Jaipur: The Rajasthan High Court has set aside a Commercial Court order that had overturned an arbitral award in a dispute involving a state beverages corporation’s unilateral deduction of an alleged excess customs duty from payments due to a liquor manufacturer under a separate financial year agreement.
A Division Bench comprising Justice Arun Monga and Justice Maneesh Sharma restored the arbitral award, subject to a correction in the amount payable, holding that the Commercial Court had exceeded the limited scope of its jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996.
The dispute arose from two separate annual agreements between the liquor manufacturer and the state beverages corporation. Under the agreements, the price payable for liquor included a customs duty component determined through approved cost sheets.
For one financial year, the government reduced the customs duty applicable to imported liquor. The corporation alleged that the company failed to disclose the reduction and consequently received excess payments based on the earlier, higher duty rate.
Instead of separately recovering the alleged dues relating to the earlier agreement, the corporation deducted the amount from payments payable to the company under the agreement for the subsequent financial year.
The company challenged the deduction in arbitration, contending that the two agreements were independent and that there was no contractual provision permitting the corporation to adjust an alleged liability arising from one agreement against payments due under another.
The Arbitrator accepted the company’s contention and held that the two agreements were separate contracts. An award was accordingly passed in favour of the company along with costs.
However, the Commercial Court, exercising jurisdiction under Section 34, set aside the award after finding the two agreements to be interconnected. It also imposed substantial costs on the company and made observations concerning liquor pricing practices and directed further action.
The company then approached the High Court under Section 37 of the Arbitration Act.
The High Court reiterated that a Section 34 court cannot act as an appellate court, reappreciate evidence or substitute its own interpretation of a contract for a plausible view taken by the Arbitrator.
The Bench examined the contractual clauses relied upon by the Commercial Court and found that none expressly authorised the corporation to adjust alleged dues arising from one financial year’s agreement against payments under a separate agreement for another year.
The Court held that the Arbitrator’s conclusion that the agreements were distinct and independent was a possible and reasoned view, and therefore could not have been interfered with merely because the Commercial Court preferred another interpretation.
The Bench also found fault with the Commercial Court for relying upon certain documents produced during the final hearing which were not part of the arbitral record. It further held that issues concerning pricing policy and business practices, which had neither been pleaded nor framed before the Arbitrator, could not form the basis for setting aside the award.
The High Court rejected reliance on tax-refund and public-policy principles, observing that the dispute was essentially a commercial dispute between contracting parties, rather than a matter concerning the State’s sovereign or tax-collecting functions.
While restoring the award, the Bench identified a computational error in the amount awarded by the Arbitrator. A portion of the awarded amount related to operational charges rather than customs duty and was therefore severed from the award. The amount ultimately payable to the company was consequently reduced.
The Court, however, clarified that the judgment does not amount to an endorsement of the company’s conduct regarding the alleged withholding of differential customs duty. The corporation and other competent authorities remain free to take appropriate action concerning the alleged excess payment under the earlier agreement.
The High Court also directed that a copy of the judgment be forwarded to the concerned government authorities and expected the corporation to examine whether any action was warranted against its own officials in connection with the manner in which the dispute had been handled.
The Court therefore set aside the Commercial Court’s order and restored the arbitral award, with a minor correction in the amount payable.