Dispute Resolution, whether before Civil Courts, Tribunals, or through arbitration, as a process is often daunting and long drawn. The conclusion of any dispute resolution mechanism is with the passing of a final decision, which in the case of an arbitration is an “Arbitral Award”. Often, the party against whom an Arbitral Award is passed, does not, on its own, comply with the directions contained in the Award, whether it be directions for performing a certain act or making payment of money etc. This constrains the Award Holder to commence another leg of litigation for “enforcing” or “executing” the Arbitral Award. In India, the process of execution or enforcement is conducted before Civil Courts that have territorial jurisdiction over the place where the assets of the Award Debtor are situated.
While execution or enforcement of Arbitral Awards is otherwise embroiled in a myriad of challenges such as procedural and administrative lags and judicial delay, an area of serious concern is payment of Stamp Duty on an Arbitral Award.
This write-up analyses the position of payment of Stamp Duty for execution / enforcement of Domestic and Foreign Arbitral Awards in India and related practical challenges.
What is Stamp Duty?
Stamp duty is a form of tax paid on a document, typically an agreement/ transactional document between two or more parties. Usually, it is a fixed amount depending on the nature of the document and is charged at a fixed rate or a certain percentage as per the value of the document in question. Thus, stamp related Statutes are fiscal instruments established to ensure revenue to the Government.
In India, the quantum of stamp duty payable on any instrument depends on the stamp related Statute applicable in the State in which the instrument is executed or brought into for enforcement or otherwise. For instance, in Delhi, the Indian Stamp Act, 1999 (as amended by the state amendment act) is applicable whereas in Mumbai, the Maharashtra Stamp Act, 1958 is applicable.
Stamp Duty on Arbitral Awards in India
Under the Indian enforcement regime, in the context of Stamp Duty, a distinction has been drawn between a Foreign Arbitral Award (i.e., an Award passed outside the territory of India) and a Domestic Arbitral Award which has been passed within the territory of India.
The Supreme Court, in its ruling in Shriram EPC Limited v Rioglass Solar SA, while allowing enforcement of a foreign award, held that the entry titled “award” as contained in Schedule I of the Indian Stamp Act, 1999 does not include a Foreign Arbitral Award. Ever since, the law in this regard stands settled. Thus, a SIAC or an ICC Award which is passed outside India, when brought for enforcement in India, does not attract payment of any Stamp Duty.
When it comes to enforcing Domestic Arbitral Award, stamp duty is attracted in the first instance, at the place where the Arbitral Award is passed and at the second instance, at the place where the enforcement is taking place (in case the place of enforcement attracts a higher stamp duty than the place of arbitration). The applicable rates vary from State to State. As an example, in enforcing a Domestic Arbitral Award in Mumbai, the Award would attract a fixed stamp duty of Rs. 500. On the other hand, were the same Award to be enforced in Delhi, it would attract a significantly higher ad valorem stamp duty of 0.1 %of the value of the property to which the award relates and in States where the Indian Stamp Act, 1999 applies as is, a whopping 1%of the value of the property to which the Award relates. This effectively means that a Domestic Arbitral Award which directs payment of Rs. 100 Crores would attract a significantly different stamp duty of Rs. 500 in Mumbai, Rs. 10 lacs in Delhi and perhaps even Rs. 1 Crore in States where the Indian Stamp Act, 1999 applies as is , depending on the place of execution. As another exemplary example, in Uttarakhand, the stamp duty payable for enforcement of a Domestic Arbitral Award of Rs. 100 Crores would be Rs. 70 Lakhs! Thus, if the assets of the Award Debtor against which the Award is sought to be enforced are situated in Delhi for instance, enforcement as a process can start only when the Award Holder pays 0.1% percent of the Award Amount as stamp duty, regardless of the value of the asset situated in that territorial jurisdiction that is available for execution purposes. For instance, if the Award Debtor owns an asset worth Rs.5 Crores in Delhi, which is available for execution, the Award holder will have to pay Stamp duty on the entire Award amount with no surety of recovering either Rs. 5 Crores or any other amount.
Consequences of non-payment
Bluntly put, if a Domestic Arbitral Award is not stamped in accordance with the applicable law in the State in which it is to be enforced, enforcement will be refused. Often, the administrative department of the concerned Court refuses to accept filing of the execution application at the very threshold basis an objection of insufficient stamp duty. Even if the filing is permitted, a Court before which an unstamped document is produced is bound to impound the same. Once a document is impounded, it is sent to the concerned Collector for adjudication and payment of Stamp Duty, at times involving a penalty.
It is interesting to note that non-payment of stamp duty does not however, qualify as a ground for setting aside a Domestic Arbitral Award and is an objection that finds relevance only at an enforcement stage.
The position that different rates of Stamp Duty (and in most States, at exorbitant rates) are applicable to different States, imposes a huge financial burden as also inconvenience on an Award Holder who is already being denied payment by the Award Debtor.
Prima facie, it appears absurd that a person who has an Arbitral Award in their favour for payment of monetary compensation (for instance) must make further payment of Stamp Duty prior to being able to enforce that Award, and that too many a times, in cases where an Award Debtor’s assets are not sufficient to cover the entire Award Amount. Such a financial burden is not placed on a person who has a Decree from a Civil Court and rightly so.
Additionally, another practical challenge and anomaly is that often Arbitral Awards contain a direction for payment of interest. When it comes to payment of Stamp Duty, an Award Holder is required to make payment on the Award Amount (including principal and interest) as on the date of the filing of the execution application. Given the magnitude of commercial arbitrations, often Arbitral Awards are for hundreds and thousands of Crores along with interest. Making payment of ad valorem stamp duty on such considerable amounts (which can become manifold over the years basis the interest component) would seem ludicrous to an Award Holder.
Given the above, there is an emerging need to amend the stamp laws of other States to follow the Maharashtra Stamp Act, 1958 and provide for a fixed and reasonable rate of stamp duty payable on an Arbitral Award. In fact, for consistently, such a fixed and reasonable rate of stamp duty can then be made applicable to Foreign Arbitral Awards as well. Whilst the execution of Foreign Awards is exempted from payment of Stamp Duty, similar exemption can also be extended to Domestic Arbitral Awards as often contracts involving a foreign party have domestic arbitration clauses, which culminate into a Domestic Arbitral Award chargeable with hefty Stamp Duty. Such amendments would be a giant step in the direction of making the country enforcement friendly and will give a boost to India’s aim of enhancing ease of doing business in India.