Stamp Duty on Arbitration Agreements

By May 21, 2019 December 20th, 2019 One Comment

In Garware Wall Ropes Limited v Coastal
Marines Construction and Engineering Limited, the Supreme
Court of India reversed the judgment passed by the Bombay High Court wherein the Single Bench
of the High Court had held that the Court can refer disputes to arbitration if
a document containing an arbitration clause is unstamped, and held that the
Courts under Section 11 of the Arbitration Act cannot proceed ahead unless the agreement
is properly stamped. Stamp Duty is a transaction tax payable on certain types of instruments (including agreements) under the Federal and State laws of India. Unless such tax is paid by affixing Stamp Duty on the instrument, the instrument has no evidential value before a court or authority. 
Dispute arose
between the parties out of the sub-lease deed which was not stamped properly.
Respondent went to Bombay High Court for appointment of
arbitrator under Section 11 of Arbitration and Conciliation Act, 1996.
Bombay High Court allowed the petition under Section 11 and
referred the disputes to the arbitrator.

In an appeal to the Supreme Court, following were the issues:
1.     What
is the effect of arbitration clause in an agreement which requires to be
2.   Whether
the document can be impounded by the judge hearing petition under Section 11 of
the Arbitration and conciliation act, 1996, or by the Arbitrator appointed
under the Section 11 of Arbitration Act.
Reliance was
placed on the
33 and 34 of the Maharashtra Stamp Act, 1958
which are similar to the provisions contained in 
Section 33 and 35 of the Indian Stamp Act. Appellant
contended that SMS Tea Estates (P) Ltd. v. Chandmari Tea Company (P) Ltd.[1] is a good law and effective despite
the introduction of Section 11(6A) vide the Arbitration and Conciliation
(Amendment) Act, 1996. In SMS Tea Estates, the Hon’ble Apex
Court held that it would be required by the judicial authorities to impound
unstamped instruments, which could not be admitted in evidence or acted upon
until duly stamped. If an instrument is impounded, upon which stamp duty
and penalty (if any) are then to be paid, it would create no friction between

Section 11 (6A) and Indian
Stamp Act.
On the respondent’s
side, a distinction was made between “validity” and “existence” of an agreement
by the Respondent. The Respondent contended that the object of the Indian Stamp
Act was to collect revenue which was within the sphere of “validity”. Pursuant
to 2015 Amendment, it was clear that an arbitrator be appointed and be vested
with the power to deal with all the preliminary issues except as regards the
existence of the agreement. The same would not be prejudicial to the either parties.
Therefore, the Arbitrator shall have power to impound the document which is not
stamped not the Judge hearing petition under Section 11.
Bombay High Court agreed to the proposition that
pursuant to the introduction of the Section 11 (6A) vide 2015 Amendment, the
scope of power left with the Judge under Section 11 is only to prima facie determine the existence of
the arbitration agreement and allowed the Section 11 Petition and appointed an
Arbitrator to resolve the disputes arising out of the sub-lease deed.
Supreme Court however held
that the Courts under Section 11 of the Arbitration Act cannot proceed ahead
unless the agreement is properly stamped.
bare look at the amended provision shows so far as Section 11 is
concerned, the Supreme Court or, as the case may be, the High Court, while
considering any application under Section 11(4) to 11(6) is
to confine itself to the examination of the existence of an arbitration
agreement and leave all other preliminary issues to be decided by the
arbitrator. The question to be considered is whether SMS Tea Estates lost its
validity due to the use of the term “notwithstanding any judgment” in Section
In SMS Tea Estates, the Court purported
to ascertain the validity and enforceability of an arbitration agreement in an
unregistered instrument which was not duly stamped. The Court observed that the
effect of inserting an arbitration clause in a deed of transfer was to put
substantive provisions of the transfer and the dispute resolution agreement in
one document. Thus, the Court observed that there were two documents which had
been rolled into one document for the purpose of convenience. The Apex Court
observed that an arbitration agreement does not require registration under
the Registration Act as an arbitration clause is an arbitration agreement
and severable from the agreement in which it is incorporated.
Apex Court
differentiated between Section
35 of the Stamp Act and Section 49 of the Registration Act. The Court held that Section 35 of the Stamp Act, does not contain a proviso like Section
49 of the Registration Act enabling the instrument to be used to establish
a collateral transaction. 

Where the arbitration clause is contained in a
document which is not registered (but compulsorily registerable) and which is
not duly stamped, Section 35 of the Stamp Act bars the said document being
acted upon and consequently, even the arbitration clause therein cannot be
acted upon. The Apex Court observed that the Courts do divulge into preliminary
issues but are enjoined to give effect to mandatory provisions such as that of
the Indian Stamp Act. The Act applies to the agreement in its entirety and
hence, it is not plausible to bifurcate the arbitration clause from it.

[1] (2011) 14 SCC 66

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