, rigs, etc. for exploration and production of Oil and/or Natural Gas. In these contracts the equipment by way of platform, rig or any other facility is fabricated by the foreign contractors as per specific requirement of the Indian Company or organisation as engaged in such exploration or production. The major part of the-work, namely, design, engineering, procurement and fabrication contractor. In certain cases, ownership in the facilities is also seen to have been transferred abroad. Because of the size and complicated nature of the platform etc., it is fabricated and transported in modules, for example jacket, piles, deck, top-side equipment modules, etc., to the actual off-shore site where these are then installed. The transport and installation of the facilities is at times undertaken by the same Contractor who had done the engineering, procurement and fabrication and in certain cases by other enterprises. After installation, the work on hook-up and commissioning is generally done by the fabrication contractor himself because that is invariably an essential part of the satisfactory completion of the contract itself.



On these facts, it is clear that income accruing or arising to the non-resident contractor should be appropriated between the various activities carried on by it, some of which would be within India and some outside. Where the ownership in the platform, terminal treatment plant or other facilities passed outside India, the non-resident will be taxable only in respect of (he activities performed in India by way of installation, hook-up and commissioning etc, of the facilities acquired by the Indian enterprises engaged in oil exploration or production. Where, however, the sale has taken place in India, there will be two elements of income that should be brought to tax. One would relate to the proportion of profits on the entire value of the contract which can be said to be attributable to the activity of the sale itself and the other would be in respect of the activities like installation, hook-up, commissioning etc. actually performed in India as part of the total works contract.



The question of determining a reasonable percentage of gross receipts as profits/income was discussed, inter-alia, with the Ministry of Petroleum, in the light of the importance of the oil sector to the Indian economy and taking into account the fact that oil industry is now passing through a very difficult period, resulting in idle capacity all round. Taking all these factors into account, it has been decided to adopt 10 percent of the gross


receipts from the contract as the net income of the contractor. It has also been decided that out of the income so computed, 10 percent (i.e. 1% of the gross receipts) would be attributable to the activity of sale itself and that the balance would be attributable to the other manufacturing etc., (i.e. other than sales) activities.


On this basis, where the sale takes place outside India, only 10 percent of the gross receipts in respect of the activities of installation, hook-up, commissioning etc., performed in India will be taxable here. Where, however the sale takes place within the country, apart from the 10 percent in respect of gross receipts for activities by way of installation etc. performed in India, the income arising from the activity of sale itself will have to be brought to tax. This will be done by estimating the income from such sale at 1% (10% of 10%) of the gross receipts in respect of all activities performed outside India. The activities performed in India are excluded for this purpose because, the entire income from such activities would already have been included as indicated in the preceding sentence. A hypothetical example is given below to clarify the matter. For this purpose it is assumed that the gross payment for fabrication and including installation, commissioning etc. is awarded to a non-resident for a total consideration of $ 10 m. It 


is further assumed the $ 8 m relates to fabrication etc. done abroad and $ 2 m to work done in India (on or off-shore). In such a case, if the sale is in India, Taxable Income will be calculated as under :-


Income in respect of work done in India -

   10% of $ 2m: $ 2,00,000


Total consideration for work done abroad: $ 8 m

     Therefore, profit on thai at 10 per cent:   $ 0.8 m

                                                                   $ (8,00,000)

     Income attributable to activity of sale in India at 10% of above: $ 80,000


 Income assessable in India (I + II): $ 2,80,000

      It, in this example, the sale is also outside India, only $ 2,00,000 would be taxable in India.




The above guidelines will be applicable to all such contracts for a period of 3 years, beginning from Assessment Year 1987-88 and for earlier assessment years where proceedings are 'open' at any stage.


These guidelines will be applicable only if the non-resident company agrees to taxation on this basis and does not dispute it in any manner whatsoever. In case where tax has already been deducted on a different basis, the non-resident company may


file a return of income disclosing income calculated on the basis of (he guidelines discussed above. In such cases assessment may be completed expeditiously and refund granted.


This may be brought to the notice of all Officers working in your charge, particularly assessing and appellate authorities dealing with cases of non residents."

3.5 SECTION 293 A AND 44 BB

3.5.1. I set out these further provisions, which were also added to the Income Tax Act 1961, because Mr. Ranina relief upon them in his evidence on behalf of ONGC, though in my view they are of no relevance for present purposes.

3.5.2. 293 A Power to make exemption, etc., in relation to participation in the business of prospecting for, extraction, etc., of mineral oils.


If the Central Government is satisfied that it is necessary or expedient so do to in (he public interest, it may, by notification in the Official Gazette, make an exemption, reduction in rate or other modification in respect of income tax in favour of any class of persons specified in sub-section (2) or in regard to the whole or any part of the income of such class of persons.


The persons referred to in sub-section (1) are the following,namely


persons with whom the Central Government has entered into agreements for the association or participation of



that Government or any person authorised by that Government in any business consisting of the prospecting for or extraction or production of mineral oils.


persons providing any services or facilities or supplying any ship, aircraft, machinery-or plant (whether by way of sale or hire) in connection with any business consisting of the prospecting for or extraction or production or mineral oils carried on by that Government or any persons specified by that Government in this behalf by notification in the Official Gazette; and


employees of the persons referred to in Clause (a) or Clause (b)."

3.5.3."44 BB."Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects.

Notwithstanding anything to the contrary in Sections 28 to 44 AA, in the case of an assessee, being a'foreign Company, engaged-in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf and financed under any international aid programme, a sum equal to ten per cent of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account [...]


4.2. The Guarantee Period under Clause 9 of the Head Contract then ran from 14 April 1984 to 13 April 1985 and was satisfactorily completed by SHI.

4.3. ONGC alleged that on 18 May 1985 a Discharge Certificate-was issued pursuant to Clause 13.3.2 of the Contract. There were some unsatisfactory features about the production of this document, and SHI were not prepared to admit the authenticity of the copy which was eventually produced. However, I declined to accept the implied suggestion that it may have been a fabrication and therefore proceed on the basis that valid Discharge Certificate was issued and received on 18 May 1985. Its terms were as follows :

"This is to certify that the Works for Phase 2 of SH Complex have been completed in accordance with the Contract on 14th April 1984 and the Guarantee Period of the Works has been expired on 13th April 1985. This Discharge Certificate is issued under Section 13.3.2 of ths Contract."

4.4. I then turn to a summary of Mil's fiscal history in relation to the Subcontract during the subsequent years. This is highly complex and lengthy, terminating only - so far as presently known - with a lengthy reasoned decision by an Income Tax Appellate Tribunal in 1994. In concerns MII's assessment year 1984-85 and 1985-86.

4.5 The details of the many assessments, appeals to Tax Commissioners, revised assessments, further appeals. to Appellate Tribunals and


further revisions, do not matter as such and I will only mention a few salient milestones and dates. The complexity of the documents and figures was increased by the act that the assessments related throughout to other MII contracts and subcontracts as well as the present subcontract, which was No. D 2206. Originally, in particular at the hearing before the Tribunal in March 1994, ONGC did not challenge the evidence of Mr. Salve on Indian Law confirniing the validity of the ultimate assessments imposed on Mlland SHI's liability to indemnify Mil in respect of them under Clause 23 of the Subcontract. ONGC merely challenged the authenticity of the documents and the figures, intimating some collusion or conspiracy between SMI and MII, though without any evidence whatever to support such allegations. With the advent of Mr. Ranina at the hearing before the Tribunal in June 1994, there were then for the first time numerous challenges to Mr. Salve's evidence on Indian. Law which do not appear to have occurred to anyone before, and for which Mr. Ranina still remains the sole proponent. Thereafter, at the hearing before me, the challenges to the authenticity of the documents and figures were rightly abandoned by Mr. Banerji, who only argued the legal position, though still based on Mr. Ranina's evidence and with his assistance. On the side of SHI, Mr. Cordara continued to rely on the evidence and assistance of Mr. Salve, who refuted Mr. Ranina at virtually every point of his argument.

4.6 For the reasons explained in section 5 below I have no hesitation in accepting the evidence of Mr. Salve and rejecting the evidence of Mr. Ranina on every relevant point of difference between them. However, before coming to the issues of law on the tax aspects which separate the parties, I must briefly summarise the history. 

4.7 MII made losses for the assessment years 1984-85 and 1985-86, The extension of fiscal India to Bombay High by the Notification of 31 March 1983 accordingly made no difference to them and did not result in Mil incurring any liability for income tax by reason of the Subcontract. On 13 December 1985 and 24 October 1986 MII filed Tax Returns showing losses for these years and a net loss to be carried forward. There is nothing in the evidence to cast any doubt on the accuracy of these figures or to suggest that they would not have been accepted as accurate by the tax authorities.

4.8 However, the enactment of section 44 BB on 1 April 1987, with retrospective effect to 1 April 1983, had the effect that Mil were thereupon legally obliged to file revised,Tax Returns for these years. They ultimately did so, after taking advice from lawyers and-accountants, and after lengthy discussions with the tax authorities in which they were represented by a Chartered Accountant, a Mr, R.D. Hingwala, a partner in Price Waterhouse since 1990, who also represented them in the subsequent lengthy history of assessments and appeals. I am satisfied on his evidence, which accorded entirely with [...]


the evidence of Mr. Salve both on law and accountancy, that throughout this history all available arguments were pressed on behalf of MII including many which were bound to fail, as they did, and that no better or different outcome could have been achieved on behalf of MII. On the contrary, the policy of enforcement by the tax authorities of the new legislation and practice in this field was such that any other stance or non-cooperation on the part of MII might well have resulted in ultimately higher assessments. 

4.9. The important matter for present purposes is that MII were undoubtedly assessed on a notional profit of 10% of their cash receipts from SHI under the Subcontract by virtue of section 44 BB, and additionally to a further notional profit of 1% (10% of 10%) under the Circular. Thus, a typical set of figures in one assessment which was referred to by way of illustration throughout the hearing, and which recurred many times on the same basis (with different figures) in other assessments and decisions, was as follows :

Contract No. D-2206 (SHI) (tax protected)


Gross receipts relating to work done              US $ 3,80,500

      in India

      10% of above as deemed profit u/s               US $ 38,050

      44 BB :


Gross receipts to work done outside               US $ 29,94,600

     India :


    1% of above (10% of 10%) as                        US $ 29,946

    deemed profit:

    Total deemed profit (a)+(b):                            US $ 67,996

    Converted into Indian currency @                        7,27,552/-

    Rs. 10.70

The relevant tax rate was then applied to the resulting figure.

4.10. On behalf of MII, Mr. Hingwala did not seek to challenge this basis of assessment on the grounds which have since been advanced by Mr. Ranina in this arbitration. In my view he was quote right not to do so, and they probably never occurred to him, because none of them would have had the slightest prospect of success. However, for the sake of completeness I should mention the main grounds of objection which were advanced on behalf of MII, in some cases achieving important successes.


It was argued - unsuccessfully - that MII's receipt under the Subcontract should be taxed on a "completed contract" and not on a "cash" basis.


The application to Mil of the Notification and of section 44 BB was challenged, unsuccessfully, on the following grounds :


That MII were not the Head Contractors for whom these provisions were designed, but only  Subcontractors.



That MII's operations under the Subcontract were not referable to "the extraction or production of mineral oils", because they all had to be completed before the stages of extraction and production could begin.


However. MII argued, successfully, that in its entirely, any multiple grossing up of the tax receivable by MII and SHI was impermissible under sub-section (iv) under sub-section (I). After many appeals, resulting in many closely reasoned decisions, this position was ultimately accepted by the tax authorities and succeeded in saving MII - and thereby SHI - considerable sums of money.


MII were also successful in eliminating Surtax perquisite and in resisting assessments to any interest or penalties on unpaid tax.

4.11 This fiscal history of Mil's assessments years 1984-85 and 1985-86 began with the first of many assessment orders on 18 March 1988 and ended -apparently- with the last of many appeals by an order of an income tax Appellate Tribunal (ITAT) dated 21 February 1994. It wotild serve no purpose to go through the hundreds of pages of documents covering this history, which also dealt with other contracts apart from the present subcontract. However, I have been able to follow it with the aid of a helpful schedule provided on behalf of SHI, and there has been no criticism of the figures as such on the part of ONGC.


4.12. Contemporaneously with these events, ONGC were dealing in a similar way with the tax affairs of SHI, as they were obliged to do under Clause 23 of the Head Contract. This parallel history is of no direct relevance for present purposes save that the principles of the assessments, on the basis of 10% under section 44 BB and an additional 1% under the Circular as illustrated in 4.9 above, were equally applied to SHI, and that Mr. Raniana's arguments to the contrary evidently equally failed to occur to ONGC.

4.13. Against this background, I then turn to a summary of the history of the claims by Mil against SHL under Clause 23 of the subcontract. These began with an intimation of future claims in July 1987, soon after section 44 BB had been enacted, and continued to be made formally under Clause 23 as the various assessments on MII were raised. SHI at first declined all liability and asked for detailed information. But solicitors then intervened on behalf of MII in 1990, and after further discussions and a negotiating meeting in Manila, agreement in principle was reached in December 1990. A formal agreement of Settlement was then concluded on 11 March 1991 whereby SHI admitted liability for the amount of the assessments made on MII, but successfully excluded any liability for interest.

4.14 As the result of these negotiations and the Agreement, SHI made the following payments to MII in US Dollars:

12 December 1990       US $ 290,638.00

20 March 1991             US $ 52,528.00

26 April 1991                US $ 769,281.84

TOTAL                           US $ 1,112,447.84

4.15. I am satisfied that MII had been legally liable to pay the equivalent sums in Rupees to the tax authorities in respect of the present Subcontract, as they did, and that SHI were also legally liable to refund the equivalent sums in US dollars to MII under Clause 23 of the Subcontract.

4.16. I also find that on the occasion of each of these payments, SHI had to sell Japanese Yen in order to buy the necessary Dollars, since they had no available Dollar funds for this purpose. The sums expended by SHI in Yen in order to make these payments were respectively Yen 38,456,407, Yen 7,313,271 and Yen 106,126,029, making a total of Yen 151,895,707.

4.17. Contemporaneously with the course of these events, SHI made claims against ONGC pursuant to Clause 17.3. of the Head Contract. All these claims were refuted by ONGC on the ground that their sole liability in relation to tax was in respect of SHI's own tax liabilities under Clause 23. Ultimately, as already mentioned, Ince & Co. served Notice of Arbitration on behalf of SHI on 6 March 1991, and the Arbitrators were appointed respectively on 11 March and 11 May 1991. The amounts claimed in the arbitration were the foregoing [...]


amount in Yen or alternatively in Dollars. However, during the course of the arbitration, and following the last decision of an ITAT on 21 February 1994 eliminating any liability for multiple grossing up, there was a repayment to MII. In the result,; the above mentioned totals were reduced to Yen 129,764,453 and US $ 898,928.84 respectively. These are the sums now claimed by SHI, and I am satisfied that they are correct as figures, subject to consideration of the legal issues discussed in the following sections.


5.1. I can by summarising my conclusion. I see no reason whatsoever for doubting the correctness of MII's assessments to tax pursuant to the Notification, Section 44 BB and the Circular in the manner set out in Section 4 above. Indeed, independently on my own view, I would regard it as my duty to accept these decisions as correct statements of the position in Indian law, since they emanate from the highest tax tribunals and have not been contradicted in any way by any High Court or other authority cited to me. Furthermore, on the principles concerning the application of Section 44 BB and the Circular (there was no issue about the Notification) they were well reasoned and persuasive, and I will briefly quote from the final ITAT decision later on in this section.However, for the sake of completeness I must deal with a series of submissions to the contrary which were made to me 


on behalf of ONGC, but which I found frankly surprising, contrived and wholly unconvincing.

5.2 The upshot of these submissions was to the following effect. First, MII were never taxable under Section 44 BB. Secondly, they were taxed under the Circular, both as regards the 10% and additional 1%, but the Circular had no connection with Section 44 BB. It was based on an administrative process of apportionment pursuant to Explanation (a) of Section 9 (1) of the Income Tax Act 1961. Thirdly, the tax authorities failed to appreciate that this was the true legal position, and their repealed references to Section 44 BB throughout their decisions were no more than what Mr. Banerji referred to as "Mechanical repetition". Fourthly, MII could and should have refused to permit themselves to be taxed on the basis of the Circular, since they had the option of refusal under its paragraph 9. What MII could and should have done was to maintain their stance that, having made losses and no taxable profits in the years in question, they were entitled to escape all tax liability by virtue of Sections 5, 9 and 28 of the Act. Fifthly and sixthly, the following consequences accordingly applied :


There was no relevant "change in any legal provision" for the purposes of Clause 17.3 of the Contract and therefore no liability on the part of ONGC to SHI, quite apart from their submissions under the Contract itself.



The payments made by MII to the tax authorities and by SHI to MII were made voluntarily and erroneously a matter of law.

5.3 I must now deal briefly with the detailed steps in the arguments advanced by Mr, Ranina which led to these remarkable conclusions. As already mentioned, they were refuted by Mr. Salve at every point, in my view with complete justification. I have underlined certain words and phrases for easier understanding of the reasoning.

5.4 The first step was that, in relation to their operations under the Subcontract, MII were not "engaged in the business of providing services or facilities..." for the purposes of section 44 BB. This conclusion was said to flow from the following arguments. First, it was claimed that the "Provision of facilities" could not include cases which involved transfers in the property of the facilities in question, and therefore not in the case of the present Subcontract since this was described as a "turnkey" contract, which is a type of contract which necessarily involved a transfer in the property of the subject matter. It was claimed that contracts which had these features were not subject to section 44 BB because this referred throughout to "supplying plant and machinery on hire...", without any reference to any sale, and because turnkey contracts involving an element of sale or transfer of property were referred to as such in other legal provisions. These were the Notification and section 293A, both of which referred to "sale or hire", section 44 BBB which referred to "turnkey power


project", and the Circular winch dealt specifically with cases of sales under turnkey projects. The submission was that when the legislature intends to deal with turnkey projects and/or contracts involving sales, this was done under specific provisions. In relation to cases such as the present subcontract this had been done by the Circular, which had legislative effect, but only on an optional basis, and section 44 BBb had no application.

5.5 I have no hesitation whatever in rejecting these arguments at every point and accepting the evidence of Mr. Salve to the contrary. My reasons are briefly as follows, though it is hard to know where to start.


The arguments entirely ignore the reference to the provision of "services" as well as "facilities" in section 44 BB. Since the present Subcontract involved virtually no procurement or supply of materials by MII, its character can be accurately described as substantially no more than the provision of services.


Furthermore, given that it was cojnmon ground that "facilities" in this context referred to the physical constructional components of the Complex, such as the platform deck, jacket, pipelines, etc., there is no reason whatever for concluding that the "provision" of such facilities would not include cases in which the property passed before or as the result of construction. I can see no sense or logic in Mr. Ranina's


argument that if there were a transfer of property of even no more than 1% of the subject matter - as opposed to a lease for, say, 999 years - the section 44 BB could not apply.


As regards the omission of any reference to "sale" in the parts of section 44 BB which deal with the supply of plant and machinery, it may well be that this difference from the other provisions referred to was the result of an oversight, though I accept, of course, that speculations about the reasons for this difference should be excluded and that the section must be construed as it is. However, for present purposes this apparent anomaly makes no difference whatever. The Subcontract was not concerned with the supply of any "plant and machinery" and it is only in this context that this difference in phraseology appears. It has no bearing on the earlier phrase concerning the provision of "services and facilities", which is the relevant part.


In any event, as regards about 99.9% of the structures, etc. constituting the "facilities" referred to in the Subcontract, the remainder being irrelevant as de minimis, it was not shown that there was any transfer of any property from MII to SHI, since all these materials had been provided by SHI to MII free of charge. The fact that the Subcontract was described as "turnkey" does not necessarily make any difference. It merely



The proper construction of Section 44 BB is in no way affected by the references to "turnkey" projects or contracts in the other sections already mentioned. On the contrary, it is perfectly clear from the terms of Section 44 BB, the facts, and the terms of the Subcontract that Mil were engaged in the provision of services and facilities within the letter and spirit of section 44BB. The legislative and fiscal purpose of this provision was clearly designed precisely for cases such as this, whereas the construction advanced by Mr. Ranina would have the effect that this legislation entirely missed its target. References to "turnkey projects" are of no significance,'since this is merely a general phrase descriptive of projects which are to be constructed, completed and commissioned in every respect without any contribution from the employer or owner.


I agree that the Circular is badly, phrased, and I have already pointed out that we may not have its final text. The Circular was not independent from section 44 BB but based on its then recent enactment. The description of the target operations in its paragraph 2 is precisely in line with section 44 BB and with contracts such as the Subcontract in the present case. The purpose of the Circular was to deal administratively with one 


aspect which had been left uncovered by section 44 BB. This concerned the allocation of some notional taxable profit to the sale or transfer of property within fiscal India of any facilities whose design, engineering, procurement and fabrication had taken place outside fiscal India. I was decided that the solution to this limited problem lay in a process of allocation which was permitted by section 9 (I) and Explanation (a) of the Income Tax Act 1961. For reasons of Uniformity and simplicity it was decided to tlx this allocation on the basis of 10% of the 10% prescribed by section 44 BB. The option in paragraph 9 of the Circular was only intended to apply to this element of an additional 1 % .not to the 10% prescribed by section 44 BB, which are mandatory.


The arguments to the contrary were based solely on the loose and imprecise language of the Circular. Thus, the reference to "these guidelines" in paragraph 9 can obviously be taken to refer to the Circular as a whole. But I am satisfied that this was not the intention. One must remember throughout that the Circular was intended for internal consumption and understanding by persons within the Foreign Tax Division of the Department of Revenue, who knew the background and what was intended, and that this was not legislative drafting.


On behalf of ONGC reliance was principally placed on the second and last sentences of paragraph 4 of the Circular. It was pointed out that both of lhem .referred to "decisions", and it was therefore understandably suggested that both sentences were directed to administrative decisions concerning allocations under Section 9( I), in relation to the crucial second sentence. A decision "to adopt 10 per cent of the gross receipts from the contract as the net income of the contractor" is something which requires specific legislation and which cannot possibly be done pursuant to section 9 or any other administrative process. This sentence can only have been directed to the recent; enactment of section 44 Bb, of which it is an entirely accurate reflection. 

5.6 For all these reasons I am left in no doubt whatever that the decisions concerning MITs liability to tax under Section 44 BB, to which I have referred in section 4 above, were entirely correct. The application of the Circular to the Subcontract in respect of the additional 1% was done as rough and ready measure, without regard to any precision concerning "sale" or transfer or property, because it was a "turnkey" contract, but the primary basis of taxation was the mandatory application of section 44 BB. In support of this conclusion, although it lengthen this Award still further, I should briefly refer to one passage in the Order dated 21 February 1994 made in respect of MII's [...]


assessments to tax for 1084-85 to 1986-87 (ITA Nos. 3265/DL/89 and 414X to 41 50/DEL/90). The reasons for the decision occupy more than 20 pages and most of it is directed to the arguments on behalf of MII summarised in paragraph 4.10 (ii) and (iii) above. I am citing this to show the close reasoning which went into the application of section 44 BB in relation to MII's operations and that; there was no question of any "mechanical repetition" in references to this section in this and other decisions. Having set out the section, the Tribunal said in the concluding paragraphs of its decisions:

"Sub-clause (a) & (b) contain the words used or to be used, which also clearly indicate that, the words the services or facilities tendered or provided in connection with the three main activities, are meant to include both before the actual operation and during the operation and during the operation of prospection, extraction or production though before actual operation of prospection etc., are dulycovered and are rightly considered for liability to tax under section 44 BB of the Act. Sub-clause (a) of sub-section (2) of section 44 BB provides for the inclusion of the amount paid or payable (whether in or out of India) to the asscssce or to any person on his behalf on account of the provision of services and facilities in computing the profits under this section. The income-tax paid by the main contractor is on behalf of the assessee, which has been so 


undertaken for the various services provided by the assessee in its capacity as a sub-contractor to the main contractor, who had in turn rendered the services or provided the facilities, in connection with the prospecting for, extraction of or for production of mineral oils. Therefore, on a plain reading of sub-clause (a) of sub-section (2) of section 44 BB of the Act, the taxes paid on its behalf has to be considered in the computation of the profits and gains under this section.

Since, the amount of tax so paid, is to be initially added to the receipts of the assessee, the aggregate amount of which would be treated as the total receipts and the factor of income have to be limited to ten percent of this aggregate. The addition of tax is to be done once at the beginning only...."

This passage speaks for itself and echoes similar passages by other Tribunals in earlier decisions. It accords exactly with my understanding of the effect and application of section 44 BB.

5.7 For the sake of completeness I should mention that Mr. Macrindle's views on the issue concerning Indian Tax Law were to the same effect as mine in all respects whereas Mr. Chandrashekhar found it unnecessary to decide these issues, but was content to proceed on the assumption that MII had been correctly taxed under section 44 BB.


Apart from a brief reference, for the sake of completeness, to SHL's alternative claim under Clause 23, the issue of ONGC's liability to SHI can be dealt with entirely by reference to Clause 17.3, since Clause 5.11.7 covers substantially the same ground. Now that the facts have been found and set out in the foregoing sections of this Award, this issue - though obviously crucial - is relatively short. The issue whether, on the facts found, ONGC are liable to SHI under Clause 17.3 depends on its true construction in the context of the other provisions of the Contract and the relevant surrounding circumstances at the time when it was concluded. On this issue it was accepted by both parties that there was no relevant distinction between the application of Indian and English Law, and indeed I was referred to a number of English authorities and textbooks on this aspect of the case.

Clause 17.3. in its ordinary meaning-:

6.2 ONGC's liability on the true construction of Clause 17.3 effectively depends on the answers to three questions in the circumstances of this case, of which the first can be divided into two parts. These are the following :


Since 11 October 1982, the date of the bid closing, has there been


any (relevant change in any legal provision of the Republic of India; or [...] 59


any (relevant) change in the enforcement of any such legal provision by the Republic of India?


If the answer to (l)(a) or (b) be "yes" has this affected economically the position of SHI?(1) and (2) are of course interdependent, and the insertion of ("relevant" is designed to provide the necessary connection).


If the answer to (2) is also "yes" have SHI. incurred any "necessary and reasonable extra cost caused by any changes" as referred to in (I) above? If the answer to (3) is also "yes" then ONGC are liable. If any of the answers are different, then ONGC are not liable.

6.3 If the answer to (3) is also "yes" then ONGC are liable. If any of the answers are different, then ONGC are not liable. .3. The correct and convenient course is to answer these questions first by reference to the wording of Clause 17.3 on its own and then to go on (or consider whether they require to be modified in the light of the context of the other provisions'of the Contract and/or any relevant surrounding circumstances. This was also the approach adopted by both parties.

6.3.1. However, before proceeding on this basis I must with one ge'neral matter concerning the construction of Clause 17.3 on which Mr. Banerji placed some reliance. He said that it was in the nature of an indemnity clause, and that it was therefore to be construed strictly and narrowly. For this proposition he cited a decision at first instanceof my own, City ofManchester Vs, Fram Gerrard Limited (1974) 6 Building Law Re. 74.

6.3.2. In my view, this case is no authority for a general proposition that all indemnity clauses must be construed strictly in the same manner as, for instance, exception or exemption provisions. If that had been the ratio of the decision, then the criticism of it in.the current edition of Hudson's Building & Engineering Contracts (1995) Vol. 2 at pp. 1455. 1456, to which I was also referred, would be justified. But this is not so. I was there construing an indemnity clause, which incorporated a peculiar characteristic which, in my view, required it to be construed strictly, viz. that the indemhifier could be called upon to provide an^S indemnity in the event of wrongful actions or omissions on the part of third parties whom he could not control and for whom he would otherwise have had no responsibility. This has no application in the present case.

6.3.3. It is self-evident that Clause 17.3. is couched in wide terms. This is commercially unclcrstable, since it was designed to cover a wide and pclteniially unforeseeable spectrum-the possible impact of possible changes in Indian law in the future. I can therefore see no reason for giving to it any particularly strict or narrow interpretation. From the point of view of its commercial purpose, the contrary approach would be more justifiable. However, in relation to the present facts, it seems to me that this question has no practical significance. The proper [...]


approach is to construe the Clause on the basis of the ordinary and natural meaning of the words used, in the usual way, and of course in its context, as already mentioned.

It then proceed to answer the questions posed in 6.2 above on this basis. But against the background of the facts already found, it seems to me that they virtually answer themselves.


The enactment of the notification on 31 March 1983, followed by the enactment of Section 44 BB on I April 1987 with retrospective-effect to 1 April 1983 were both relevant changes in the legal provisions of the Republic of India, after the date of the bid closing. But for their enactment, MII would not have been liable to«y» Indian income tax during the years in question, whereas their enactment caused Mil to become liable to pay the tax which they in fact paid. Alternatively, if there were any substance in the contention that Mil had not been validity taxed pursuant to these provisions, then there was a change in the enforcement of MITs alleged liability to tax under the Income Tax Act 1961 by virtue of these provisions. So the answer is "Yes" to both (a)and (b).

The position of SHI was economically affected by the changes referred to in (1) above, and this was their relevance, since SHI had to pay to MII the amount of tax for which MII had become liable as the


result of these changes, and since SHI in fact paid the relevant sums to MII. So the answer to (2) is again ''Yes".

6.3. I then deal separately with question (3), since this is the only one which can be said to raise an issue of interpretation going beyond the simple application of the language of the Clause to the facts. Many arguments were put forward for suggesting that the payments by SHI to MM did not constitute "necessary and reasonable extra cost" caused by the changes referred to in the answer to question (1). I shall have to mention some of these arguments again later when considering Clause 17.3 in its general context, although in my view there was no substance in any of them. However, I will first consider these words in Clause 17.3 on their own, giving them their natural and ordinary meaning.

6.5.1 "Cost"

Are the payments made by SHI to MII properly describable as "cost" to SHI? This word is very wide, as even Mr. Ranina acknowledged, and I cannot see the slightest reason for answering this question in the negative. The payments were obviously, a cost incurred by SHI, and equally obviously an 'extra cost', if this word adds anything, since it is a cost which would not have been incurred if the first parte of Clause 17.3 had not come into operation.

6.5.2 One of ONGC's contentions, however, was that payments of tax were not, "costs". They relied on two matters. The first hardly bears


examination. Mr. Ranina pointed out that in a company's profits and loss account a liability for tax would be shown separately and not as an item of cost under headings such a "Expenditure". But such entries of course only refer to tax payable by the company in question. When the payment arises under a contractual obligation to pay or refund some other party's tax, then such a payment is obviously a cost under the contract in question and would be shown as such if the costs of the contract were to be dissected. Apart from being self-evident, the fact that this is recognized in Indian tax law is evidenced by section 10 (6B) of the Income Tax Act 1961 : see paragraph 3.2.4 above.

6.5.3. Secondly, Mr. Banerji sought to rely on a decision of S.N. Variava, J. in an oral Judgement given on 4 June 1990 in Dixliyn-Field International Drilling Co. S.A. Vs. ONGC (Arb. Suit No. 2449 of I989). However, this merely points to the distinction explained above and it also shows the danger of referring to Judgements construing the language of other contracts as authority for the instant, one. The contract in that case contained a similar,"change of law' provision to Cladse 17.3 which might result in substantial additional costs to Contractor on account of Contractor's operations under this Agreement. (It may be noted in passing that the latter words substantially narrowed the ambit of that provisioning comparison with the present one). The claimant/contractor was then disadvantageous assessed under Section 44 BB and claimed that there was an arbitral


issue about its application, However, the relevant tax provision in that case was precisely the opposite of Clause 23 in the present case, since the contract expressly provided that the claimant/contractor was to be liable for "any and all liabilities or claims for taxes which any taxing authority ... may assess or levy against Contractor on account of or resulting from Contractor's operations pursuant to this Agreement"; and it also stated that the Contractor's compensation under the contract included an allowance for this tax liability. In that context it is therefore not surprising and indeed inevitable, that the new tax liability under section 44 BB could not be treated as "additional costs" within the provision quoted. As the Judge observed :

This is not "Substantially additional cost" as contemplated by Article 31.1. In my view, Article 15.4 is very clear and includes all tax liabilities, contingent or future."

This is a straightforward application of the maxim generalia specialibus non derogant, much referred to on behalf of ONGC. GiVen the fact that under one specific provision of that contract the contract had to pay all taxes imposed on him, no such tax could be treated as "additional costs" for the purposes of the generality of the "change of law" provision in that case. In the case of the present subcontract, however, the position under Clause 23 is the reverse, as discussed hereafter, and this maxim cannot have any application.


6.5.4. "Necessary and reasonable"

ONGC did not, and could not, say that the costof SHIV of' the payments made to Mil was not necessary and reasonable if those words are applied to the factual situation in which SHI found themselves. The cost of SHI of these payments was clearly necessary and reasonable, since SHI were legally obliged to make them, Given the ordinary and natural meaning of these words and applying them to the facts, in the same way as has already been done in relation to the rest of Clause 17.3, it is therefore again clear thai the wording covers the facts.

Irrelevance of the Subcontract as such

6.6 However, ONGC's main contention about Clause 17.3 as a whole, including in particular the final words "caused by such a change", is that this provision is for some reason to be deprived of its ordinary meaning and effect because the payments made by SHI were made pursuant to their Subcontract with MII. Before coming to the alleged effect of the other provisions of the Contract, I must therefore first deal with this submission.

6.7. In my view the whole of the generality of this argument is shot through with fallacy. The fact that the extracost of SHI arose from an" obligation under the Subcontract and not in some other way is in my view not only relevant but in fact an argument in favour of the application of Clause 17.3, given that its contents in their ordinary and


natural meaning are covered by the facts. Since so much irrelevant play was made with this aspect, in so many different permutations, as though the subcontract somehow threw a blight on the application of Clause 17.3, I put the question rhetorically; why should it make any difference to the effect of Clause 17.3 that the extra cost for SHI was incurred, and became necessary to be borne by them on the ground that it arose out of an obligation which they had assumed under the subcontract in the circumstances of this case? Unless there is something which has this effect in Clause 17.3 itself, which I have already shown not to be case, or of some other provision of the Contract with which I still have to deal, the answer must be that there is no such reason whatever, SHI's obligations under the Subcontract were closely, and indeed inextricably, linked to their obligations under the Contract. The fulfillment by MII of their obligations under the Subcontract formed part and parcel of SHI's responsibility for performance of the Head Contract. The fact that SHI's obligation to make these payments arose under the subcontract, and not in some other way or under some other contractual obligation, unconnected or only remotely connected with the Contract, is an argument in favour of the application of Clause 17.3 and not against it.

6.8 It is at this point that there was considerable misunderstanding, if I must respectfully say so, in the arguments on behalf of ONGC criticising one passage in the Reasons given by Mr. MacCrindle. It


It was said that Mr. MacCrindle had erroneously expressed the view that ONGC were liable to SHI because ONGC could reasonably foresee that the subcontract would be tax-protected in the same way as the Head Contract. But that was not his reasoning at all. Foreseeability by itself obviously cannot found liability. The foundation for liability lies in the application of the language of Clause 17.3 to the facts. It is only at that point that foreseeability becomes relevant in the sense that imforsecability, commonly termed remoteness, could exclude the application of Clause 17.3. Thus, if SHI's liability had not arisen under this Subcontract, with its normal and foreseeable features, but under some other unconnected and unforeseeable obligation assumed by SHI, then the position would clearly be different. One can take a simple illustration. Suppose "that a change in the law had exposed SHI to some necessary extra cost which had nothing to do with the Contract in the present case, but with some other contract or some other connection which they may have had within India, then one would obviously exclude the application of Clause 17.3 even though the generality of its language could still be applied to the facts. One would then say that such extra cost was unforeseeably by ONGC and clearly too remote.

6.9 In this connection, although there is clearly no question of unforseeability or remoteness on the facts, it is relevant to bear in mind how closely related SHI's obligation to MII under the


Subcontract were to their performance of the Head contract. Mr. Banerji sought to weaken this aspect by pointing to Clause 3.2 of the General Conditions dealing with subcontracting. He said that, within the limits of this general provision, SHI could conclude subcontracts with anyone and on any terms as they might wish. But this is not correct and would in any event be irrelevant. It is commonplace for head contractors such as SHI to perform their obligations to the owner or employer by numerous subcontracts, and even to the extent to which they may choose to perform these obligations personally, they must do so through their employees, with whom they will also be in a contractual relationship. Given the width of the language of provision such as Clause 17.3, it is therefore wholly probable that any extra costs to someone in the position of SHI will arise in connection with some form of subcontract. But in the present case the connection with theHead Contract could not be closer. SHI had agreed with ONGC to employ Mil as their principal subcontractor, anfONGC had entered into the Contract in reliance on this fapt. This aspect was part and parcel of the Bid, to which reference may be made for the interpretation of the Contract if necessary : Clause 1.2.3 of the General Conditions. This fact was also part of the evidence given on behalf of ONGC knew that the inanition was for the subcontract to be tax-protected. Finally in this connection, it should be remembered that the Head Contract itself incorporated part: of the terms of the Sub-


contract with MII named as the Subcontractor : see paragraph 2.4.4 above.


6.10. The final aspect of ONGC's arguments on the relevance of the Subcontract to the application of Clause 17.3 was concerned with causation. The argument was that the necessity for the cost incurred by SHI in making the payments to MII arose from the Subcontract and not from the changes in the law, so that the final words of the Clause, "caused by such a change", did not apply. But in my view this argument is equally untenable. This being in substance an indemnity clause, one must search for, and identify, the proximate cause, the supervening event which was the effective cause of SHI's liability to MII. For this purpose one must choose between the unforeseen advent of changes in the law, against which Clause 17.3 was designed to protect, and the foreseeable and indeed commonplace feature that the Subcontract was tax-protected; a phrase which is used by the tax authorities themselves, and a practice which caused section 10 (6B) to be inserted into the 1961 Act. In my view it is obvious the context of the choice which has to be made for the purposes of Clause 17.3, that the effective supervening cause was the change in the law. In this connection I entirely agree with the reasoning of Mr. MacCrindle, contained in the very passage of his Reasons which was criticised by Mr. Banerji :


"I consider that the necessary and reasonable extra cost to Sumitomo unavoidably caused by such changes (in Indian law) was not less than that amount (the amount paid to MII). It may be said this extra cost to Sumitomo arose also in part from the obligation which had been assumed by it under the Subcontract to indemnify MII against MII's Indian tax liabilities. But there had been nothing commercially abnormal, irrational and unpredictable about the assumption by Sumitomo of that obligation under the Subcontract in December 1983 - that was certainly at all material times reasonably foreseeable ONGC. Nor would the terms of the Subcontract alone have resulted in that extra cost to Sumitomo - that extra cost was effectively caused by the abovementioned changes in the Income Tax Act 1961 or in its enforcement. The trigger was the retrospective introduction in 1987 of Section 44 BB."

In my view this reasoning cannot be faulted.

Irrelevance of other provisions

6.11. The final aspect of ONGCs submissions was that the application of Clause 17.3 to the facts, upon its true construction and effect as discussed up to this point, was altered by the context of a number of other provisions of the Contract. In my view all these submissions are also untenable, and I will deal with them briefly in the order of the provisions of the Contract which were relied upon for the purpose.



Clause 3.1.: There was no assignment of any of SHTs obligations or interests in the contract to anyone. The fact that many of the General Conditions of the Subcontract were on back-to-back identical terms with the Head Contract, in particular Clause 23, obviously does not constitute any assignment under this provision.


Clause 13.2.7.: As already pointed out, this formed part of a group of sub-clauses dealing with the prescribed administrative procedures for invoicing and payments during the progress of the Works and also providing for the consequences if these were not observed. General Condition 13.2.7 was designed to ensure compliance with the prescribed chain of payments, and performance of other obligations, from ONGC to SHI and thence to SHI's subcontractors, such as MII, without any direct obligation on the part of ONGC which might bypass SHI. The purpose of this provision was purely administrative and it has no bearing whatever on Clause 17.3.


Clause 13.3.4.: The submission was that the issue of the Discharge Certificate (see paragraph 4.3 above) absolved ONGC from any further liability under the Contract. But Clause 13.4 does not say that the issue the Discharge Certificate puts an end to the Contract in every respect. It might have said so in theory, but in practice it obviously could not do so, as is made 


clear by Clause 13.3.5. In a contract of this nature it is commercially impossible for all obligations on either side to terminate with the end of the Guarantee period. There are a number of provisions of the Contract whose effect was clearly not intended to be terminated at this point. A prime example is Clause 23, since the final assessment to tax of companies in the position of SHI is liable, if not bound, to take place some years from the completion of the Contract Works, as happened in this case. There are also other clauses of the Contract which clearly fall into the same category which clearly fall into the same category which I have not troubled to set out, such as provisions dealing with confidentiality, patent infringements and similar obligations, and provisions dealing with potentially long term liabilities for environmental pollution.he context of Clause 13.3.4 lies in the satisfactory completion of the Works after the expiry of the Guarantee Period. I recognise that its wording might be taken to have a wider ambit, though I do not think that this was the intention underlying a standard provision of this nature. But even if this is accepted, so that the words in 13.3.5 "(subject to sub-Clause 13.3.4)" should be taken to apply in a wider context, this makes no difference. Even on this wide interpretation, the affect is no more than that both SHI and ONGC had to give written notice 73 before the issue of the Discharge Certificate of any claim ("matter or things") which was then know, in order to maintain the other's liability for it under Clause 13.3.5. Even on this - in my viewiexcessively - wide interpretation, Clause 13.3.4 could not bar Claims covered by other provisions of the contract whose existence was unknown at the expiry of the Guarantee Period and in respect of which no written notice could accordingly be given.

The context of Clause 13.3.4 lies in the satisfactory completion of the Works after the expiry of the Guarantee Period. I recognise that its wording might be taken to have a wider ambit, though I do not think that this was the intention underlying a standard provision of this nature. But even if this is accepted, so that the words in 13.3.5 "(subject to sub-Clause 13.3.4)" should be taken to apply in a wider context, this makes no difference. Even on this wide interpretation, the affect is no more than that both SHI and ONGC had to give written notice 


before the issue of the Discharge Certificate of any claim ("matter or things") which was then know, in order to maintain the other's liability for it under Clause 13.3.5. Even on this - in my viewiexcessively - wide interpretation, Clause 13.3.4 could not bar Claims covered by other provisions of the contract whose existence was unknown at the expiry of the Guarantee Period and in respect of which no written notice could accordingly be given.


Clause 23: The submission was effectively that since the subject matter of this provision was tax, Clause 17.3 could not also have been intended to cover tax. This proposition only has to be stated in the context of the wording of these provisions to expose its fallaciousness. Clause 23 deals with SHI's own liability to tax. Clause 17.3. deals with any cost necessarily and reasonably incurred by SHI as the result of any change in Indian law. I have already explained in 6.5.1 and 6.5.2 above why there is no reason to exclude SHI's obligations in respect of MII's liabilities to tax as being anything other than a "cost" to SHI. Why then should Clause 23, which merely makes the Head Contract tax-protected in favour of SHI, cut down the ordinary and natural meaning of Clause 17.3.? Mr. Banerji relied on the old maxim generalia specialibus non-derogant. Its effect is that any provision dealing with specific matter, which 


are also everybody some other general provision, so as to cause apparent surplusage, will take precedence. But this has no application to the relationship between Clauses 17.3 and 23. One only has to read them to see this. They do not cover the same ground at all. The position in relation to Clause 23 is the reverse of the position which existed in the Dixilyn-Field case (supra 6.5.3) where the contractor was required to pay his own tax and was not tax protected. 

Moreover, any argument based on something in the nature of surplusage involves the assumption that the provisions of the contract in question are drafted so as not to overlap with each other. But this is not the position in relation to the Contract in the present case, it might be possible to cite many provisions which cover the same or similar ground, but in relation to Clause 17.3 it is sufficient to refer to Clause 5.11.7 to demonstrate that a complex contract of this nature was never designed to be as precise as a jigsaw puzzle. In my view there is equally no substance in this submission.


Clause 27.2. This provision excludes any liability on the part of ONGC to SHI for consequential damages suffered by SHI for any breach of the Contract by ONGC or any negligent act or commission by ONGC, or for which ONGC may be responsible, in connection with the performance of the work. 75

Again, with respect, one only has to read this provision to see that it has no application whatever to the true construction and effect of Clause 17.3. There is no question of any breaches of Contract, negligence or other wrongful act on the part of ONGC to which any such restriction in the recoverable damages has any relevance.


6.12. Finally, I should briefly refer to the reasons stated by Mr. Chandrasekhar for his conclusion that SHTs claim should fail. These were mentioned by Mr. Banerji, but not put into the forefront of his argument.

Mr. Chandrasekhar effectively gave three reason, but I cannot - with respect - agree with any of them.

First, he said, without further explanation, that the claim was clearly excluded by Cause 13.2.7 of the Contract. I have already dealt with this aspect in 6.1 1(b) above and need not repeat this, but I cannot follow the point at all. The second and third reasons are equally difficult to follow, as expressed in the following paragraph :


"By the time SHI executed the main contract with ONGC on 7.9.1983, the Notification dated 31.3.1983 ... had already extended the Income Tax Act 1961 to the offshore sites in which MII carried on its activities under the subcontract. SHI should have anticipated that the activities of MII in the offshore site would attract levy of Income tax. If SHI intended that income tax that might be levied on MII should also be borne by ONGC, SHI should have bargained for inclusion of an express provision to that effect in that main contract. In the absence of such express provision in the main contract, SHI cannot claim that the income tax levied on MII and reimbursed by it (SHI) should also he borne by ONGC."


With all due respect, these comments cannot affect the construction and effect of Clause 17.3. One can always say, in relation to any point of disputed construction that a party should have bargained for an express provision. But the contract must of course be construed as it is, and in this case it depends on the true construction of Clause 17.3 in its context, with which I have already fully dealt. ..Moreover, the Contract had become effective and binding as from 14 April 1983 : see 2.3.1 above. This was only two weeks after the Notification had appeared in Gazette. Even if this change in the law had by them become known to SHI, which in practice may well be highly doubtful,


it would clearly be unrealistic for them to seek to reopen their Bid at that point and within that period of time.

6.13. I have now considered all of ONGC's numerous arguments in relation to the construction and effect of clause 17.3 with great care and at great length. However, I remain quite unpersuaded by any of them and therefore conclude that SHI's claim must succeed.

6.14. I should add, for the sake of completeness, that in my view SHTs alternative claim under Clause 23 must clearly fail. The provision only deals with taxes imposed on SHI and cannot therefore cover taxes imposed on Mil. If Clause 17.3 had been absent, the contrary might be more arguable, but this does not arise.


7.1 As already mentioned, an argument based on the 3 years period of limitation under Indian law was revived in ONGC's final written submission after the close of the hearing. The argument is that if ONGC are liable, then the relevant period of limitation began to run on or about 1 April 1987 when the releyant change in the law took place by the enactment of Section 44 BB with retrospective effect to 1 April 1983. The basis of the argument is that this was the date when SHI's cause of action (if any) arose, and that the 3 year period of limitation accordingly expired on or about 31 March 1990.

7.2. It seems to me, with all respect, that one only has to state this proposition to see that it is wholly untenable. The change in the law


did not in itself give rise to any cause of action to SHI. It merely provided a trigger for the potential future operation of Clause 17.3. A right under this Clause then arose thereafter when SHI made demands on ONGC and. finally, when SHI made the payments in question to MII against which they are entitled to be indemnified. The first of these was in December 1990 and the arbitration was then commenced about 3 months later. There is therefore nothing in this submission.



8.1.1. The total principal sums claimed by SHI in the alternative have already been set out in paragraph 4.17 above and found to be correct, viz. Yen 129,764,463 or alternatively US $ 898,928.84. In paragraph 4.1 6 above I have also already found the relevant facts in this regard : SHI paid in Dollars but had previously suffered their loss in Yen, since they had to sell Yen in order to buy the Dollars. It is therefore necessary to decide in which currency SHI should be compensated. I have not found this an altogether easy .question. It matters, because the'Yen has strengthened considerably against the Dollar. On the other hand, the reverse side of that coin, to which I come later, is that the Dollar interest rate is substantially higher than that of the Yen.

8.1.2. The currency of account of the Contract was in Yen, but it is now clear law that this is of little or no relevance. As the result of the appeals in tort and contract decided by the House of Lords in what is


usually referred to as The Despina (1979) AC 685, it was established that a claimant must be compensated for his expenses or loss "in the currency which most truly expresses his loss" (see e.g. Lord Wilberforce at p. 701 and Lord Russell of Killown at p. 705), provided.that a loss in that currency was reasonably foreseeable. This principle was then applied in these cases in a way which is conveniently summarised in the headnote as follows :

"Where a Plaintiff proved that he conducted his business in a specific currency and it was reasonably foreseeable that he would use that currency to purchase the necessary currency to meet the immediate and direct expenditure caused by the Defendant's tort (or breach of contract), then Judgement should be expressed in the Plaintiff's currency ..."

8.1.3. ONGC did not challenge that this was the general law, but they submitted that this principle should not be applied in the present case because Clause 27,2 of the contract excludes claims for "consequential damages". They accepted, as they had to, that the meaning of this phrase has been authoritatively defined to cover loss which is not a direct, but only some indirect, loss suffered by the Plaintiff as the result of the Defendant's wrongful act "see e.g. Millar's Machinery Co. Ltd. Vs. David Way (1935) 40 Com. Cas. 204, Saint Line Vs. Richardsons (1940) 2 KB 99 (CA) and Croudace Vs. Cawoods (1978) 2 Lloyd's Rep. 55 (CA). But they said that


SHI's direct loss was in Dollars and that their loss in Yen was merely the' indirect cause .of ONGCs refusal to compensate them under Clause 17.3. They also sought to reinforce this argument by referring to paragraph 652 of McGregor on Damages (15th ed. 1988) where the expressions "direct loss" and "indirect loss" were used descriptively in a similar currency situation.

8.1.4. I have had some hesitation on this point, but in the end I am driven to (he conclusion that Mr. Corclara is right in submitting that SHI's loss is to he measured and assessed in Yen. I cannot accept that the terminology used in McGregor determines the question whether the exclusion of "consequential damages" has the effect for which ONGC contended. SHTs true and direct loss was in Yen, and that is the currency in which they should be compensated. Applying the reasoning of the authorities on the meaning of "consequential damages" cited above, and looking at the facts and outcome of those cases by analogy, it must follow that this is correct answer. The position on the authorities appears, to be that exclusions of "consequential" damages have little or no effect other than to rule out losses which would in any event have been too remote to be recoverable.


8.2.1. In my view SHI was clearly entitled to damages in the full sum of yen 129,764,463 as referred to in paragraphs 4.17 and 8.1.1. above and not


merely to the equivalent of the first of the three sums paid to MII in 12 December 1990 prior to the notice of arbitration which was given (hereafter on 6 March 1991. The reference to arbitration was required because ONGC had made it clear that they would make no payments whatever to SHI, knowing full well that SHI would be required to make further payments to MII as MI's tax adjustments progressed. Moreover all the sums paid to MII which are now claimed, less the subsequent refund, were claimed in the Statement of Claim delivered on or about 30 October 1992. SHI's right to all 3 payments (less this refund) is in accordance with English law - the crucial law of the arbitration - and English practice : see Toepfer Vs. Cremer (1975) 2 Lloyd's Rep. I 18 (C.A.).


8.3.1. It was rightly pointed out on behalf of ONGC in their final written submissions that the right to interest on damages has to be decided according to the proper law of the contract (see Miliangos Vs. George Frank (1976) AC 443), and thus according to Indian law in this case. I therefore proceed upon this basis.

8.3.2. SHI found their primary claim for interest on the last three lines of Clause 13.2.3 of the Contract which provide'for a rate of 1.25% per month on amounts outstanding for more than 30 days from the receipts of the relevant invoice. However, this provision only applies to undisputed amounts and is in any event clearly restricted to


payments during the progress of the works. I therefore do not accept thai this provision has any application for present purposes.

8.3.3. In the alternative SHI rely on my discretionary power to award interest in the normal way. In response to this ONGC submit that Clause 13.2.3 also has the effect of barring any award of interest other than pursuant to this provision. But there is nothing in this provision, nor anywhere else in the Contract, which has this effect. This point had (rightly) not been pleaded nor raised previously, and I therefor proceed on the basis of my discretionary powers as discussed below.

8.3.4. In this regard ONGC have referred me to the decision of the Indian Supreme Court in Renusagar Power C. Ltd. Vs. General Electric Co., AIR 1904 SC 860, paragraphs 134 and 135, it appears from this that the question whether interest is to be awarded for any period prior to the date of the reference to arbitration is characterised in Indian law as matter for the substantive law, i.e. Indian law in this case, and it also appears from the decision in Union of India Vs. Rallia Ram AIR 1966 SC 395, as clarified by later decisions, that there is no general discretionary power in respect of this period. Such a discretionary power, at any rate in relation to proceedings in Court, only exists under Section 3 (i) of the Interest Act 1978, but in relation to preference interest sub-section (b) requires that a prior written notice shall have been given to this effect. There is no evidence of any such notice in the present case. Moreover, the largest of the three payments


was only made on 26 April 1991, after the reference had. begun, it therefore follows that I do not award any interest for any period prior to the reference in any event.

8.3.5. However the Renusagar case also shows that the power to award interest after the beginning of the reference is a matter for the law governing the arbitral proceedings. This is English law : see the decision of Potter J. in the present case referred to in paragraph 1.25 above, which confirmed and applied a number of earlier authorities to the same effect. The discretionary power to award interest in arbitrations is stated in Section I9A of the Arbitration Act 1950, inserted by the Administration of Justice Act, 1982. For present purposes the relevant provision is sub-section (b) which confers power to award simple interest at such rate as the arbitrator thinks fit "on any sum which he awards, for such period ending not later than the date of the award as he thinks fit."

8.3.6. This is the power which I propose to exercise, since I consider that it is clearly appropriate in the circumstances of this case, and since interest was claimed both in SHI's request for Arbitration and in their statement of Claim. As regards the period, this will run from 15 May 1001 when the original Tribunal had been appointed and all three sums had been paid by SHI to MII, to the date of this Award. As regards the rate, although it has been stated on behalf of ONGC that a rate of 6% will generally be regarded as reasonable, having regard to


my decision on the issue as to the currency of account, I consider that I must deal with this matter more precisely. In their final written submissions SHI have produced evidence to show average prime interest rates over the period from December 1990 to May 1995 both in Yen and US Dollars, the respective averages being 4.77% and 7.20%. In my view, since I am making my Award in Yen for the reasons set out above, I must base myself upon an average Yen rate. Looking at the figures, the highest rates were prior to May 1991. In all the circumstances, therefore, I consider that a rate of 4.50% is reasonable.


There is no doubt that I have a discretionary to grant any appropriate declaration as part of my award if I consider it desirable to do so : see e.g. Mustill & Boyd, Commercial Arbitration, 2nd ed. at p. 390. SHI claim that, given the long time which may elapse before the final conclusion of assessments to tax in India, I should make a declaration to the effect that, if MII were to incur hereafter any further liability to tax under the Subcontract for which SHI are liable, and if the circumstances are still within Clause 17.3, then there should be a declaration that ONGC are under a continuing liability to indemnify SHI. The advantage of doing this would be to avoid the possible need for a further arbitration covering the same ground in respect of any fresh amount.

I agree that it would be right to grant such a declaration in principle. However, it must be carefully limited to the possibility of further assessments in relation to the subcontract being made as the result of the Notification and section 44 BB, since these alone constitute the relevant changes in the law to which this Award is directed. For instance, any further assessments under the Circular alone would not be covered by Clause 17.3, since they would be based merely on an allocation made pursuant to section 9, and therefore under the old law : see paragraphs 5.5. (6) and (8) above. Furthermore, there must also be a corresponding declaration in favour of ONGC to the effect that they are entitled to any further rebates or refunds which may hereafter be made to MII.


8.5.1 Having succeeded, SHI are obviously entitled to their entire costs of this arbitration, to be taxed or agreed, if the outcome had gone the other way, there might well have been scope for some qualified order m view of the manner in which this arbitration has been conducted in some respects. In the circumstances, however, I say no more about these aspects.


9.1 I, the undersigned Umpire, the Rt. Hon. Sir Michael Kerr, hereby AWARD and DECLARE as follows : [...]


(1) The Respondents ONGC must pay to tat Claimants SHI on demand the sum of Japanese Yen 129,764,463 together with interest at an annua! rate of 4.50% from 15 May 1991 to the date of this Award.

(2) It is hereby declared that in the event that the Claimants become liable to pay, and to pay, further sums to MII hereafter due to any assessment to income tax on MII under the present Subcontract pursuant to section 44 BB of the Income Tax Act 1961, then the Respondents must indemnify the Claimants against any such payment on demand; and, conversely, the Claimants must pay to the Respondents the amount of any further refund which may hereafter be received beyond that referred to ill paragraph 4.17 above.

(3) The Respondents must pay to the Claimants all the Claimants' costs of this arbitration, to be taxed in default of agreement, on demand.

(4) Finally, the Respondents must pay my fees and expenses, and the fees and expenses of Mr. MacCrindle QC and Mr. Chandrashekhar, the original Tribunal as well as the other costs of this arbitration, such as the hire of rooms, the provision of transcripts, etc. In the event that the Claimants have already paid any sums on account of such fees, expenses or costs, then 


all such sums must be refunded by the Respondents to the Claimants on demand.

Dated in London, 27th June 1995



David Grief

Senior Clerk

Essex Court Chambers

24, Lincoln's Inn Fields

London WC2A 3ED



The Rt. Hon. Sir Michael Kerr

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