Are E-contracts amenable to Stamp Duty?
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Are E-contracts amenable to Stamp Duty?

Anuj Agrawal

Introduction

Easy access to the internet has popularized the concept of entering into contracts in the electronic form (“e-contracts”). We commonly find several websites requiring visitors to agree to or accept a standard set of terms and conditions of use by clicking the “Accept” key. This, inter alia, has evolved as an accepted way of entering into contracts.

Though e-contracts facilitate convenience to both the parties, they also pose a serious issue of amenability to stamp duty. This article is an endeavour to answer the questions that revolve around this issue.

Legislations on stamps in India

The power of the State to charge stamp duty on instruments is derived from the Constitution of India (“Constitution”). Under Entry 44 of List III of Schedule VII to the Constitution, the power to levy stamp duty on all documents, is concurrent. In other words, the charging provisions of a law relating to stamp duty can be made by both the Union and the State Legislature. The Indian Stamp Act, 1899 (“Indian Stamp Act”) contains the present law on  stamp duties. However, due to the operation of Constitutional provisions, India does not have a uniform law that governs the rate of stamp duty across the country. Certain States such as Karnataka have enacted a State legislation viz., the Karnataka Stamp Act, 1957 (“Karnataka Stamp Act”) to deal with the aspect of stamp duty payable in Karnataka. Other States such as Andhra Pradesh, which has not enacted a separate law on rate of stamp duty, are governed by the Indian Stamp Act.

Indian Stamp Act, 1899

Section 2 (14) of the Indian Stamp Act defines “Instrument” to include every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded.

Section 3 of the Indian Stamp Act prescribes the instruments that are chargeable with stamp duty. All instruments mentioned in Schedule I thereto are so chargeable if they are executed in India and in certain cases when executed out of India.

As per the provisions of this Act, every instrument that is executed in India is required to be duly stamped. Section 35 provides that no instrument chargeable with duty shall be admissible in evidence, or shall be acted upon, registered or authenticated by any such person or by any public officer, unless such instrument is duly stamped. The term “stamp” is defined to mean any mark, seal or endorsement by any agency or person duly authorised by the State Government, and includes an adhesive or impressed stamp, for the purpose of duty chargeable under the Indian Stamp Act. The term “duly stamped” when applied to an instrument, means that the instrument bears an adhesive or impressed stamp of not less than the proper amount and that such stamp has been affixed or used in accordance with law for time being in force in India.

Further, Section 10 of the Indian Stamp Act provides that the stamp duty payable with respect to a particular instrument shall be paid, and such payment shall be indicated on such instrument by means of a stamp, only in accordance with its provisions. In the event the Indian Stamp Act does not provide for the manner or procedure in which a particular instrument is to be stamped, then the State governments may enact rules to fill the void.

Aligned on the abovementioned provisions, a particular ‘instrument’ needs to be ‘duly stamped’ only in the manner prescribed under the Indian Stamp Act or such law as prescribed by a State government if the Indian Stamp Act is silent about the same. As a matter of fact, the state legislations on the subject have provisions which mirror the Indian Stamp Act.

Requirement of stamp duty for e-contracts

Need for execution

(i)     Under the stamp legislations in India, instruments that are executed are subject to stamp duty. Several States have introduced amendments in their stamp laws to bring electronic records within the purview. For instance, an instrument is defined in the Karnataka Stamp Act as every document and record created or maintained in or by an electronic storage and retrieval device of media[1] by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. Accordingly an electronic document would be an instrument for the purposes of this Act. However a mere instrument does not become subject to stamp duty. Section 3 of the Indian Stamp Act, Karnataka Stamp Act and the stamp legislations of several other States in India specify that an instrument to be chargeable with stamp duty must be “executed”. The term “executed” or “execution” when used with reference to instruments, is defined in Section 2(12) to mean “signed” and “signature”. Therefore an instrument is only chargeable with stamp duty if it is signed or bears a signature. Courts have also held that a document which is not signed is not liable to stamp duty.[2] Accordingly, a document which is in a physical form needs a person’s signature for it to be considered executed and therefore subject to stamp duty. However to understand how an electronic document can be ‘signed’ and therefore deemed executed, one must look to the provisions of the Information Technology Act, 2000 (“IT Act”).

(ii)   Section 5 of the IT Act provides that where any document is required to be signed or bear the signature of any person, such requirement shall deemed to have been satisfied if such information or matter is authenticated by means of a digital signature. A combined reading of Sections 2(p) and 3 of the IT Act define a digital signature to mean authentication of any electronic record by a subscriber by the use of asymmetric crypto system and hash function which envelope and transform the initial electronic record into another electronic record.

We can infer from a combined reading of the Indian Stamp Act and the IT Act[3] that for an electronic document to be executed, a digital signature needs to be affixed. However, we observe that most of the e-contracts are in the nature of “click-wrap” i.e. contracts which only require the users to click the “Accept” or “Agree” keys and not affix any digital signature. Therefore, they are not ‘signed’ and consequently not ‘executed’ and therefore would not be an instrument liable to stamp duty in terms of the Indian Stamp Act or any other similarly-worded stamp legislation for the time being in force in India.

Absence of due procedure

Further, it is also relevant to note that in the absence of express provisions on the method and manner of stamping electronic documents, it may be considered that they may not be subject to stamp duty. A view has been taken that once the substantive law provides for a document to be stamped, mere absence of law or rules on the procedure should not come in the way of the substantive compliance in the law. However it is clear that the rules as currently in existence on the method and manner of correct stamping clearly envisage a physical document. The very principle and objective under which the IT Act created provisions which validated and made electronic documents legally binding was to extinguish the need to create such physical documents. That being the case, using the current provisions of the stamp legislations in India to conclude that physical copies of such documents will need to be created and stamped would be defeating the very provisions of the IT Act. It is a recognized rule of interpretation of statutes that expressions used therein should ordinarily be understood in a sense in which they best harmonize with the object of the statute, and which effectuate the object of the Legislature.[4] Accordingly, any interpretation that goes against one of the stated objectives of the IT Act should be avoided and therefore an obligation cannot be deemed to have imposed on a person to create a physical copy and have it ‘duly stamped’ in the manner provided in the current stamping laws.

As already pointed out, the Indian Stamp Act explains the term “duly stamped”, “as applied to an instrument, means that the instrument bears an adhesive or impressed stamp of not less than the proper amount and that such stamp has been affixed or used in accordance with law for time being in force in India.” The very nature of this requirement of “duly stamped” is therefore bound to remain unfulfilled in an electronic contract and it would be impossible for parties to find their own means of stamping such electronic documents which would satisfy the test of ‘duly stamped’ as provided above unless they create physical copies of the said electronic contracts. This, as already stated, could not have been the intention. Therefore, in view of the present construction of the laws, there can be no obligation imposed to stamp these electronic documents.

Conclusion

In view of the above, it may be concluded that e-contracts, as long as they are not signed physically or through affixing digital signature, may not be subject to stamp duty primarily because they would not satisfy the test of ‘execution’ as currently defined in the law and also because no procedure has been prescribed for their stamping. Such e-contracts would include contracts in the nature of online “click-wrap” or communication of mere terms and conditions over electronic mail as well.  

Uthara Priyadharshini is an Associate at Indus Law


[1] Emphasis supplied.

[2] Zirka v. Sohiu, AIR 1923 Lah 242; CCRA v. State Bank of India, (1976) 2 MLJ 275.

[3] Section 5, IT Act.

[4] Shah, J., in New India Sugar Mills Ltd. v. Commissioner of Sales Tax, Bihar, AIR 1963 SC 1207 and followed in several other judgments.

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