Supreme Court Rules on CENVAT Credit Dispute Between BPCL and Go Airlines

The Supreme Court recently delivered an important ruling in the case of Bharat Petroleum Corporation Limited (BPCL) v. Go Airlines (India) Limited. This case revolved around an arbitration dispute concerning CENVAT credit claims related to the supply of aviation fuel. The judgment provides clarity on the jurisdiction of an arbitrator to entertain counterclaims beyond the original reference and sets significant precedent for arbitration proceedings in commercial contracts.

Background of the Case

The dispute arose out of an Aviation Fuel Supply Agreement between BPCL and Go Airlines. The agreement, initially signed for the period from January 1, 2007, to March 31, 2009, was renewed for another term from April 1, 2009, to March 31, 2011. Under this agreement, BPCL supplied aviation fuel to Go Airlines. However, conflicts emerged over outstanding payments and the applicability of CENVAT credit.

Key events in the case:

BPCL raised a claim for delayed payment interest, amounting to Rs. 1.95 crores, and initiated arbitration proceedings.
Go Airlines, in response, filed a counterclaim seeking CENVAT invoices for aviation fuel supplied.
BPCL contested the counterclaim, arguing that it was beyond the scope of the arbitration reference.
The arbitrator ruled in favor of BPCL, holding that the counterclaim on CENVAT invoices was outside the jurisdiction of arbitration.
Go Airlines challenged the arbitrator’s ruling before the Bombay High Court, which overturned the decision and held that the arbitrator had jurisdiction.
BPCL appealed to the Supreme Court against the Bombay High Court’s judgment.

Arguments by the Petitioner (BPCL)

BPCL argued that the arbitration agreement only covered disputes explicitly arising from the terms of the aviation fuel supply agreement.
The counterclaim regarding CENVAT invoices did not arise from the agreement and was first raised in May 2010, after arbitration had commenced.
Since CENVAT credit was introduced only from April 1, 2010, BPCL had no obligation under the earlier agreements to provide CENVAT invoices.
BPCL asserted that the arbitrator was correct in rejecting the counterclaim as beyond the scope of arbitration.

Arguments by the Respondent (Go Airlines)

Go Airlines contended that Clause 7(ii) of the agreement required BPCL to issue invoices that included applicable taxes and duties, thereby covering CENVAT credit.
The airline argued that its request for CENVAT invoices was an implied term of the contract necessary for business efficacy.
Go Airlines further claimed that under Section 23 of the Arbitration and Conciliation Act, 1996, a counterclaim could be raised even after arbitration had commenced.
The Bombay High Court’s decision to allow the counterclaim was justified as it was intrinsically linked to the fuel supply agreement.

Supreme Court’s Observations and Judgment

The Supreme Court, comprising Justices R. Banumathi, A.S. Bopanna, and Hrishikesh Roy, ruled in favor of Go Airlines and upheld the Bombay High Court’s decision. The key observations made by the Court include:

The counterclaim on CENVAT invoices was not entirely separate from the original dispute and had some connection to the aviation fuel supply agreement.
The arbitrator had jurisdiction to entertain counterclaims unless explicitly excluded by the arbitration agreement.
“Whether the counterclaim regarding CENVAT invoices is arbitrable or outside the scope of reference can only be determined after full inquiry.”
The Court emphasized that rejecting a counterclaim at the threshold was improper, as it should be examined on merits during arbitration.

The Supreme Court affirmed that counterclaims should not be summarily rejected and directed the arbitrator to consider the CENVAT credit counterclaim on its merits.

Key Takeaways from the Judgment

Arbitrators have broad jurisdiction to hear counterclaims unless specifically restricted by the arbitration agreement.
Commercial contracts must be interpreted holistically to determine implied obligations.
Courts should refrain from interfering in arbitration unless there is a clear jurisdictional violation.
This ruling strengthens arbitration as a dispute resolution mechanism by ensuring fair consideration of all claims.

Final Verdict

The Supreme Court’s judgment ensures that parties in arbitration proceedings cannot avoid legitimate counterclaims merely by arguing lack of jurisdiction. This ruling strengthens the arbitration process in commercial contracts and reinforces the principle that disputes should be adjudicated on their merits rather than dismissed on technical grounds.

The decision is expected to have wide implications for businesses engaged in arbitration, particularly in cases involving contractual obligations related to taxation and compliance. It provides greater clarity on the scope of counterclaims in arbitration and ensures that commercial disputes are resolved comprehensively.

Petitioner Name: Bharat Petroleum Corporation Limited.
Respondent Name: Go Airlines (India) Limited.
Judgment By: Justice R. Banumathi, Justice A.S. Bopanna, Justice Hrishikesh Roy.
Place Of Incident: India.
Judgment Date: 23-10-2019.

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