Arbitration Agreement Not Exempt From Stamp Duty Even If Contract And Work Is Executed Outside The State: Bombay HC [Read Judgment]

Justice GS Patel was hearing an arbitration application filed by S Satyanaryana and Co., a partnership firm based out of Vishakhapatnam. West Quay Multiport Pvt Ltd based in Mumbai is the respondent.

Case Background

West Quay develops berths at various ports in India. The Vishakhapatnam Port Trust awarded West Quay a works contract for the development of a berth at one a Jetty in Vishakhapatnam. The respondent appointed S Satyanrayana (Applicant) as a subcontractor under two agreements/work orders both dated December 5, 2012. These were for material supply and labour for construction of a compound wall for a stack yard at this Jetty berth at the West of Essar Pallet Plant in Vishakhapatnam port.

All the contract works were to be done in Vishakhapatnam (outside Maharashtra). The only thing contemplated within Maharashtra was arbitration under the clause 55.2 of each agreement, which contemplated that any dispute arising out of the contracts will be referred for arbitration which will be held in Mumbai. Also, stamp duty was paid on all of the said documents in accordance with the local statute in Vishakhapatnam.

After disputes and differences arose between both parties, the applicant invoked arbitration through letters dated November 2 and 3, 2015 and made a nomination. West Quay opposed this in its letter dated November 24, 2015 that the applicants had not clarified which agreement they were raising disputes under. Then the applicant called upon the respondent to nominate its own arbitrator and since the respondent failed to do so, the petitioner fled the petition under Section 11.

Submissions

Advocate Ankita Singhania appeared on behalf of the respondent West Quay and Advocate Ketan Chotani for the applicant.

Advocate Singhania argued that the said agreement is liable to be subjected to an assessment as to stamp under the Maharashtra Stamp Act 1958. Even if the works under the contract were to be done outside Maharashtra, if the agreement is brought into Maharashtra for any purpose at all, it would be liable to stamp, Singhania submitted.

She further submitted that in view of Supreme Court's decision in Garware Wall Ropes Limited vs Coastal Marine Constructions & Engineering Ltd. the issue of "whether an arbitration agreement can be acted upon for the purposes of Section 11 without stamp where an agreement requires stamp" is no longer res integra.

Singhania also relied upon the decision in Black Pearl Hotels Private Limited vs Planet M Retail Limited.

Whereas, Advocate Chotani argued that the agreement is not chargeable to stamp duty in Maharashtra at all under the Maharashtra Stamp Act. The reason, is to be found in Section 3 of the Maharashtra Stamp Act and particularly Section 3(b). Chotani then submitted that Section 3, sub-clause (b) speaks of every instrument executed outside Maharashtra after the date on which the Act came into force.

But it relates to any property situate "or to any matter or thing done or to be done in this State" and is received in the State. That the two agreements received in the State is not disputed. But do they relate to "or to any matter or thing done or to be done in this State in this State"? Chotani asked.

Sub-clause (b) must be restricted or read down to mean only those contract works that were required to be done by the contractor. Arbitration, is a dispute redressal mechanism, not a thing "done or to be done" under the agreement. It is only when there is a dispute about a thing "done or to be done" under the agreement that the arbitration clause begins to operate and therefore arbitration per se is not under the contract, Chotani argued.

Judgement

Justice Patel then examined various provisions of the Maharashtra Stamp Act, specifically Section 19 of the act.

Section 19 relates to- Payment of duty on certain instruments or copies thereof liable to increased duty in Maharashtra State Where any instrument of the nature described in any article in Schedule I and relating to any property situate or to any matter or thing done or to be done in this State is executed out of the State and subsequently such instrument or a copy of the instrument is received in the State.

Court observed-

"Now this tells us to what Section 19 applies. Section 19 is included in part (C) which relates to the time of stamping instruments. Section 17 deals with instruments executed in the State. Section 18 deals with instruments chargeable with duty executed entirely out of the State. They are to be stamped within three months after they are first received in the State. Section 19 however echoes the words of Section 3(b) and speaks of an instrument which relates to property situate or to any matter or thing to be done in this State but which is executed outside the State and subsequently such instrument is received within the State.

It is clear that Section 19 must be read with Section 3. It is not an exception to Section 3. Both relate to the same subject matter, i.e. an agreement executed outside the State but which is said to relate to any matter or thing to be done in the State. Both raise the same question, whether arbitration, and only arbitration, can be said to be a thing done or to be done in the State."

Justice Patel accepted Advocate Singhania's submissions and observed-

"I believe I should have the greatest difficulty in accepting Mr Chotani's argument without running seriously afoul of the Supreme Court decisions in Garware Wall Ropes and SMS Tea Estates Private Limited. To accept that argument would necessarily involve a severance of the arbitration clause from the rest of the contract. That in turn would require me to return a finding that while the rest of the contract may be required to be stamped, since that portion of the agreement is not being 'brought into the State' and nothing is being done under the remaining portion, and further since arbitration agreements are themselves not assessable to stamp, therefore no stamp is payable."

Of necessity, this would involve segregating or severing the arbitration clause from the rest of the agreement. That I think is now clearly impermissible and cannot be done. If the applicant has paid stamp duty in the local State and of course there will be an adjustment and credit given for the amount already paid, that will however not exempt the document from payment to stamp duty under the Maharashtra Stamp Act, Justice Patel said.

Finally, Court noted-

"Arbitration is founded in contract and Garware Wall Ropes now tells us that such a contract is one and indivisible at least to the extent of its arbitration agreement. There is party autonomy in what they may decide between themselves and this must be respected by the Court. The arbitrator himself is a creature of contract. Arbitration is impossible without agreement."

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