Possible Challenges On Payment Of Stamp Duty On Arbitral Awards In Maharashtra Under The Maharashtra Stamp Act, 1958

Background

The stamp duty applicable to arbitral awards in India is governed by the state-specific stamp laws. As the stamp duty payable on arbitral awards was relatively uniform and nominal this helped in reducing the procedural complications and brought down enforcement costs. Until recently, Maharashtra too, imposed a nominal stamp duty of INR 500 on arbitral awards, which was similar to the stamp duty payable on arbitral awards in most other States. However, vide the notification of the Maharashtra Stamp (Amendment) Act, 2024, ("Amendment Act") on January 1, 2025, amending the Maharashtra Stamp Act, 1958 ("Maharashtra Stamp Act"), this has changed drastically and has some significant impact on arbitral awards passed or brought to Maharashtra.

Revised Stamp Duty Structure under the Amendment Act

Under the substituted provisions pertaining to stamp duty payable on arbitral awards, stamp duty is now calculated as follows:

For instance, in Maharashtra, on an award of i) INR 1 Crore, the stamp duty payable on the award would be INR 87,500 and on an award of ii) INR 10 Crore, the stamp duty payable on the award would be INR 5,12,500 and on an award of iii) INR 100 crore, the stamp duty payable would be INR 27,62,500.

The Legal Framework Governing Stamp Duty on Arbitral Awards

The Supreme Court in Shriram EPC Ltd. v. Rioglass Solar SA¹ has clarified that foreign arbitral awards are not liable for stamp duty, as they do not fall under expression 'award' under the Indian Stamp Act, 1899. However, for domestic arbitral awards pertaining to affairs arising in Maharashtra, the Maharashtra Stamp Act would be applicable.

Section 3 of the Maharashtra Stamp Act mandates payment of stamp duty on various instruments mentioned in Schedule I of the Maharashtra Stamp Act. Section 17 of the Maharashtra Stamp Act makes all instruments that are chargeable with duty and executed by any person in Maharashtra liable to be stamped prior to the time of execution or latest by the next working day following the day of execution of the instrument. Section 18 of the Maharashtra Stamp Act states that every instrument that is chargeable with duty and executed outside Maharashtra, has to be stamped within 3 months after the instrument chargeable with duty has been first received in Maharashtra. Furthermore, Section 19 of the Maharashtra Stamp Act mandates that if any instrument chargeable with duty is executed outside Maharashtra and then upon receipt of such instruments in Maharashtra, the applicable stamp duty shall be the amount chargeable under Schedule 1 of the Maharashtra Stamp Act for a similar instrument executed within Maharashtra, after deducting any duty already paid under any other law.

In summary, an arbitral award executed in Maharashtra would require to be stamped at the time of its execution or by the next working day. When arbitral awards executed outside Maharashtra are brought within Maharashtra one would have a period of 3 months within which such arbitral awards ought to be stamped, and the duty would be the differential duty between the stamp duty already paid outside Maharashtra and the stamp duty payable.

Operational Challenges

Substantial Stamp Duty levy is incurred before recovery

The Amendment Act will necessitate payment of substantial stamp duty upfront before recovering any amount from the award-debtor. This imposes an additional significant financial burden even before the award is enforced and the amount is actually recovered by the award-holder despite having won the arbitration. In the event, that the award is challenged, it is likely that this cost would have to be borne without any certainty of recovery, making enforcement not only expensive but also financially uncertain. Perhaps, the Amendment Act, ought to have levied stamp duty on the amount that is actually recovered by the award-holder and not the total amount under the award.

Procedural Uncertainty

The Maharashtra Stamp Act at Section 30, also suggests that the duty of ensuring that the award is duly stamped is on the arbitral tribunal. This would mean that the arbitral tribunal will have to direct parties to procure the necessary stamp paper before issuing the award. Practically, this would mean that the arbitral tribunal will have to indicate to the parties to the arbitration, the operative part of the award before the award is actually executed by the arbitral tribunal. This creates a procedural hurdle as the award-debtor or losing party can delay enforcement by simply refusing to procure the required stamp paper. In case of refusal or delay by the losing party, the award-holder may be left with no choice but to bear the further additional burden of the stamp paper and then recover from the losing party. The arbitral tribunal is also required to make the award within the timelines prescribed by Section 29A of the Arbitration and Conciliation Act, 1996 ("the Arbitration Act"), the additional time needed for parties to procure stamp paper would lead to further delays in this process.

Uncertainty in the case of set-aside of an Award

Neither the Arbitration Act nor the Maharashtra Stamp Act provide any clarity on what will happen to stamp duty paid by the parties on an arbitral award, if the arbitral award is later set aside by a court. In absence of any clarity, it is assumed that the stamp duty paid stands forfeited. This creates a significant financial risk for the parties incurring the stamp duty, who must pay substantial stamp duty upfront, and who are at risk of losing this amount if a court sets aside the award. Perhaps, the Maharashtra Stamp Act could be amended to state that the benefit of any stamp duty paid on an award which has been set aside can be inured to the benefit of a party who has obtained a subsequent award arising out of the same dispute.

Extra-territorial application of the Maharashtra Stamp Act

Given the specific wording of Section 17 of the Maharashtra Stamp Act, it is possible that despite an arbitration being seated and conducted outside of Maharashtra an arbitral award may become liable for the higher stamp duty payable in Maharashtra solely because one of the arbitrators has executed the award within Maharashtra. This peculiarity places an additional burden on parties to consider not just the seat and venue of arbitration but even the physical location where arbitrators sign the award, adding unnecessary complexity to the process. This would also disincentivize parties to appoint Maharashtra based arbitrators or alternatively to ensure that the arbitrator travels to a location outside Maharashtra just to enable them to sign the award.

Additionally, the Supreme Court in Sundaram Finance Ltd. v. Abdul Samad & Ors.², has held that an arbitral award could be enforced in any jurisdiction where the award debtor's assets are located. Accordingly, despite the arbitration taking place outside Maharashtra, an award-holder seeking to enforce the award against a party having assets located in the state of Maharashtra would perhaps be required to pay stamp duty on the award as per the Maharashtra Stamp Act?

Concluding Remarks

Given the change in law imposed by the Amendment Act, parties engaging in arbitration must carefully consider their strategy while drafting an arbitration agreement. One immediate step that parties can take is to analyse the overall stamp duty liability carefully before selecting the seat and venue of arbitration to jurisdictions that have fixed stamp duty as opposed to jurisdictions that impose ad valorem stamp duty.

If the arbitral award is executed in Maharashtra, the parties must keep Section 17 of the Maharashtra Stamp Act in mind and ensure that the arbitral award is stamped prior to the time of execution of the award or latest by the next working day of the execution.

Footnotes

1. Shriram EPC Ltd. v. Rioglass Solar SA, (2018) 18 SCC 313, para 26.

2. Sundaram Finance Ltd. v. Abdul Samad, (2018) 3 SCC 622, para 19.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.