Judgment / Award Debtor not entitled to deduct TDS on Awarded Amount : Delhi High Court Rules

Justice Vibhu Bakhru
Judge, Delhi High Court

The Delhi High Court recently in Voith Hydro Ltd. & Ors. v. NTPC Ltd. [OMP (ENF.) (COMM.) 64/2018] decided an interesting question as to whether a judgment / award debtor is entitled to deduct TDS on the amount awarded by an arbitral tribunal, and whether the deposit of such amounts with the Income Tax Authorities constituted a discharge of their debts under the award. While holding that no tax is to be deducted on the awarded amounts, the Court held as under:

"24. As is apparent from the above, the following three principal questions fall for consideration before this Court:

(i) Whether there is any binding agreement between the parties whereby they have agreed that the amounts awarded in foreign currency would be computed at the exchange rate as prevalent on 15.09.2017? If not, the exchange rate to be applied for discharge of the amounts awarded in foreign currency.

(ii) Whether it was open for NTPC to deduct TDS on the awarded amounts and whether the deduction of the said amount and deposit of the same with the Income Tax Authorities constitutes a discharge of the amounts awarded to the aforesaid extent?

(iii) Whether Voith is entitled to charges for extending the Bank Guarantees, as claimed?

25. The question as to which is the exchange rate applicable for determining the amounts payable in Indian currency in execution of an award made in foreign currencies, is no longer res integra. Concededly, the said issue is covered by the decision of the Supreme Court in Forasol v. Oil and Natural Gas Commission: 1984 (Supp) SCC 263, as followed by the Supreme Court in Renusagar Power Co. Ltd. v. General Electric Co. Ltd.: 1994 Supp (1) SCC 644.

26. In Forasol v. Oil and Natural Gas Commission (supra), the Supreme Court had held that the exchange rate prevalent on the date on which the decree is passed would be the applicable exchange rate. It further clarified that if the decree is challenged in an appeal and such appeal is decided wholly or in part, the exchange rate prevailing on the date on which the decree or order is passed, would be applicable. Insofar as the arbitral awards are concerned, the date on which the challenge to the arbitral award is finally rejected, would be the date for determining the foreign exchange applicable to an award made in foreign currency. In Furest Day Lawson Limited v. Jindal Exports Limited: (2012) 194 DLT 439 and Progetto Grano S.P.A. v. Shri Lal Mahal Limited: Ex.P. No. 52/2012, decided on 29.05.2014, this Court had considered the date on which the Special Leave Petition against the order rejecting objections to recognition and enforcement of a foreign award was dismissed as the relevant date for determining the exchange rate to be applied for enforcing the awards made in foreign currency.

27. Ms Anand did not dispute the above. She, however, rested NTPC's case on the ground that the parties had arrived at a settlement and Voith was bound by the same. According to NTPC, the parties had agreed that 15.09.2017 would be the cut-off date for determining the exchange rate. Ms Anand relied on the Minutes of the Meeting dated 11.09.2017 and Voith's letter dated 16.11.2018, in support of her contention that the parties had agreed to the exchange rate as prevailing on 15.09.2017. The said contention is unmerited. A plain reading of the Minutes of the Meeting dated 11.09.2017 indicates that it does not record any agreement regarding the applicable exchange rate. The said minutes relate to the amounts that were required to be released in terms of the Office Memorandum of Niti Aayog dated 05.09.2016 (Niti Aayog's Circular).

28. More importantly, the Niti Aayog Circular was issued by Niti Aayog to provide measures for revival of the construction sector. The Niti Aayog Circular contemplates release of 75% of the arbitral award against the Bank Guarantees. This was only an ad hoc measure to elevate stress in the construction sector. The amounts released in terms of the Niti Aayog Circular cannot be considered as amounts disbursed in discharge of an arbitral award. The Standing Operating Procedure (SOP) issued on 24.11.2016 for release of the payments in terms of Niti Aayog's Circular also makes it amply clear that the payments released under the said Circular would be without prejudice to the rights to the Departments/PSUs. Furthermore, the same would be required to be secured by bank guarantees and in the event the departments/ PSUs prevail in their challenge to the arbitral award, the amount disbursed would be liable to be recovered with interest.

29. Thus, in the present case, the exchange rate as applicable on the date when the NTPC's Special Leave Petition was dismissed by the Supreme Court - that is, 22.09.2020 - will be the relevant date for ascertaining the exchange rate applicable for determining the INR equivalent to the amounts awarded in foreign currency. However, according to Voith, as part payment had been received on 06.11.2018, the exchange rate applicable on that date may be considered for determining the awarded amounts paid by NTPC. Since the value of foreign currencies as on 22.09.2020 was higher than on 06.11.2018, this Court considers it apposite to bind Voith to its concession in this regard.

30. In view of the above, the exchange rate as applicable on 06.09.2018 would be considered relevant for the amounts released on 06.11.2018 being the part payment released by NTPC in terms of the Niti Aayog Circular and the exchange rate as applicable on 22.09.2020 would be considered for discharging the remaining amount awarded in foreign currency.

Re: TDS

31. The next question to be addressed is whether NTPC is entitled to credit for the TDS deducted from the payments made to Voith.

32. Mr Mukhopadhaya had referred to the decision of the Supreme Court in All India Reporter Ltd. v. Ramchandra D. Datar (supra), wherein the Supreme Court had held that once a claim - in that case, a claim for compensation to an employee for wrongful termination of an employment - is decreed, "the claim assumes the character of a judgment-debt by a Civil Court and must be executed subject to deductions and adjustments permissible under the Code of Civil Procedure". The Court further observed as under:

"The rule that the decree must be executed according to its tenor may be modified by a statutory provision. But there is nothing in the Income Tax Act which supports the plea that in respect of the amount payable under a judgment-debt of the nature sought to be enforced, the debtor is entitled to deduct income tax which may become due and payable by the judgment-creditor on the plea that the cause of action on which the decree was passed was the contract of employment and a part of the claim decreed represented amount due to the employee as salary or damages in lieu of salary".

33. In Islamic Investment Company v. Union of India and Anr.: (supra), the Bombay High Court following the decision in All India Reporter Ltd. v. Ramchandra D. Datar (supra) rejected the contention that the Judgment Debtor (in that case, the Food Corporation of India) must be allowed to deduct TDS on the interest payable to a non-resident. The Court observed that:

"when such amounts becomes part of a judgment-debt, they lose their original character and assume the character of a judgment debt. Once such an amount assumes the character of judgment debt, the decree passed by the civil court must be executed subject only to the deductions and adjustments permissible under the Code of Civil Procedure".

34. The Court further observed that there was no provision under the Income Tax Act or under the Code of Civil Procedure, 1908 where an amount of interest payable under a decree would be subject to TDS.

35. In Glencore International AG v. Dalmia Cement (Bharat) Limited: Ex. P. 75/2015 dated 31.07.2019, this Court, inter alia, referred to the following decisions:

(i) All India Reporter v. Ramachandra D. Datar, (1961) 2 SCR

(ii) V.K. Dewan v. DDA, Execution Petition No. 194/2005, Delhi High Court.

(iii) Sino Ocean Limited v. Salvi Chemical Industries Limite, Chamber Summons No. 76/2013 in Execution Application (Lodg.) No. 263/2012.

(iv) American Home Products Corporation v. MAC Laboratories Pvt. Ltd. and Anr., (1986) 1 SCC 465.

(v) Islamic Investment Company v. Union of India (UOI) and Anr., 2002 (4) BOMCR 685.

(vi) S.S. Miranda Ltd. v. Shyam Bahadur Singh, (1985) 154 ITR 

36. After referring to the aforesaid decision, this Court observed as under:

"I may, however, note that these judgments do enunciate the principle, which is, that once a claim merges into a decree of the Court it transcends into a judgment-debt and, therefore, only those adjustments and deductions can be made which are permissible under the Code of Civil Procedure, 1908. The judgments encapsulate the theme that a decree should be executed according to its tenor unless modified by a statute such as the 1962 Act."

37. Ms Anand also did not dispute that TDS was not liable to be deducted on judgment debts. However, she contended that the payments had been made in Indian currency and therefore, were subjected to TDS and that the same had been accepted by Voith without any protest.

38. Mr Mukhopadhaya submitted that Decree Holder nos. 2 and 3 state that they are not assessees under the Income Tax Act, 1961 and are not required to file their Income Tax return in India. He also contended that Decree Holder nos. 2 and 3 are not liable to pay any tax in India. This Court is not required to examine whether Decree Holder nos. 2 and 3 are liable to pay tax in India. However, it is clear that tax was not required to be deducted at source since the payments made by NTPC were in discharge of the Award or as ad hoc payments under a mechanism evolved under the Niti Aayog Circular.

39. The contention that Voith had agreed to such deduction is also unmerited. Decree Holder no.1 had accepted the said payments not only on its behalf but also on behalf of other Decree Holders and therefore, this Court finds it difficult to accept that the Decree Holder no.1 had accepted and agreed to NTPC deducting tax at source. However, there is merit in the contention that Voith knew, as way back in 2018, that NTPC had deducted TDS and it does not appear that Voith had raised any objection to the same at the material time.

40. This Court is of the view that failure of Voith to object at the material time would not amount to accepting deduction and deposit of TDS as payment towards the awarded amount.

41. It is relevant to note that NTPC had deducted TDS in two tranches. It had deducted ₹2,58,55,348/- (₹1,32,10,961/- on the principal and ₹1,26,44,387/- on the interest) and had deposited the same on 07.12.2018. This amount was deducted at the time of remission of money in terms of the Niti Aayog Circular. The second tranche of ₹1,34,488/- was deducted by NTPC while depositing the balance amount. Out of the aforesaid amount ₹1,10,84,032/- was deducted on account of the principal amount and ₹23,50,456/- on account of interest. The said TDS was deposited on 07.01.2020. During the course of arguments, Mr Mukhopadhaya submitted that a sum of ₹1,06,42,438/- could be absorbed by Decree Holder No.1 against the TDS of ₹2,58,55,138/- deducted and deposited by NTPC. He further stated that a further sum of ₹55,29,831/- could be absorbed by Decree Holder No.1 out of the sum of ₹1,34,488/- deducted and deposited by NTPC on 07.01.2020.

42. In view of the above, this Court considers it apposite to direct that NTPC be credited to the extent of TDS amounting to ₹1,61,72,269/- (₹1,06,42,438/- plus ₹55,29,831/-) against TDS deducted and deposited by NTPC. The said amount would be considered as discharged by NTPC on the dates when these amounts were deposited to the credit of Decree Holder No.1.

43. Insofar as the remaining amount of TDS is concerned, NTPC is entitled to apply to the Income Tax Authorities for refund of the same. It is further directed that the Income Tax Authorities shall process NTPC's request for refunding of the TDS incorrectly deposited on the strength of this order."

The Award Holder was represented by Mr Ciccu Mukhopadhaya, Senior Advocate, Mr Omar Ahmad, Mr Ishan Gaur, Mr Vikram Shah, Mr Amol Gupta and Ms Simran Khorana, Advocates