The High Court of Delhi (High Court), in the recent case of Religare Finvest Ltd. v. Asian Satellite Broadcast Pvt. Ltd.,1 has held that the sufficiency of the stamp duty on the arbitration agreement is a jurisdictional issue falling under Section 16 of the Arbitration and Conciliation Act, 1996 (Arbitration Act).
Seven companies forming part of the Zee group of companies approached the Appellant, Religare Finvest Limited (Appellant), to avail loan facilities for investment and consolidation of promoters' interest in their group companies. Accordingly, separate loan agreements (Loan Agreements) were entered into between Religare and (i) Asian Satellite Broadcast Pvt. Ltd., (ii) Konti Infrapower & Multiventures Pvt. Ltd., (iii) Widescreen Holdings Pvt. Ltd., and (iv) Edisons Infrapower & Multiventures Pvt. Ltd. (Zee Companies). The Zee Companies failed to repay their debt on time, constraining the Appellant to issue notices invoking arbitration. Consequently, a common arbitrator was appointed (Sole Arbitrator) and four separate arbitration proceedings ensued.
The Zee Companies filed applications in each of the proceedings, challenging the scope of proceedings and jurisdiction of the Arbitrator under Section 16 of the Arbitration & Conciliation Act (Arbitration Act). It was contended that, as the Loan Agreements were first executed in Mumbai, they should have been stamped in accordance with Section 24 read with Entry 5(h)(A)(iv)(b) of Schedule I of the Maharashtra Stamp Act, 1958 (MSA) at the rate of 0.2%, and since the Loan Agreements were insufficiently stamped, they were unenforceable. Thus, it was pleaded that unless deficient Stamp Duty is paid, the proceedings should be terminated. In 2020, the Sole Arbitrator passed the impugned orders, accepting the plea of the Zee Companies. However, instead of terminating the proceedings, the Sole Arbitrator observed that if Religare wishes to continue with its claim, it should take the original Loan Agreements to the Collector of Stamp, Maharashtra – who will, within three months, determine the stamp duty payable on the same, including penalty, if any, in terms of the MSA. Further, both parties were given liberty to approach the tribunal after the requisite stamp duty on the Loan Agreements is paid. Aggrieved with the order, Religare filed an appeal before the High Court.
Whether insufficient stamp duty is a jurisdictional issue under Section 16 of the Arbitration Act?
The Appellant argued that the Zee Companies' applications under Section 16 challenging the jurisdiction of the learned Arbitrator was not maintainable, as the sole ground taken thereunder regarding insufficiently of stamp duty is not a jurisdictional ground. However, while relying upon the case of N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd., 2021 4 SCC 379 the High Court held that there is no legal impediment to the enforceability of the arbitration agreement, pending payment of stamp duty on the substantiative contract. The adjudication of the rights and obligations under the Work Order or the substantive commercial contract would, however, not proceed before complying with the mandatory provisions of the Stamp Act. Accordingly, the High Court held that the sufficiency of the stamp duty on the arbitration agreement is a jurisdictional issue under Section 16 of the Arbitration Act. It was also held that an arbitral tribunal is obligated to examine whether an instrument before it is adequately stamped or not. The Court observed that Section 33 of the MSA casts a statutory obligation on every person empowered by law, or holding a public office, or a person who by consent of parties (which would include an arbitrator) is empowered to receive evidence, to examine the instrument presented before him, and ascertain whether the instrument is duly stamped. In view of the statutory interdict, the bar against the admissibility of an unstamped instrument, is absolute in nature, including for a collateral purpose.
Additionally, the High Court observed that the 'doctrine of severability' of the arbitration clause, invoked by the Appellant, cannot be misconstrued to mean that in arbitration proceedings the question of insufficiency of stamp duty has to be ignored altogether. The non-payment or deficiency in stamp duty may not invalidate the Loan Agreements but this shortcoming renders such documents to be inadmissible in evidence and liable to be impounded, till the time requisite stamp duty is paid. Further, in light of the principle of kompetenz-kompetenz, the arbitral tribunal is vested with wide powers to rule on its own jurisdiction, which includes the powers to examine any objection qua the existence or validity of the arbitration agreement, which by necessarily extension includes the enforceability of a document deficiently stamped. Therefore, it was finally concluded that the plea of insufficiency of stamp duty, touching upon the question of the validity of the Loan Agreements, is a jurisdictional issue.
Further, the High Court held that the power of the court to rule on its own jurisdiction also includes the power to determine the validity of the arbitration agreement which necessarily includes the enforceability of a document deficiently stamped. It held that issue of stamp duty shall be decided as a preliminary issue since the inadequately stamped arbitration agreement cannot be taken in evidence and acted upon. Therefore, the tribunal should direct the parties to first get the agreement sufficiently stamped before adjudicating rights and obligations under the agreement.
The High Court reiterated that when an insufficiently stamped instrument is presented before the arbitrator, he shall impound the same and direct the parties to pay the requisite stamp duty. This is evident from the provisions of Section 34 of the Indian Stamp Act, 1899 which provides that "any person having by law or consent of parties authority to receive evidence" is mandated by law to impound the instrument, and direct the parties to pay the requisite stamp duty. Therefore, the High Court opined that the Sole Arbitrator was correct to decide the issue of stamping as a preliminary issue and direct the Appellant to get the underlying Loan Agreements properly stamped.
The High Court further held that an agreement is deemed to be executed only when both the parties sign it, merely because the respondent signed it in Mumbai, it would not attract MSA, since the Appellant finally signed it in New Delhi. Therefore, the High Court opined that the Indian Stamp Act, 1899 would apply. Ultimately, it was observed that the Sole Arbitrator erred in concluding that the Loan Agreements were chargeable to stamp duty in Mumbai. Even if stamp duty has been affixed as per the MSA, it does not ipso facto, under law, render the instruments amenable to the MSA. A party's understanding would not preclude it from disputing the question of chargeability of stamp duty under law, as under Section 19 of MSA, an instrument would be chargeable to duty in Maharashtra only when it is received in the State and not otherwise. Thus, the documents with signatures of only Zee Companies were not 'instruments' to attract the said provision. Accordingly, the High Court, set aside the order to a limited extend and remanded back the matter to the tribunal to determine the stamp duty as per the Indian Stamp Act, 1899.
The present decision delves deep into the interplay of the doctrine of severability of an arbitration agreement and the requirement of proper stamping of the underlying agreement under the Indian Stamp Act, 1899 or the applicable state enactment. The decision of the High Court further reinforces the legal position laid in the Supreme Court dictum in N.N. Global (supra). It is now clear that the arbitrators are empowered by law to require the parties at dispute to have the underlying agreement appropriately stamped prior to taking up the matter on merits.
1. Religare Finvest Ltd. v. Asian Satellite Broadcast Pvt. Ltd., 2022 SCC OnLine Del 221.
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