Facts of the Case

The petitioners and the respondent, M/s Landson Infrastructure, had executed a registered Lease Deed dated 14 November 2013. The Lease Deed contained an arbitration clause contemplating reference of all disputes between the parties to adjudication by a sole arbitrator.

The parties had agreed that the arbitration proceedings would be conducted at Bengaluru and would be governed by the provisions of the Arbitration and Conciliation Act, 1996.

Disputes subsequently arose between the parties, and legal notices were exchanged, including a legal notice dated 10 January 2022 issued on behalf of the petitioners.

In the said legal notice, the petitioners stated, inter alia, that the respondent was tendering rent of ₹6,00,000 per month despite the contractual terms. The petitioners further stated that they had paid GST and income tax on amounts which they had not actually received for a period exceeding twelve months and were therefore constrained to raise invoices only for the amount actually tendered by the respondent.

The petitioners approached the High Court under Section 11(5) of the Arbitration and Conciliation Act, 1996, seeking appointment of a sole arbitrator to adjudicate disputes arising from the registered Lease Deed dated 14 November 2013.

Issues Involved

  1. Whether disputes arising under the registered Lease Deed containing an arbitration clause were liable to be referred to arbitration under Section 11(5) of the Arbitration and Conciliation Act, 1996.
  2. Whether the petitioners’ stand regarding issuance of invoices only for the rent amount actually tendered by the respondent created an issue involving penal consequences under GST law.
  3. Whether the alleged GST-related penal implications rendered the dispute non-arbitrable.
  4. Whether the respondent’s objection was sufficient to prevent the High Court from appointing a sole arbitrator at the Section 11 stage.

Petitioners’ Arguments

The petitioners submitted that the registered Lease Deed dated 14 November 2013 expressly contemplated reference of all disputes to adjudication by a sole arbitrator.

It was emphasized that the parties had agreed to arbitration at Bengaluru under the Arbitration and Conciliation Act, 1996.

In response to the respondent’s GST-related objection, the petitioners argued that their legal notice merely explained the reasons for raising invoices for amounts lower than what the respondent was contractually required to pay.

The petitioners clarified that invoices were raised for the amounts actually tendered by the respondent and that such conduct should not be construed as an act inviting penal consequences.

Accordingly, the petitioners maintained that the disputes remained arbitrable and that an independent sole arbitrator should be appointed.

Respondent’s Arguments

The respondent contended that the petitioners’ stand regarding issuance of invoices for lesser amounts would be contrary to the provisions of the Central Goods and Services Tax Act, 2017 and could invite penal consequences.

It was argued that because the petitioners’ claim was premised on such a stand, the dispute could not be referred to arbitration.

The respondent relied upon the Supreme Court decision in Emaar MGF Land Limited vs Aftab Singh, (2019) 12 SCC 751, in support of its objection concerning arbitrability.

The respondent’s essential contention was that a dispute involving penal consequences could not be adjudicated through private arbitration.

Court Order / Findings

The High Court observed that there could be no dispute regarding the proposition that where penal consequences are involved, the dispute cannot be arbitrated.

However, on the facts of the present case, the Court found that, prima facie, the petitioners were not contending that invoices for lesser amounts had been raised because they intended to avoid payment of GST or income tax.

Rather, the petitioners’ case was that they were constrained to raise invoices for the amounts actually tendered by the respondent, notwithstanding the contractual terms.

On a prima facie consideration, the High Court was not inclined to hold that the respondent must succeed in its objection at the stage of the Section 11 proceedings.

Accordingly, the Court allowed the petition while expressly leaving all contentions open.

The Court appointed Hon’ble Sri Justice V. Jagannathan, Former Judge of the High Court of Karnataka, as the Sole Arbitrator to enter upon reference of the disputes between the petitioners and the respondent.

The arbitration proceedings were directed to be conducted at the Arbitration and Conciliation Centre (Domestic and International), Bengaluru, in accordance with the Rules governing the said Centre.

The Registry was also directed to communicate the order by email to the Arbitration and Conciliation Centre and to the appointed Sole Arbitrator, as required under the Appointment of Arbitrators by the Chief Justice of Karnataka High Court Scheme, 1996.

Important Clarification

The High Court did not hold that disputes involving actual penal consequences under GST law are arbitrable.

On the contrary, the Court expressly acknowledged the proposition that where penal consequences are involved, the dispute cannot be arbitrated.

The crucial distinction in the present case was that, on a prima facie view, the petitioners’ stand did not establish that lesser invoices had been raised with the intention of avoiding GST or income tax. Their case was that invoices had been raised for the amount actually tendered by the respondent despite the contractual terms.

Therefore, the respondent’s GST-based objection was not considered sufficient, at the Section 11 appointment stage, to prevent constitution of the arbitral tribunal.

The Court also left all contentions open, meaning that the appointment of the arbitrator did not amount to a final adjudication on the substantive contractual, tax, GST, income-tax, or other legal issues between the parties.

Sections / Legal Provisions Involved

Section 11(5) of the Arbitration and Conciliation Act, 1996 — Relates to appointment of an arbitrator where the parties fail to agree on the arbitrator within the statutory framework applicable to a sole-arbitrator reference.

Arbitration and Conciliation Act, 1996 — Governs the arbitration agreement and the reference of disputes to arbitration.

Central Goods and Services Tax Act, 2017 — Referred to in the respondent’s objection concerning the alleged consequences of raising invoices for amounts lower than the contractual rent.

Income-tax implications — Referred to factually in the petitioners’ legal notice concerning tax allegedly paid on amounts not actually received.

Link to download the order -https://www.mytaxexpert.co.in/uploads/1783491953_1390compressed.pdf

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