Companies Act Case Law TDM Infrastructure Private Limited Vs UE Development India Private Limited

Companies Act Case Law TDM Infrastructure Private Limited

Vs

UE Development India Private Limited

 

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL JURISDICTION

ARBITRATION APPLICATION NO. 2 OF 2008
TDM Infrastructure Private Limited …Petitioner

Versus

UE Development India Private Limited …Respondent
ORDER
1. The parties hereto are companies registered and incorporated

under the Companies Act, 1956 (for short “the Act”). Directors and

shareholders of the petitioner – company, however, are said to be

residents of Malaysia. The Board of Directors of the petitioner also sits

at Malaysia.

 

2. A contract for rehabilitation and upgrading was awarded to the

respondent by the National Highway Authority of India. Respondent
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subcontracted a portion thereof to the petitioner by three letters of awards

dated 12.04.2002, 24.05.2002 and 29.08.2002.

 

However, for the purpose of present petition, we are concerned

with the second and third letters of award. The parties entered into those

contracts containing an arbitration clause, which read as under:

 

“If the parties fail to settle the question, dispute
or difference through negotiations, the same
shall be referred to Arbitration as per the
provisions of the Indian Arbitration Act, 1940
and the rules made thereunder and any statutory
modifications or re-enactment thereof that may
be made from time to time and actually in force
at the time of reference. The cost of arbitration
shall be borne by the parties in the ratio to be
agreed upon by the parties. The venue of the
Arbitration shall be New Delhi. The language
to be used in the arbitration proceedings shall
be English.”
3. Disputes and differences having arisen between the parties, the

said arbitration agreement was resorted to, wherefor a notice dated

22.03.2007 was served by the petitioner through its solicitors M/s. Shook

Lin & Bok. A nominee was proposed. In response thereto, the

respondent herein through its solicitors M/s. Shearn Delamore & Co. also
3
proposed its nominee by a letter dated 18.04.2007. Respondent,

however, proposed amendments to the original dispute resolution and

arbitration clause by suggesting change of venue of the arbitration to

Kuala Lumpur, Malaysia in stead and place of New Delhi and that the

disputes be arbitrated in terms of the Malaysian Law and the Malaysian

Arbitration Act, 2005. The said proposal of the respondent was rejected

by the petitioner. Petitioner thereafter proposed alternative nominee

which was also rejected by the respondent and in turn suggested its own

nominee which was not acceptable to the petitioner.

 

4. By reason of this application under Section 11(5) and 11(6) of the

Arbitration and Conciliation Act, 1996 (for short “the 1996 Act”), a

prayer has been made for appointment of a sole arbitrator to adjudicate

upon the disputes and differences between the parties arising out of or in

relation to the aforementioned second and third letters of award.

 

5. One of the contentions raised by the respondent is that the

petitioner – company being registered in India, this Court has no

jurisdiction to pass an order for appointing an arbitrator. It was urged

that the Company in law must be held to be situate in India

notwithstanding that the directors are foreign nationals as for all intent
4
and purport, the Company incorporated in India would always be

controlled in India.

 

6. Mr. Sumeet Kachwah, learned counsel appearing on behalf of the

petitioner, would submit that in view of the provisions contained in

Section 2(1)(f) read with Section 11(6) of the 1996 Act, this Court alone

has the jurisdiction to appoint an arbitrator as the central management

and control of the petitioner company is exercised in Malaysia inasmuch

as the term “central management” would mean that its day to day

management does not take place in India.

 

7. Drawing our attention to the fact that the Indian Income Tax Act,

1961 contains a similar provision, it was urged that the test which

should be applied in a case of this nature is the real business test as

propounded by the House of Lords in De Beers Consolidated Mines

Limited v. Howe (Surveyor of Taxes) [(1906) AC 455] which has been

approved by this Court in V.V.R.N.M. Subbayya Chettiar v.

Commissioner of Income Tax, Madras [1950 SCR 961] and McLeod and

Company Ltd. v. State of Orissa and Others [(1984) 1 SCC 434].
5
8. The terms “nationality”, “domicile” or “residents” must be

interpreted, Mr. Kachwah would submit, having regard to the text and

context in which they are used. Our attention in this behalf has been

drawn to the provisions of Section 1(4) of the English Arbitration Act,

1975 and Section 85 occurring in Part II of English Arbitration Act,

1996, which, however, has not come into force.

 

9. Mr. Dhyan Chinappa, learned counsel appearing on behalf of the

respondent, on the other hand, would submit that the interpretative tools

for interpretation of the provisions of the 1996 Act and taxing statute are

different.

 

It was urged that the jurisdiction of this court must be determined

having regard to the provisions contained in Sections 2(6), 11(9) and 28

of the 1996 Act.

 

It was furthermore submitted that the English Courts, even in

respect of a taxing statute, have deviated from its earlier stand as would

appear from a decision in Unit Construction Co. Ltd. v. Bullock [1960

AC 351].
6
10. The 1996 Act was enacted to consolidate and amend the law

relating to domestic arbitration, international commercial arbitration and

enforcement of foreign arbitral awards as also to define the law relating

to conciliation and for matters connected therewith or incidental thereto.

 

The preamble of the 1996 Act shows that the Parliament of India

intended to give effect to the rules framed by the United Nations

Commission on International Trade Law (UNCITRAL) known as

UNCITRAL Model Law on International Commercial Arbitration in

1985.

 

11. Before embarking on the questions adverted to heretobefore, we

may notice some provisions of the 1996 Act.

 

Sections 2(1)(a), 2(1)(b), 2(1)(f), 2(6), 2(7) and 2(8) of the 1996

Act read as under:
“2(1) In this Part, unless the context otherwise
requires,–

(a) “arbitration” means any arbitration
whether or not administered by permanent
arbitral institution;
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(b) “arbitration agreement” means an
agreement referred to in section 7;

(f) “international commercial arbitration”
means an arbitration relating to disputes
arising out of legal relationships, whether
contractual or not, considered as commercial
under the law in force in India and where at
least one of the parties is–

(i) an individual who is a national of, or
habitually resident in, any country other
than India; or

(ii) a body corporate which is
incorporated in any country other than
India; or

(iii) a company or an association or a
body of individuals whose central
management and control is exercised in
any country other than India; or

(iv) the Government of a foreign country;

(6) Where this Part, except section 28, leaves
the parties free to determine a certain issue, that
freedom shall include the right of the parties to
authorise any person including an institution, to
determine that issue.

(7) An arbitral award made under this Part
shall be considered domestic award.

(8) Where this Part.–
8
(a) refers to the fact that the parties have
agreed or that they may agree, or

(b) in any other way refers to an agreement
of the parties,

that agreement shall include any arbitration
rules referred to in that agreement.”
Sections 11(1), 11(5) and 11(9) read as under:

 

“11 – Appointment of arbitrators
(1) A person of any nationality may be an
arbitrator, unless otherwise agreed by the
parties.

(5) Failing any agreement referred to in
sub-section (2), in an arbitration with a
sole arbitrator, if the parties fail to agree
on the arbitrator within thirty days from
receipt of a request by one party from the
other party to so agree the appointment
shall be made, upon request of a party, by
the Chief Justice or any person or
institution designated by him.

(9) In the case of appointment of sole or
third arbitrator in an international
commercial arbitration, the Chief Justice
of India or the person or institution
designated by him may appoint an
arbitrator of a nationality other than the
nationalities of the parties where the
parties belong to different nationalities.”
9
Section 28 of the 1996 Act reads as under:

“28 – Rules applicable to substance of dispute
(1) Where the place of arbitration is
situate in India,–

(a) in an arbitration other than an
international commercial arbitration,
the arbitral tribunal shall decide the
dispute submitted to arbitration in
accordance with the substantive law
for the time being in force in India;

(b) in international commercial
arbitration–

(i) the arbitral tribunal shall
decided the dispute in accordance
with the rules of law designated by
the parties as applicable to the
substance of the dispute;

(ii) any designation by the parties
of the law or legal system of a
given country shall be construed,
unless otherwise expressed, as
directly referring to the substantive
law of that country and not to its
conflict of laws rules;

(iii) failing any designation of the
law under clause (a) by the parties,
the arbitral tribunal shall apply the
rules of law it considers to be
appropriate given all the
10
circumstances surrounding the
dispute.

(2) The arbitral tribunal shall decide ex
aequo et bono or as amiable compositeur
only if the parties have expressly
authorised it to do so.

(3) In all cases, the arbitral tribunal shall
decide in accordance with the terms of
the contract and shall take into account
the usages of the trade applicable to the
transaction.”
12. Whereas Part I of the 1996 Act deals with domestic arbitration,

Part II thereof deals with the Foreign Award.

 

The term “International Commercial Arbitration” has a definite

connotation. It inter alia means a body corporate which is incorporated

in any country other than India. However, according to the petitioner, it

is a company whose central management and control is exercised in any

country other than India and, thus, despite the fact that the company is

incorporated and registered in India, its central management and control

being exercised in Malaysia, it will come within the purview of Clause

(iii) of Section 2(1)(f) of the 1996 Act.
11
13. Whenever in an interpretation clause, the word “means” is used the

same must be given a restrictive meaning.

 

“International Commercial Arbitration” and “Domestic

Arbitration” connote two different things. The 1996 Act excludes

domestic arbitration from the purview of International Commercial

Arbitration. The Company which is incorporated in a country other than

India is excluded from the said definition. The same cannot be included

again on the premise that its central management and control is exercised

in any country other than India. Although clause (iii) of Section 2(1)(f)

of the 1996 Act talks of a company which would ordinarily include a

company registered and incorporated under the Companies Act but the

same also includes an association or a body of individuals which may

also be a foreign company. Sub-section (6) of Section 2 of the 1996 Act

leaves the parties free to determine certain issues. That freedom shall

include the right of the parties to authorize any person including an

institution, to determine the same. Thus, in a case of this nature, the

court shall not interpret the words in such a manner which would be

opposed to the intention of the parties.
12
A statute which provides for an arbitration between the parties and

a taxing statute must be interpreted differently. The term “International

Commercial Arbitration” even does not find place in the UNCITRAL

Model Law. It finds place only in the English Arbitration Act which has

also not been given effect to.
14. Part II of the 1996 Act deals with enforcement of foreign awards.

The 1996 Act keeping in view the scheme of the statute must be read in

its entirety. It takes into consideration various situations. Power of this

Court to appoint an arbitrator would arise in view of Sub-section (12) of

Section 11 of the 1996 Act only if it is to be held that the dispute has

arisen in relation to an international commercial arbitration.

 

Whether, thus, an agreement falls within the purview of Section 2

(1)(f) of the 1996 Act is the core question. Section 2(1)(f) speaks of

legal relationship whether commercial or otherwise under the law in

force in India. The relationship has to be between an individual who is a

national of or habitually resident in any country other than India as

specified in Clause (i) of Section 2(1)(f). `Nationality’ or being
13
`habitually resident’ in respect of a body corporate in any country other

than India should, in my view, receive a similar construction.

 

15. Determination of nationality of the parties plays a crucial role in

the matter of appointment of an arbitrator. A company incorporated in

India can only have Indian nationality for the purpose of the Act. It

cannot be said that a company incorporated in India does not have an

Indian nationality. Hence, where both parties have Indian nationalities,

then the arbitration between such parties cannot be said to be an

international commercial arbitration.

 

16. The learned counsel contends that the word “or” being disjunctive,

clause (iii) of Section 2(1)(f) of the 1996 Act shall apply in a case where

clause (ii) shall not apply. We do not agree. The question of taking

recourse to clause (iii) would come into play only in a case where clause

(ii) otherwise does not apply in its entirety and not where by reason of an

exclusion clause, consideration for construing an agreement to be an

international commercial arbitration agreement goes outside the purview

of its definition. Once it is held that both the companies are incorporated

in India, and, thus, they have been domiciled in India, the arbitration

agreement entered into by and between them would not be an
14
international commercial arbitration agreement and, thus, the question of

applicability of clause (iii) of Section 2(1)(f) would not arise.

 

The Chief Justice of India or his designate, furthermore, having

regard to Sub-section (9) of Section 11 of the 1996 Act must bear in

mind the nationality of an arbitrator. The nationality of the arbitrator

may have to be kept in mind having regard to the nationality of the

respective parties.

 

17. Only in a case where, however, a body corporate which need not

necessarily be a company registered and incorporated under the

Companies Act, as for example, an association or a body of individuals,

the exercise of central management and control in any country other than

India may have to be taken into consideration.

 

18. Chapter VI of the 1996 Act dealing with making of an arbitral

award and termination of proceedings in this behalf plays an important

role. In respect of `international commercial arbitration’, clause (b) of

Sub-section (1) of Section 28 of the 1996 Act would apply, whereas in

respect of any other dispute where the place of arbitration is situated in

India, clause (a) of Sub-section (1) thereof shall apply.
15
19. When, thus, both the companies are incorporated in India, in my

opinion, clause (ii) of Section 2(1)(f) will apply and not the clause (iii)

thereof.

 

20. Section 28 of the 1996 Act is imperative in character in view of

Section 2(6) thereof, which excludes the same from those provisions

which parties derogate from (if so provided by the Act). The intention of

the legislature appears to be clear that Indian nationals should not be

permitted to derogate from Indian law. This is part of the public policy

of the country.

 

21. Russell on Arbitration, 23rd edition, page 357, in his commentary

on English Arbitration Act, 1996, shows that although a distinction has

been made between a domestic and non-domestic arbitration but the

provisions relating to domestic arbitration had not been brought into

force.

 

22. Section 85 of the English Arbitration Act, 1996 which provides for

a modification of Part I in relation to domestic arbitration agreement

reads, thus:
16
“85. – Modification of Part I in relation to
domestic arbitration agreement.
(1) In the case of a domestic arbitration
agreement the provisions of Part I are modified
in accordance with the following sections.
(2) For this purpose a “domestic arbitration
agreement” means an arbitration agreement to
which none of the parties is –
(a) an individual who is a national of, or
habitually resident in, a state other than the
United Kingdom, or
(b) a body corporate which is incorporated in,
or whose central control and management is
exercised in, a state other than the United
Kingdom, and under which the seat of the
arbitration (if the seat has been designated or
determined) is in the United Kingdom.
(3) In subsection (2)”arbitration agreement” and
“seat of the arbitration” have the same meaning
as in Part I (see sections 3, 5(1) and 6).”
Sub-section (4) of Section 1 of the English Arbitration Act, 1975 is

also to the same effect.

 

23. It is of some significance to notice that whereas the 1996 Act lays

emphasis on one of the parties being outside India; the English
17
Arbitration Act for the purpose of domestic arbitration agreement

excludes a body corporate which is incorporated and whose central

control or management is exercised in a State other than United

Kingdom.

 

24. Thus, under the English Arbitration Act, what is being considered

is domestic arbitration agreement where a body corporate is incorporated

in a State other than United Kingdom; whereas under the 1996 Act only a

body corporate which is only incorporated in a State outside India shall

be included within the meaning of the international commercial

arbitration.

 

25. Reference to the provisions of Indian Income Tax Act, 1961, in my

opinion, is not apposite. Taxing statutes are enacted for a different

purpose. They provide for compulsory exaction. Section 6 of the

Income Tax Act clearly states the situation contemplated under Clause

(ii) of Sub-section (3) of Section 6 is only for the purpose of the said Act.

It speaks about two contingencies, viz., where the company is an Indian

Company and control and management of whose affairs may be situated

wholly in India. The provision of the 1996 Act, therefore, in my opinion,

is not in pari materia with the provisions of the Indian Income Tax Act.
18
26. Even in a case where taxing statute applies, nationality or domicile

of the assessee may have to be taken into consideration.

 

27. The decisions which, thus, have been relied upon by Mr. Kachwah

are not applicable to the facts of the present case.

 

28. An interpretation should ensure certainty in determination of

jurisdiction as to which court should a disputant approach for

appointment of an arbitrator under Section 11 of the Act. Else, the

question is always mooted as to whether a company is controlled outside

India or not and accordingly would have to be determined in each and

every case, if an objection is raised. The interpretation of the Act, as

suggested hereinbefore, would lead to determination of jurisdiction of

either the High Court or this Court with certainty.

 

In Subbayya Chettiar v. IT Commissioner, Madras [AIR 1951 SC

101], this Court, while dealing with the issue of Hindu Undivided Family

and the residence of the family endorsed the definition of Patanjali Sastri

J. (in the same case before the Madras High Court) as follows:

“`Control and management’ signifies, in the
present context, the controlling and directive
power, `the head and brain’ as it is sometimes
19
called, and `situated’ implies the functioning of
such power at a particular place with some
degree of permanence, while `wholly’ would
seem to recognize the possibility of the seat of
such power being divided between two distinct
and separated places.”

 

In that case, this Court, while dealing with the definition contained

in Section 4 of the Income Tax Act was mainly concerned with a Hindu

Undivided Family and not a Company. Furthermore, in the findings of

Patanjali Sastri, J., there is a direct reference to “some degree of

permanence”.

 

A difficulty in having a clear definition of domicile has been

noticed by this Court (albeit in a different context) in Central Bank of

India Ltd. v. Ram Narain [AIR 1955 SC 36] stating:
“Writers on Private International Law are agreed
that it is impossible to lay down an absolute definition
of “domicile”. The simplest definition of this
expression has been given by Chitty, J. in Craignish
v. Craignish wherein the learned Judge said:
“That place is properly the domicile of a person
in which his habitation is fixed without any present
intention of removing therefrom.”
But even this definition is not an absolute one. The
truth is that the term “domicil” lends itself to
illustrations but not to definition. Be that as it may,
two constituent elements that are necessary by
English law for the existence of domicil are: (1) a
residence of a particular kind, and (2) an intention of
20
a particular kind. There must be the factum and there
must be the animus. The residence need not be
continuous but it must be indefinite, not purely
fleeting. The intention must be a present intention to
reside for ever in the country where the residence has
been taken up. It is also a well established proposition
that a person may have no home but he cannot be
without a domicil and the law may attribute to him a
domicil in a country where in reality he has not. A
person may be a vagrant as when he lives in a yacht or
wanderer from one European hotel to another, but
nevertheless the law will arbitrarily ascribe to him a
domicil in one particular territory. In order to make
the rule that nobody can be without a domicil
effective, the law assigns what is called a domicil of
origin to every person at his birth. This prevails until
a new domicil has been acquired, so that if a person
leaves the country of his origin with an undoubted
intention of never returning to it again, nevetheless
his domicil of origin adheres to him until he actually
settles with the requisite intention in some other
country.”

 

In Unit Construction Co. Ltd. (supra) on a question as to whether

subsidiary companies of a holding company based in South Africa would

be deemed to be domiciled in England, it was held:

“My Lords, I do not read the reference to the
ordinary constitution of a limited liability
company as evidencing an intention to make
any addition to the test indicated by Lord
Loreburn in the De Beers case. I think that all
Sir Raymond Evershed was saying was that, in
almost every case, the articles of association of
a limited company vest the control of the
company in the board of directors and that
accordingly, if you found out that the board of a
company habitually met in a particular country,
21
you would thus settle the residence of that
company. He plainly had not in mind a case
such as the present, where it would appear that
the board of directors appointed under the
articles did not meet at all during the period
relevant to the assessments now in question,
nor was he expressing any opinion as to what
the right conclusion would be, if, for instance,
the control was vested not in the board but in
managing agents. It seems to me that, in the
circumstances disclosed in the Case Stated, the
commissioners, if the Court of Appeal were
right as to the law, might, but for the admission
made by the appellant company, have been
compelled to find that the African subsidiaries
had no residence anywhere. Moreover, it may
well be asked what the position would have
been had the business of each of the African
companies been conducted by their duly
appointed boards but, in disregard of the
articles, all the board meetings had been held in
London and all instructions had been issued
from London. Logically, if the Court of Appeal
were right, these meetings should be
disregarded and the African subsidiaries could
not be held to be resident in England, but
counsel for the Crown shrank from carrying his
argument to this logical conclusion. Counsel
for the Crown suggested that, unless the
application of Lord Loreburns principle was
made in accordance with the Court of Appeals
interpretation of it in the present case, the
consequences would be disastrous and
companies could vary their liability by moving
control to and fro. My Lords, so they could,
even on the Court of Appeals view, if they
amended the relevant articles (not a very
difficult process in the case of a hundred per
cent subsidiary). Moreover the adoption of the
interpretation of the law laid down by the Court
of Appeal could lead to the strange
consequences which I have already indicated.
22
My Lords, I do not think that adherence to the
test laid down by Lord Loreburn and to the
application thereof which, as I think, has
hitherto been adopted namely, that the question
where the central control actually abides is a
question of fact for the decision of the
commissioners will lead to any disastrous
consequences. The facts of the case before
your Lordships are most unusual. It is surely
exceptional for a parent company to usurp the
control; it usually operates through the boards
of the subsidiary companies, and had the
commissioners found in the present case that
that was what had in substance happened, it
may well be that your Lordships could not have
disturbed that finding. But they have found to
the contrary, and, as I have already said, it
seems to me that there was evidence justifying
their conclusion.”

 

The domicile of a company being an artificial person would

depend upon the nature and purport of the statute. [See McLeod and

Company Ltd. (supra)].

 

In the said decision itself, however, it is noticed that the nationality

of a company is determined by the law of the country in which it is

incorporated and from which it derives its personality. However, for the

purpose of taxation, test of residence may not be registration but where

the company does its real business and where the central management

and control exists. A distinction, thus, exists in law between a
23
nationality and the residence. Furthermore, there exists a dispute that all

the Board meetings take place only in Malaysia. In a matter involving

determination of jurisdiction of a court, certainty must prevail which

cannot be determined by entering into a dispute question of fact.

 

29. For the reasons aforementioned, I am of the opinion that this Court

has no jurisdiction to nominate an arbitrator. The application is

dismissed with costs. Counsel’s fee assessed at Rs. 50,000/-.
………………………….J.
[S.B. Sinha]
New Delhi;
May 14, 2008

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