PR. COMMISSIONER OF INCOME TAX-XVIII vs. PRAVEEN SAXENA

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The arbitral proceedings arose interalia from a claim of the Respondent No.1 for refund of a sum of Rs. 12,69,12,090/- with interest. It is the case of the Claimants that this amount was paid towards share subscription amounts by Ager Mauritius to CHI and the shares were not issued by CHI. It is therefore claimed in terms of Clause 10 of the SSA, the amount is to be refunded to the Claimant No. 1[i.e. Ager Mauritius], The claimants also claimed damages to the tune of Rs. 4,44,67,137/-. Clause 10 of the SSA is as under: “10. Consequence of Non-allotment of Equity Shares to Ager Mauritius In event Ager Mauritius Shares-I to III (as single block) or Ager Mauritius Shares-IV cannot be allotted and issued to Ager Mauritius within the Term of the Agreement for whatsoever reason, then the Company shall return to Ager Mauritius through normal banking channels the Ager Mauritius Subscription Amount-I or such corresponding amount for which Ager Mauritius Shares-I to IV (as single block) have not been allotted within the Term of the Agreement.”

The Petitioner filed a statement of defence and a counter-claim before the learned Arbitrator contending the Claimants had committed a series of breaches of SSA and therefore is liable to pay a sum of Rs.65,11,00,000/- towards losses and damages suffered on account of loss of business opportunity etc. and Rs.47,50,00,000/- towards the refund of the amount paid by it for the Amritsar Transaction to the present Petitioner. D. AWARD

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By its Award dated 06.10.2015, the Tribunal awarded Rs.19,92.51,981/- to Ager India and Ager Mauritius against the respondent with interest@12% per annum from 26.8.2015 till payment. The sum of Rs.19,92,51,981/- was calculated on the basis of the principle of Rs.12,69.12,090/- plus interest @12% upto the date of the Award. The said sum of Rs.19,92,51,981/- was to further carry interest@12% till the date of payment. The amount of Rs.12,69,12,090/- was said to be the amount paid by Ager Mauritius to CHI in terms of Clause 3.1 of the SSA. Although the SSA required 13.50 Crore to be paid, admittedly only Rs.12,69,12.090/- was paid by Ager Mauritius. 2. The petitioner has challenged the award primarily on two counts, besides other; (a) the learned arbitrator erred in awarding interest on the claim of the respondent in contravention of clause 10 above and (b) the report of M/s.Dun & Bradstreet Information Services India Private Limited filed by the petitioner qua damages was wrongly rejected without going into its details. 3. Qua (a) it is submitted by the learned counsel for the petitioner that RBI has specifically barred the refund of share subscription money and secondly clause 10 above does not provide for any interest to be paid on the same. The learned counsel for the petitioner referred to a circular dated November, 12, 2002 issued by the Reserve Bank of India, Exchange Control Department, Central Officer, Mumbai-4000001 which is as follows : Repatriation of refund of funds received for purchase of shares

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A.P. (DIR Series) Circular No.45 (November 12,2002)

RESERVE BANK OFINDIA EXCHANGE CONTROL DEPARTMENT CENTRAL OFFICE MUMBAI 400 001

A.P. (DIR Series) Circular No.45 To

November 12,2002 All Authorised Dealers in Foreign Exchange Madam/Sirs, Repatriation of refund of funds received for purchase of shares Under the current exchange control regulations authorised dealers require prior permission of the Reserve Bank to allow repatriation of funds received for purchase of shares. 2. It has now been decided to delegate the authority to authorised dealers to allow repatriation of surplus funds/refund of remittance received for purchase of shares to a person resident outside India in the following cases; (a) Refund of funds received towards allotment of shares under Regulation 5(I) of the Reserve Bank Notification No. FEMA20/ 2000-RB dated May 3, 2000. (b) Remittance of surplus funds received for purchase of shares offered on rights basis. (c) Remittance on account of surplus funds received for purchase of shares or on account of

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cancellation of trade, under Two-way fungibility of ADRs/GDRs. 3. Authorised dealers may, accordingly allow remittances representing refund of funds received from a person resident outside India for purchase of shares, in the cases listed in paragraph 2 above, provided that the authorised dealers are satisfied: (i) with the bonafides of the applicant (ii) that the repatriation represents refund of funds received for purchase of shares, by way of inward remittance from outside India or by debit to NRE/FCNR account maintained with an authorised dealer in India; (iii) that no part of remittance represents interest on the funds received. 4. Authorised dealers may bring the contents, of this circular to the notice of their constituents concerned. 5. The directions contained in this circular have been issued under Section 10 (4) and Section 11(1) of the Foreign Exchange Management Act 1999 (42 of 1999). Yours faithfully, Grace Koshie Chief General Manager 4. The learned counsel for the petitioner has also referred to Section 10(1) and 10(4) of the Foreign Exchange Management Act which is as under: “10(1) The Reserve Bank may, on an application made to it in this behalf, authorise any person to be known as

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authorised person to deal in foreign exchange or in foreign securities, as an authorised dealer, money changer or off- shore banking unit or in any other manner as it deems fit. 10(4) An authorised person shall, in all his dealings in foreign exchange or foreign security, comply with such general or special directions or orders as the Reserve Bank may, from time to time, think fit to give, and, except with the previous permission of the Reserve Bank, an authorised person shall not engage in any transaction involving any foreign exchange or foreign security which is not in conformity with the terms of his authorisation under this section.”

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law. He cited Associate Builders V. Delhi Development Authority (2015) 3 SCC 49 says. Coming to each of the heads contained in the Saw Pipes judgment, we will first deal with the head "fundamental policy of Indian Law". It has already been seen from the Renusagar judgment that violation of the Foreign Exchange Act and disregarding orders of superior courts in India would be regarded as being contrary to the fundamental policy of Indian law. To this it could be added that the binding effect of the judgment of a superior court being disregarded would be equally violative of the fundamental policy of Indian law. 7. Further it is argued clause 10 of the share subscription agreement stated above does not provide for any interest. It is argued the interest probably has been awarded by the arbitrator by way of damages but since the claim of the damages made by the claimant is rejected then how interest be awarded as damages. 8. Another issue raised by the learned counsel for the petitioner is his counter claim for 65.11 crores in addition to refund of his investment (Jaipur as well as Amritsar) was not considered by the arbitrator despite the issues framed in this regard and that the learned arbitrator had dealt with the counter claim as under: There is a third reason as to why the question as to who committed default becomes unnecessary. This is because of the subsequent statement made by the learned counsel for the respondent, Mr.Muralidharan that the respondent is not seeking specific performance of the SSA and is

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also not examining any witness to prove the quantum of damages mentioned in the counter claim . We shall now refer to this aspect. Counsel for respondent no. I stated, even at the stage of the Sec.l7 Application, that the respondent is not seeking specific performance of the SSA but that it is only claiming damages as stated in the Counter claim. So far as damages are concerned, the Respondent filed a Report regarding loss of profit etc as estimated by M/s Dun & Bradstreet Information Services Pvt.Ltd., (pages 279-371 of Respondents. documents). RW1, in fact, during the course of his evidence, wanted to produce and prove the above report before the Tribunal. But there was an objection by the claimant's counsel that the said Report cannot be proved by RW1 as RW1 is not the author of the said report. It was contended that the author of the said Report must be allowed to be examined. Mr.Muralidharan, for the 1st respondent, then took time to examine the author of the said Report. Time was granted by the Tribunal. However, subsequently, by e-mail dated 21-11-014 to the Tribunal and to the Counsel for the claimants, Mr.Muralidharan stated that the Respondent is not examining anybody to prove the said Report which estimated the damages allegedly suffered by the 1st respondent. This is clear from the contents of said e-mail dated 21-11-2014 sent by Mr .Muralidharan:

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"We have to state and submit that no further witnesses are sought to be examined on behalf of the respondent no.1. It is therefore requested that the directions issued on 6-11-2014 for holding the next meetings of the Hon'ble Arbitral Tribunal at Hyderabad on 2-2-2015 and 3-2-2015 for cross examination of RW2 be recalled and the said meetings may be cancelled." Therefore, if according to the learned Counsel for the Respondent, the Respondent is not seeking specific performance of the SSA nor proving the damages as set out in the Counter claim of the Respondent, there is, in our opinion, no need to consider whether claimant has committed breach of SSA in not complying with its obligations under the Ager Conditions Precedent. 9. It is argued by learned counsel for the petitioner that despite there being a breach of contract by the respondent, the learned arbitrator did not award any damages only because of non-producing the author of the report on damages despite there being sufficient oral evidence on record to prove such loss/counter claim of the petitioner which the learned arbitrator had ignored. 10. The learned counsel for the petitioner relied upon M/s A.T. Brij Paul Singh and others vs. State of Gujarat (1984) 4 Supreme Court Cases 59 which notes: “7. A Division Bench of the High Court examined the voluminous evidence bearing on the question whether the rescission of the contract by the

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respondent was justified and recorded a categorical finding which reads as under: In that view of the matter, therefore, we are of the opinion, that the respondent- State was not justified in rescinding the contract 1 under Clause (3) of the contract document. This finding clearly establishes that the respondent was guilty of breach of contract. xxxx 8. Once is it held that the respondent was guilty of breach of works contract, part of which was already performed and for performing which the appellant, a Poona based contractor had transported machinery and equipment from Poona to the work site near Rajkot in Saurashtra, certainly he would be entitled to damages. One of the heads of damages under which claim is made is 'loss of expected profit in the work'. The claim under this head as canvassed before the High Court was in the amount of Rs. 4,30,314/-. 9. It was not disputed before us that where in a works contract, the party entrusting the work commits breach of the contract, the contractor would be entitled to claim damages for loss of profit which he expected to earn by undertaking the works contract. What must be the measure of profit and what proof should be tendered to sustain the claim are different matters. But the claim under this head is certainly admissible.” 11. It is argued the learned arbitrator had not given any finding qua breach of contract but had only decided about quantum of damages and since there was no proof of the quantum, the counter claim was rejected. The finding of the Arbitral tribunal referred to is as under:

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"Therefore, if according to the learned Counsel for the Respondent, the Respondent is not seeking specific performance of the SSA nor proving the damages as set out in the Counter claim of the Respondent, there is, in our opinion, no need to consider whether claimant has committed breach of SSA in not complying with its obligations under the Ager Conditions Precedent. Plea of fundamental breach Learned counsel for the respondent no.1, then contended that this is a case of a "fundamental breach" of the SSA and that therefore, the provisions of Clause 10 of the SSA requiring refund of the amounts to claimants by .respondent no.1, cannot be applied. No authority has been cited by the learned counsel for the 1st respondent for the above contention. If the words "for whatever reason" in Clause 10 are of wide amplitude, as mentioned by us and are without any limitation, we are unable to carve out an exception to cases of "fundamental breach", as opposed to ordinary breaches of contract even if we assume that there is a fundamental breach by the claimants as contended by Respondent no.l. We therefore, reject this contention.”

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On Part (B), the Tribunal, however, held in favour of the claimant, in the light of provisions of Clause 10 of the SSA, that as within 120 days of SSA, the respondent no.1 company had not allotted shares in the respondent no.1 company to claimants, the amount paid by claimant no.l (Rs.12,69,12,090/-) to Respondent 1), has to .be prima facie refunded to the claimant by Respondent No.1. It was held that the non-allotment of shares may be "for any reason whatsoever" under Cl.1 0 i.e., even if it is due to the defaults of claimants 1 and 2.”

(2) Such counter claim shall have the same effect as a cross suit so as to enable the court to pronounce a final judgment in the same suit, both on the original claim and on the counter claim.

(3) The plaintiff shall be at liberty to file a written statement in answer to the counter claim of the defendant within such period as may be fixed by the court.

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(4) The counter claim shall be treated as a plaint and governed by the rules applicable to plaints.”

(c) and Section 97 (b) (i) of the Income Tax Act. “Impermissible avoidance arrangement. 96.(1)An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—

(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length;

(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

(c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or

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(d) xxxx. Arrangement to lack commercial substance. 97. (1) An arrangement shall be deemed to lack commercial substance, if— (a) the substance or effect of the arrangement as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part; or (b) it involves or includes— (i) round trip financing;” 17. Further submissions raised by the learned counsel for the petitioner is qua a cheque of Rs.2.50 crores issued by the respondent no.1 to petitioner which was for encashment but the learned tribunal held otherwise: “We have considered the evidence of the claimants and the respondents. We agree with the contention of the claimants that the evidence of RW1 is consistent with the plea of claimant that the cheque was given only as security as stated by the claimant and not for purpose of encashment. On the other hand, the evidence of RW1 in regard to this deposit is not consistent and full of gaps and is not reliable . We accept the evidence of CW1 and reject the evidence of RW1. We, therefore, hold on Issue No.5 of the claim that the cheque bearing no.240926 for Rs.2.50 Crores was given by claimant no.2 to respondent no.l only as security and not for encashment. We also hold that the respondent no.l was not entitled to present the cheque for payment and claimant no.2 was justified in stopping payment by letter addressed to Bank.” 18. The learned counsel for the petitioner referred to Questions no. 105 and 106 alongwith its answers given as under:

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“Q105. Was the cheque of Rs.2.50 crores forming subject matter of the Section 138 proceedings referred to above handedover to Respondent No.1 as part of the transaction which is presently pending in this arbitration? A. Yes. Q 106. I put it to you that the cheque of RS.2.50 crores referred to in previous question was given to Respondent No.1 to secure the transfer of the intercorporate deposit of Rs.2.50 crores as referred to in Clause 6.4 of Ex.C-2 extended by Claimant No.2 to the Company known as Radhamohan Builders Private Limited to Respondent No.1 and that Respondent No.1 was not entitled to have encashed that cheque. What do you say? A. No, as per EGM dated 15th May 2010 the resolution which was passed by Respondent No.1 Company, the said sum of Rs.2.50 crores was paid to Claimant No.2 for transfer of inter corporate deposit that Claimant No.2 had made with Radhamohan Builders Private Limited in favour of Respondent No.1. The cheque was issued towards refund of the ICD paid to Claimant No.2.” 19. Hence it is argued the award be set aside. 20. I have heard the arguments. The facts reveal an idea conceptualized by the parties to develop hotels and only for this reason the money was paid by the respondents for purchase of land and to build a hotel and to have control over the land by purchase of shares in such hotels. Since the assets were to be purchased so the respondent need to control the said company.

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liable to a penalty up to three times the sum involved in such contravention and confiscation of the value equivalent, situated in India, the Foreign exchange, foreign security or immovable property. Proviso: Provided further that the Reserve Bank may, on an application made to it and for sufficient reasons permit an Indian Company to refund the amount of consideration received towards issue of security, if such amount is outstanding beyond a period of 180 days from the date of receipt.

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contemplated under the FEMA Act nor is in any of the circular(s). There is no prohibitive bar prescribed in the aforesaid circular as sought to be claimed by the petitioner. It only provides general provision available to the Indian companies to refund the amount received towards the purchase of share from time to time. The present circular of RBI only outlines the scheme of establishment under the enactment with regard to the purchase of equity instruments by a person resident outside India and mechanism with regard to the inward remittance and refunds in such case if any. The crux is if any money comes to India for purchase of shares and the shares are not purchased within 180 days, the money needs to be refunded, as simple as that. 24. In Cruz City 1 Mauritius Holdings vs. Unitech Limited (2017) 239 DLT 649 it was held: “97. It plainly follows from the above that a contravention of a provision of law is insufficient to invoke the defence of public policy when it comes to enforcement of a foreign award. Contravention of any provision of an enactment is not synonymous to contravention of fundamental policy of Indian law. The expression fundamental Policy of Indian law refers to the principles and the legislative policy on which Indian Statutes and laws are founded. The expression "fundamental policy" connotes the basic and substratal rationale, values and principles which form the bedrock of laws in our country. 104…... There was a paradigm shift in the statutory policy. The focus had now shifted from prohibiting transactions to a more

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permissible environment. The fundamental policy of FEMA no longer proscribes or prohibits Indian entities from expanding their business overseas and accepting risks in relation to transactions carried out outside India. And, as the title of FEMA suggests, the policy now is to manage foreign exchange. Under FEMA, all foreign account transactions are permissible subject to any reasonable restriction which the Government may impose in consultation with the RBI. It is now permissible to not only compound irregularities but also seek ex post facto permission. Thus, the question of declining enforcement of a foreign award on the ground of any regulatory compliance or violation of a provision of FEMA would not be warranted. 108. Having held that a simpliciter violation of any particular provision of FEMA cannot be considered synonymous to offending the fundamental policy of Indian law, it would also be apposite to mention that enforcement of a foreign award will invariably involve considerations relating to exchange control. The remittance of foreign exchange in favour of a foreign party seeking enforcement of a foreign award may require permissions from the Reserve Bank of India. There may also be a question whether the initial agreement pursuant to which a foreign award has been rendered required any express permission from RBI. However, as indicated earlier, the policy under FEMA is to permit all transactions albeit subject to reasonable restrictions in the interest of conserving and managing foreign exchange. India has not accepted full capital account

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convertibility as yet. Thus, there are transactions for which permission may not be forthcoming. Whereas certain transactions are permitted under FEMA and regulations made thereunder without any further permissions; other transactions may require express permission from the RBI. However, these considerations can be addressed by ensuring that no funds are remitted outside the country in enforcement of a foreign award, without the necessary permissions from the Reserve Bank of India. This would adequately address the issue of public interest and the concerns relating to foreign exchange management, which FEMA seeks to address. 109. As discussed hereinbefore, this Court while considering the question whether to decline enforcement of a foreign award on the ground of public policy, is also required to consider the nature of the policy that is alleged to have been contravened. The approach that this Court would bear is one that favors enforcement of a foreign award and if the public policy considerations can be addressed without declining recognition of the foreign award, the Court would lean towards such a course. 110. The contention that enforcement of the Award against Unitech must be refused on the ground that it violates any one or the other provision of FEMA, cannot be accepted; but, any remittance of the money recovered from Unitech in enforcement of the Award would necessarily require compliance of regulatory provisions and/or permissions.

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may be liable to be proceeded against for violation of provisions of FEMA, the enforcement of the Award cannot be declined.” The above law clarifies the award of interest is in no way against the fundamental policy of Indian Law. 25. The next issue raised is of damages and round tripping. The arbitral tribunal has held: “Whether Respondent No. I is entitled to a refund of a sum of Rs. 47,50,00,000/- and interest thereon as claimed ? While according to the claimant, on account of the non allotment of shares by respondent no.1 to claimant no.1 and 2, the share purchase money of Rs.l2,69,12,090/- paid to the Respondent no.1 has to be refunded, it is the contention of the respondent no.1 that if that be so, all the payments made by respondent no.1 to claimants I and 2, in respect of the interest of claimant no.2 in Amritsar property, and the Jaipur property, being payments of Rs.4 7,50,000/- and Rs.16,01,000/- respectively, should also be refunded to the Respondent no.1. (Admittedly there was no payments in respect of the third item, the Visakhapatnam property of Visu ). In answer, Claimants contend that under the "round tripping" method of mutual payments adopted by both parties, identical amounts of Rs.47.50 Crores and Rs.16.01 Crores have already been paid back by claimants to respondent no.1 for purchase of shares in 1st respondent company.

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Then the following method was adopted by both parties for the payments of Rs.47.50 Crores and Rs.16.01 Crores to each other for the Amritsar and Jaipur properties, namely, the "round tripping" procedure. It will be seen that all the payments by each party to other in respect of Rs.47.50 Crores and Rs.l6.0 1 Crores were made from the initial amount of Rs.12,69, 12,090/- paid by claimant no.1 through claimant no.2 in rupees and not in USD. This is done by way of respondent no.1 issuing a cheque for Rs.5 Crores from out of Rs.12,69,12,090/- in favor of claimants and simultaneously, claimants issuing a cheque for Rs.5 Crores in favor of respondent no. I and repeating such issuance of cheques by each side to the other, to complete the mutual payments of Rs.47.50 Crores and Rs.16.01 Crores. We shall explain this procedure in more detail. The net result is that only the first payment of Rs.12,69,12,090/- made by claimant no.1 (through claimant no.2) to respondent no.1, remains with the respondent unpaid. We have already held under Issue no.2 of the claim that the respondent no.1 has to pay back Rs.12,69,12,090/- to claimants.”

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arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. —When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it." Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Compensation for failure to discharge obligation resembling those created by contract.—When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract. —When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract." Explanation.—In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non- performance of the contract must be taken into account.”

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is unqualified except as to the maximum stipulated; but compensation has to be reasonable, and that imposes upon the Court duty to award-compensation according, to settled principles. The section undoubtedly says that the aggrieved party is entitled to receive compensation from the party who has broken the contract, whether or not actual damage or loss is

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proved to have been caused by the breach. Thereby it merely dispenses with proof of "actual loss or damages"; it does not justify the award of compensation when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good loss or damage which naturally arose in the usual course of things, or which the parties knew when they made the contract, to be likely to result from the breach.”

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to respondent no.l only as security and not for encashment. We also hold that the respondent no.l was not entitled to present the cheque for payment and claimant no.2 justified in stopping payment by letter addressed to Bank.”

(iv) Each party has all necessary consents, licenses and approvals in connection with the entry Into, and performance of, its obligations under this agreement and as a shareholder In the Company. (vi) The Parties hereto confirm the enforceability of these presents Inter-se.”

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what has been held by the Court while exercising jurisdiction under Section 34 of the Act. If that is so, we do not see how in an appeal under Section 37 of the Act, the High Court could have re-appreciated the evidence to come to a contrary finding. The High Court was not sitting in appeal over the award of the arbitrator but it is the order passed under Section 34 of the Act, which was the subject matter of challenge before the High Court. The High Court seems to have missed the subtle difference between the two jurisdictions and thereby committed an error which would require to be corrected in this appeal.”

YOGESH KHANNA, J FEBRUARY 27, 2018 VLD/DU