THE AUTHOR:
Naman Maheshwari, Managing Counsel at NMN Chambers
Introduction
A 7 Judges Constitution Bench of the Supreme Court of India in a landmark judgment given on 13 December 2023 titled “In Re: Interplay Between Arbitration Agreements Under The Arbitration And Conciliation Act 1996 And The Indian Stamp Act 1899” (See, 2023 INSC 1066) decided that the question of stamping of arbitration agreements does not arise at the stage of appointment of the arbitral tribunal under Section 8 or 11 of the Arbitration & Conciliation Act, 1996 but it is only for the tribunal to examine once so appointed by the concerned Court.
While hearing the arguments, the Court restricted itself to deciding the stage wherein the question of stamping could be considered. The Court deemed it fit not to distinguish between the stamping of substantive contracts and arbitration agreements and whether the arbitration agreements attract stamp duty at all. According to the author, had the Court contemplated this issue, the Court would have perhaps come to the same conclusion in addition to ironing out one crease on the question of stamp duty on arbitration agreements which is now ubiquitously raised as a preliminary objection after the arbitral tribunals are appointed.
The relevance of this question lies in the fact that an arbitration agreement may exist either as an arbitration clause in a substantive contract i.e. agreement within an agreement; or as a standalone agreement i.e. separate agreement accompanying the substantive contract. In both cases, one may argue that an arbitration agreement is subject to separate stamp duty in addition to the substantive contract (N.N. Global Mercantile v. Indo Unique Flame, Judgment of the Supreme Court of India, 25 Apr 2023, para. 89). However, the author argues that the comprehensive reading of the provisions of the Indian Stamp Act, 1899 and the jurisprudence developed by the Indian Courts indicates otherwise and concludes that an arbitration agreement is not subject to stamp duty at all. It is only the substantive contract that attracts stamp duty and this reasoning fosters the judgment of the Supreme Court with the only distinction that the question of stamping of an arbitration agreement does not arise at any stage of the arbitral process, be it the stage of appointment of arbitral tribunal, interim relief, evidence or final award.
Missed Opportunity to Interpret Section 5 of the 1899 Indian Stamp Act
The reasoning of In Re (supra) gave pivotal importance to Section 5 of the Arbitration & Conciliation Act, 1996 for minimal judicial intervention in the arbitral process, a provision which unfortunately went unnoticed by the previous judgment of another Constitution Bench of the Supreme Court in N.N. Global Mercantile v. Indo Unique Flame. The Supreme Court further lent credence to the doctrine of separability and statutory provisions for examining the effect of non-payment of stamp duty on arbitration agreements. Yet, it missed an opportunity to consider if at all, the arbitration agreements per se attract stamp duty under the provisions of the Indian Stamp Act, 1899, and in particular, Section 5 thereof which is directly applicable in case of stamping of arbitration agreements. The text of Section 5 of the Indian Stamp Act, 1899 reads as under:
“Any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of which such matters, would be chargeable under this Act.”
In simple words, the expression “several distinct matters”, in the context of arbitration agreements, implies that if an arbitration agreement is treated as a distinct matter with respect to a substantive contract, it attracts a separate stamp duty. Conversely, if an arbitration agreement is deemed ancillary to the substantive contract, it does not attract stamp duty.
Tests for Identifying “Distinct Matters”
Under Section 5 of the Indian Stamp Act, 1899, several tests for identifying “distinct matters” have been laid down by various Indian courts when the stamp law was relatively new. Albeit such different tests were laid down by different courts in different periods, all of them suggest a similar examination, which in the words of an eminent Indian jurist Subba Rao (C.J.), is primarily to ascertain the leading object of the instrument and to see whether the second matter is only ancillary to the main object or is independent of it (See, Suryanarayanmurty v. Satyanarayanaraju, 1956 SCC OnLine AP 143, para.7). Halsbury’s Laws of England state that an instrument, stamped for its leading and principal object, covers everything accessory to that object (See, Halsbury’s Laws of England, third ed., vol. 33, para. 492, pp. 274-275).
There are, further, several cases where various instruments, which, in respect of their leading characteristic, were either not liable to duty, or if liable were properly stamped, have been held not to be chargeable with any further duty by reason of the inclusion of provisions considered to be merely ancillary to the leading object. Further stamp duty has been attracted where a provision has been held not to be merely ancillary to another main provision but separate and distinct (See, Santdas Moolchand Jhangiani v. Sheodayal Gurudasmal Massand, AIR 1971 Bom 237, Nagpur Bench of the Bombay High Court, para. 5). Another test laid down in relation to the expression “distinct matters” is whether the transactions can be carried out by two or more instruments instead of one (See, Allahabad HC in Ram Sarup v. Toti and Another, AIR 1933 All 321 (FB) Page 483 (5 Judges).
Arbitration Agreement – Distinct or Ancillary?
For the purpose of stamping, what gains crucial importance from the above discussion is the question of whether an arbitration agreement is distinct or ancillary to the substantive contract. In the opinion of the author, the fundamental reason to consider an arbitration clause ancillary to the substantive contract is that the existence of an arbitration clause sans the substantive contract is of no significance and it merely provides a dispute resolution mechanism in a substantive contract. Judicial precedents also seem to support this reasoning.
As early as 1912, Calcutta High Court was called upon to decide whether an agreement to refer disputes to arbitration contained in a broker’s note is required to be separately stamped as an agreement, apart from the stamp payable on the broker’s note. It was argued by the counsel before the court that the arbitration was not a part of the same proceeding. The learned Judge, however, held that the agreement to refer any dispute whatever arising out of the contract to arbitration is a part of the contract itself and not a “distinct matter” within the meaning of Section 5 of the Indian Stamp Act. He, therefore, came to the conclusion that no separate stamp duty was payable (See, The Bombay Company Ltd. v. The National Jute Mills Co. Ltd., (1912) ILR 39 Cal 669).
The House of Lords in England also held the arbitration clause to be collateral and ancillary to the substantive contract as early as 1942 in the celebrated decision of Heyman v. Darwins Ltd. ([1942] A.C. 356 HL ), followed by Bremer Vulkan Schiffbau and Maschinenfabrik v. South India Shipping Corpn. Ltd. (1981 AC 909) and Harbour Assurance Co. Ltd. v. Kansa General International Insurance Co. Ltd. (1993 QB 701), all of which were relied upon by the Supreme Court of India in the judgment of NN Global Mercantile v. Indo Unique Flame (3 Judges) ((2021) 4 SCC 379). However, the judgment In Re (supra) did not consider the same judicial precedents from this aspect, specifically with reference to Section 5 of the Indian Stamp Act.
Conclusion
Given the statutory provisions and spate of judicial precedents, it is beyond cavil that the arbitration agreements do not attract stamp duty, being ancillary to the substantive contracts. This reasoning adds a layer of clarity to the judgment of the Supreme Court of India In Re (supra) that only the substantive contracts attract stamp duty under Indian law.
ABOUT THE AUTHOR
Naman Maheshwari is the Managing Counsel at NMN Chambers. He holds a Master’s in International Disputes Settlement (MIDS) from Geneva (Switzerland) and is registered with the Indian Bar since 2014. He is currently appointed as Assistant Government Counsel, State of Rajasthan. He has a vast experience of litigation and arbitration in jurisdictions such as the UAE, Singapore, the UK, and Australia. He has also been a part of team representing the Government of India in an oil and gas arbitration.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
