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.

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34

 

35

36

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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.

 

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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 [...]

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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

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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 [...]

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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)

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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.

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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.

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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 [...]

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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. THE ISSUES UNDER THE INDIAN TAX LAWS

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 

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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 :

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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

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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.

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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 [...]

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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 

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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.

6. THE LEGAL POSITION UNDER THE CONTRACT

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 :

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 briefly.deal 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 [...]

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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.

(1)(a)and(b)

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

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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

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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

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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 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.

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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

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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

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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

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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-

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

Causation

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 :

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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.

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Conclusions

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 :

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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,

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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. LIMITATION

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

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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. REMEDIES

9. CURRENCY

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

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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

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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. QUANTUM

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

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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. INTEREST

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

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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

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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

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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.

8.4 DECLARATORY RELIEF

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 COSTS

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. AWARD

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

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(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 

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

Dated in London, 27th June 1995

Witness:

Sd/- 

David Grief

Senior Clerk

Essex Court Chambers

24, Lincoln's Inn Fields

London WC2A 3ED

Signed:

Sd/-

The Rt. Hon. Sir Michael Kerr