Brief case: SC criticises Formula One in tax case

A weekly selection of key court orders

SC criticises Formula One in tax case  

In the running income-tax dispute between Formula One World Championship Ltd, a UK-based company, and the revenue department and involving Jaypee Sports International Ltd, Axis Bank, foreign banks Lloyds and Royal Bank of Scotland (RBS) and several affiliates of Formula One, the Supreme Court has cut the Gordian knot by directing Formula One to deposit $15.45 million in the Bombay High Court.

The question was whether Formula One was liable to pay tax on income earned by conducting races in India during 2011-13. Formula One and Jaypee Sports had entered into a race promotion contract and artwork licence agreement. At Jaypee’s request, Axis Bank opened four letters of credit in favour of Formula One, which were confirmed by RBS and Lloyds. The Delhi High Court ruled that Formula One was liable to pay tax on payments it received from Jaypee. Formula One hurried to call upon the foreign banks to release payments but the income-tax department attached them.

The high court upheld the attachment order. The apex court, dealing with the appeal, RBS vs Axis Bank, ruled that the attachment order was valid. It made severe observations against Formula One, stating that it had tried to “overreach judicial orders”. Despite knowing the embargo on the letters of credit, it rushed to encash them from the two UK banks, the judgment said.

Selecting arbitrator according to contract 

The Supreme Court last week overruled the judgment of the Delhi High Court and stated that an arbitrator appointed before the 2015 amendment to The Arbitration and Conciliation Act could proceed with arbitration though he may not be eligible under the amended law. The Act was amended to include a schedule which makes some persons ineligible for arbitration.

This was meant to avoid objections related to independence and impartiality of the arbitrators. In this case, Aravali Power Co vs Era Infra Engineering, the chief executive officer of Aravali was nominated as the arbitrator and the opposite party participated in the arbitration. Later, Era Infra objected to the choice suspecting the independence of the arbitrator, who is an employee of one of the parties. It moved the high court seeking the appointment of an independent arbitrator. Aravali argued that according to the contract, its officer was eligible to act as arbitrator.

However, the high court directed it to submit a set of names for choice of an arbitrator. Aravali appealed to the Supreme Court. It allowed the appeal. The apex court stated that in cases originating before the amendment, the normal course is to appoint a person named in the contract. Merely because he is an officer of one of the parties does not disentitle him from the job. But if circumstances indicate chance of bias, the chief justice can appoint an independent arbitrator, the court ruled.

Lok Adalat award can be challenged 

An award passed in a Lok Adalat set up under the Legal Services Authorities Act can be challenged before the high court, alleging fraud or misrepresentation by one of the parties. But such petitions cannot be taken up by a civil court after the award is passed. Only the high court can hear the petition challenging the award.

The Supreme Court stated so while setting aside the judgment of the high court of Andhra Pradesh/Telangana in a case of sale of land in which over 30 parties were involved. While they were litigating in the civil court, they brought a settlement document before the Lok Adalat which passed an award according to it. Later, some parties challenged the compromise award before the civil court. It rejected the petitions stating that once the compromise award has been approved, only the high court can intervene, that too on limited grounds.

When the dispute reached the high court, it ruled that the civil court must hear it. On further appeal to the Supreme Court, it held that the civil court was right in holding that it has no power to set aside a compromise decree; only the high court can deal with it, that too if there were grave faults such as fraud or misrepresentation. 

NHAI rapped for futile litigation

The Delhi High Court last week blamed public sector undertakings (PSUs) for litigating with public money, challenging arbitration awards. “We find this court to be inundated by challenges against arbitral awards by PSUs seeking re-appreciation of the findings of the arbitrator.

Such litigation defeats the very purpose for which the Arbitration Act was conceived…and basically seek to convert this court into a court of appeal over the decision of the arbitral tribunal,” the high court stated while dismissing the appeal of National Highways Authority of India (NHAI) against Hindustan Construction Co. The court imposed costs on NHAI and remarked that by “filing untenable objections, NHAI has compounded its liability and stands burdened with interest. All these amounts are payable out of the public exchequer.” 

Delhi HC to decide on Air India  sales tax issue

The Delhi High Court last week referred to a larger bench the question raised by Air India regarding its sales tax liability when it sells outdated or unused aircraft, scrap and depleted parts. It relied upon a 1996 judgment of the high court relating to the Delhi Transport Corporation to claim exemption as both are transport undertakings and transport was the main business, not sale of scrap.

On the other hand, the revenue authorities relied upon another set of judgments of the high courts and the Supreme Court, passed in relation to the railways, to argue that Air India is liable to pay sales tax on the sales effected by it. In view of the conflict of views in relation to road, rail and air transport companies, the issue has to be decided by a larger bench.

Firm barred from using Bata name

The Delhi High Court has allowed the petition of Bata India Ltd seeking permanent injunction against BSR Stylish Walk, which has infringed the trademark, logo and the Bata label of the international footwear major. The court had earlier appointed a commissioner to check the documents and artistic works in the rival company’s “Bata Showroom” and had reported rampant violation of the copyright and design in the records.

The barcode stickers and carry bags had also carried the Bata name. The high court, therefore, accepted the complaint of Bata India and imposed heavy costs on the rival firm, observing that “the use of trademark was bound to cause incalculable losses, harm and injury to Bata India, and immense public harm”.