Introduction
Stamp Duty is a very crucial aspect of any financial transaction and cannot be overlooked. One of such crucial transactions is corporate arrangement on which stamp duty must be paid otherwise the consequences would be tremendous. Section 230 – 240 of the Companies Act, 2013 deals with Compromises, Arrangements and Amalgamations. In Companies Act, 1956 the process of approval of amalgamation was court driven, for which now the National Company Law Tribunal has been empowered. Here in this write-up, the author has discussed the intricacies of the payment of stamp duty on merger of companies, beginning from the landmark judgement to elaborate the concept and critically analysing the conflicting issues in stamping which now have been solved to applicable rates of stamp duty in certain states.
Background
Courts’ power to authorize scheme of amalgamation: Earlier, in the Companies Act, 1956, Section 394 laid a foundation that High Courts shall have the power to approve a scheme of compromise or arrangement whereby properties or liabilities of the amalgamating company (transferor) will be transferred to the amalgamated company (transferee). Now, Companies Act, 2013 has empowered the NCLTs to approve the same. However, considering the fact that majority of the judgements were passed at the time when this sanctioning power was with the High Courts, the term ‘High Court’ has been used in this write-up henceforth.
Conflict on payment of stamp duty on merger: The property of the transferor company vests in the transferee company as soon as the order is passed by the court sanctioning the amalgamation scheme. This concept propagated to the biggest conflict in history of stamp duty as to whether the order of court sanctioning the amalgamation scheme will be liable to stamp duty. Before coming to the conclusion of levy of stamp duty on court order, it is crucial to understand the very basics of ‘why stamp duty is charged on an order of the High Court?’. Let’s discuss this question with the aid of landmark judgements consisting of the major issues which came in the way of charging stamp duty on corporate arrangements.
Issues discussed in the landmark judgements which held that ‘High Court order approving scheme of corporate arrangement is subject to Stamp Duty’
Issue 1: A court order approving the scheme is not an instrument:
A concern was raised that Stamp duty can only be levied on documents (or instruments) and Stamp duty on a court order which is not an order but merely approval of an act of the parties in transferring property would be ultra vires the Legislature. An order in exercise of judicial functions cannot be “a document” or an “instrument” and cannot become the subject of a levy of stamp duty in India.
In response to this contention, Hon’ble Bombay High Court in the matter of Li Taka Pharmaceuticals Ltd. Vs State of Maharashtra & Other held that it is an instrument which transfers the properties. Such order is based upon compromise or arrangement between the two companies of transferring assets and liabilities of one company to another company known as “transferor-company” and that order is an “instrument” as defined under section 2(1) of the Bombay Stamp Act which includes every document by which any right or liability is transferred.
Issue 2: State Legislature is not competent to impose Stamp duty
It was contended that stamp duty is not levied on the ‘document’ but on the ‘transfer’ of property, which arises out of amalgamation, which the State Legislature is not competent to impose. Such a tax can only be imposed by Parliament under List I, entry 97.
To this, court held that entry 63 of List II empowers the State Legislature to prescribe rates of stamp duty in respect of documents other than those specified in the provisions of List I, that is to say, rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts. By the sanctioning of amalgamation scheme, the property including the liabilities are transferred and on that ‘transfer instrument’, stamp duty is levied. Therefore, it cannot be said that the State Legislature has no jurisdiction to levy such duty.
Issue 3: Transfer would be of no consequence if stamp duty is not paid
Section 2(g)(iv) of the Bombay Stamp Act defined “conveyance” by including orders by which properties are transferred. Therefore, it was contended that this definition is repugnant to section 394 of the Companies Act and the State legislation cannot prevail over the provisions of the Companies Act.
The court held that Bombay Stamp Act nowhere provides that the property which is transferred to the transferee company shall be divested. It only provides that such a document is required to be stamped. If it is not stamped, it would not be admissible in evidence as provided under section 34 of the Bombay Stamp Act.
Issue 4: No specific entry for levy of stamp duty on High Court order by states
Another major concern which arises is whether duty is payable or not without having specific entry for stamp duty on order approving amalgamation schemes. In this regard the Hon’ble Bombay High Court in the matter of Li Taka Pharmaceuticals Ltd. Vs State of Maharashtra & Other held that “Entry 44 of List III empowers the State Legislature to provide for stamp duties other than duties or fees collected by means of judicial stamps. Along with this, entry 63 of List II empowers the State Legislature to prescribe rates of stamp duty in respect of documents other than those specified in the provisions of List I, that is to say, rates of stamp duty in respect of bills of exchange, cheques, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts. By the sanctioning of amalgamation scheme, the property including the liabilities are transferred as provided in sub-section (2) of section 394 of the Companies Act and on that transfer instrument, stamp duty is levied. Therefore, it cannot be said that the State Legislature has no jurisdiction to levy such duty.”
Issue 5: Why stamp duty is charged on an order of the High Court?
Such questions were raised by many corporations, the reason being there was no clear provision on stamping pursuant to mergers. High Courts were of conflicting opinions, leaving different states with different manner of stamp duty treatment on mergers. Finally the prolonged issue of payment of stamp duty on mergers was brought to an end by the Apex Court of India in the year 2004 in the case of Hindustan Lever & Anr. vs. State of Maharashtra (2004) 9 SCC 438 (SC) (‘commonly referred to as the Hindustan Lever case’).
The Hon’ble Supreme Court of India clarified that the Court acts like an umpire in a game of cricket who has to see that both the teams play their game according to the rules and do not overstep the limits. But subject to that, how best the game is to be played is left to the players and not to the umpire. The propriety and the merits of the compromise or arrangement have to be judged by the parties who as sui juris with their open eyes and fully informed about the pros and cons of the scheme arrive at their own reasoned judgment and agree to be bound by such compromise or arrangement.
The word “Instrument” is defined to mean, every document by which any right or liability is, or purports to be created, transferred, limited, extended, extinguished or recorded, but does not include bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of shares, debenture proxy and receipt. The recital in the scheme of amalgamation as well as the order of the High Court, declares, that, upon such order of High Court, the undertaking of the transferor company shall stand transferred to the transferee company with all its movable, immovable and tangible assets to the transferee company without any further act or deed. Thus the amalgamation scheme sanctioned by the Court would be an “instrument” within the meaning of Stamp Act. By the said “instrument” the properties are transferred from the transferor company to the transferee company, the basis of which is the compromise or arrangement arrived at between the two companies.
In this case, the Hon’ble Supreme Court of India held that the order of the High Court for approving the scheme of corporate compromise or arrangement under the Companies Act, is a ‘conveyance’ and, hence, subject to Stamp Duty.
Issue 6: Scheme of amalgamation is not covered under the definition of “conveyance”
The Hon’ble High Court of Delhi in the matter of Delhi Towers Limited vs Gnct Of Delhi CA No. 466/2008 in Company Petition No. 50/2003 (Popularly known as the Delhi Towers case) held that an approved scheme of amalgamation amounts to a transfer inter-vivos between two companies who were juristic persons in existence at the time of passing of the order and sanctioning of the scheme whereby right, title and interest in the immoveable property of the transferor company are transferred to the transferee company. The transfer takes place in the present and is not postponed to any later date and is covered under the definition of conveyance under sub-section 10 of section 2 of the Stamp Act.
Issue 7: Jurisdiction – Stamp duty in different states
The jurisdiction of the petition lies with the National Company Law Tribunal (“NCLT”) of the state in which the registered office of the company lies. Hence, in case the registered offices of the companies involved in the amalgamation are situated in two different states, petitions will be filed before the NCLT of both the states.
Coming to the aspect of stamp duty in such a case, section 4 of Indian Stamp Act, 1899 provides that in case several instruments are employed for completing the transaction, the principal instrument only shall be chargeable with the stamp duty. One must understand that since the Scheme would only become effective & operative and the property would stand transferred and vested from the transferor to the transferee, only when order sanctioning the Scheme has also been passed by the second court. Therefore, earlier corporations used to take the liberty of the view that if two courts of different states are passing orders of approving the scheme, the order which has been passed at a later stage will be subject to stamp duty.
However, post judgement of Bombay High Court dated 31st March, 2016 in the matter of The Chief Controlling Revenue vs M/S. Reliance Industries Limited, Writ Petition No. 1293 of 2007, they have completely negated that Section 4 of Stamp Act is applicable to merger because the scheme of amalgamation does not fall under the ambit of sale, mortgage or settlement. The Hon’ble Bombay High Court held that although the two orders of two different high courts are pertaining to the same scheme, they are independently different instruments and can not be said to be the same document especially when the two orders of different high courts are upon two different petitions by two different companies. When the scheme is based on chargeability on instruments and not on transactions, it is immaterial whether it is pertaining to one and the same transaction. The duty is attracted on the instrument and not on transaction. Now both the orders will be subject to stamp duty. Therefore, corporations have been advised now to first have their registered offices in the same state to mitigate the cost and effect of payment of stamp duty in two states.
Way out from payment of stamp duty in two states: Many a times, due to certain commercial factors, companies are not inclined to shift the registered office of either of the companies. In such a case, companies can apply to one bench of NCLT for transferring the case to the other bench of NCLT only. In this way, the companies will have to pay stamp duty only on the order of one NCLT without even shifting the registered office of any company. Furthermore, since it also reduces the burden of both NCLT and the companies applying for amalgamation, it is a win-win situation for all.
Issue 8: Companies can claim set off of stamp duty paid in one state from another state
Another major carve out which companies started to take was deducting the stamp duty already paid in one state from the stamp duty they were liable to pay in another state pursuant to passing of order of approving scheme of amalgamation. However, the Reliance Industry Judgement (supra) clearly denied the benefit of rebate of stamp duty already paid on order of the High Court of one state against the stamp duty payable in another state.
Rates of Stamp Duty on Merger
Stamp duty rates specified by few states have been stated hereunder:
Maharashtra
Article 25(c) of Schedule 1 of the Maharashtra Stamp Act, 1958 states the stamp duty on conveyance shall be higher of the following:
- i) 5 Percent of the market value of the property; or
- ii) 0.7 percent, of the aggregate of the market value of the shares issued or allotted in exchange and the amount of consideration paid, for such amalgamation
Karnataka
Article 20 (4)(i) of the Schedule of the Karnataka Stamp Act, 1957 states the stamp duty on the amalgamation of the companies shall be one percent of the aggregate value of shares issued or allotted in exchange, or otherwise and in case of a subsidiary company, shares merged (or cancelled) with parent company and in addition, the amount of consideration if any, paid for such amalgamation, whichever is higher
Tamil Nadu
Revenue Authorities in Tamil Nadu issued an order dated March 01, 2019 which clarified that stamp duty on amalgamation shall be the highest of –
(i) 2% of the market value of the immovable property or
(ii) 0.6% of the aggregate market value of shares.
Gujarat
Article 20(d) of Schedule I of the Bombay Stamp Act, 1958 (noW Gujarat Stamp Act, 1958) provides that the stamp duty on amalgamation shall be:
- 1% of the market value of shares issued or allotted in exchange of or otherwise, or the face value of such shares whichever is higher and amount of consideration if any, paid for such amalgamation
- 1% of true market value of immovable property situated in the State of Gujarat of the transferor company
Further, the state of Gujarat vide Gujarat Stamp (Amendment) Act, 2013 imposed an upper cap of Rs. 25 crore on stamp duty on amalgamation.
Comments
Post a Comment