The (dilemma of) stamp duty- Mergers…!
Stamp Duty a State and not Central subject matter. While some of the
States in India have enacted their own Stamp Acts and others have adopted
the Indian Stamp Act, 1899 (the “IS Act”) with their state amendments.
The Stamp Duty is levied on the Instruments and the term instrument is
covered under the definition of ‘Conveyance’ in IS Act and it has also been
given a separate definition under the IS Act.
The term "Conveyance" includes a conveyance on sale and every
instrument by which property, whether moveable or immoveable is
transferred and which is not otherwise specifically provided for by
Schedule I of the IS Act.
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In the case of Hindustan Lever & Anr. v/s. State of Maharashtra & Anr., the
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following observations were made by the Hon'ble Supreme Court of India:
“Thus the amalgamation scheme sanctioned by the Court would be an
"instrument" within the meaning of Section 2(i). 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.”
It was further held that, the basis for passing an Order sanctioning the Scheme of
Amalgamation is an agreement between two or more companies. The Scheme of
Amalgamation has its genesis in an agreement between the prescribed majority of
shareholders and creditors of the transferor company with the prescribed majority
of shareholders and creditors of the transferee company.
“The intended transfer is a voluntary act of the contracting parties. The transfer
has all the trappings of a sale.”
Supreme Court of India held that, the definition of “conveyance” in the Act was
an inclusive definition and includes within its ambit an order of the High Court
under section 394 of the Companies Act, 1956 and therefore it attracts stamp duty.”
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In the matter of Chief Controlling Revenue Authority v. Reliance Industries
. Limited, the Hon’ble Full Bench of the Bombay High Court on 31st March, 2016,
pursues to retort the question of quantum of stamp duty payable where companies
involved in the merger are incorporated in more than one state which was left open for
past several years.
In the amalgamation of Reliance Petroleum Limited (RPL) into Reliance Industries
Limited (RIL), whereby the assets, liabilities and entire undertaking of RPL were to be
transferred to and vested in RIL. While RPL was incorporated in the state of Gujarat,
RIL was incorporated in Maharashtra. For this reason, the High Courts of both the
states were seized of the matter, and passed separate orders sanctioning the scheme
after the companies complied with the necessary formalities. While the Bombay High
Court passed its order (on a petition by RIL) on 7th June, 2002, the Gujarat High Court
passed its order (on a petition by RPL) subsequently on 13th September, 2002. After
both the orders were passed, RIL paid a stamp duty of INR.10 crores in the State of
Gujarat on the order passed on the Gujarat High Court. Given that the stamp duty of a
maximum of INR.25 crores was payable in Maharashtra on the amalgamation, RIL
took up the contention that it only needed to pay INR.15 crores, claiming credit for the
INR.10 crores that it had already paid in Gujarat. The revenue authorities in
Maharashtra refused to accept this position, and instead sought full stamp duty. After a
series of appeals, the revenue authorities in Maharashtra preferred a reference to the
Hon’ble Bombay High Court to decide on the questions of law.
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The Hon’ble Full Bench identified and answered the questions for
. consideration as follows:
Whether a scheme sanctioned between the two companies under Section
391 and 394 of the Companies Act, 1956 is one and the same document
chargeable to stamp duty regardless of the fact that order sanctioning the
scheme may have been passed by two different High Courts by virtue of
the fact that the Registered Office of the two companies are situated in
different States?
Answer: A scheme settled by two companies is not a document chargeable
to stamp duty. An order passed by the Court sanctioning such a Scheme
under Section 394 of the said Act, which effects transfer is a document
chargeable to stamp duty. In case if the Registered Offices of the two
Companies are situated in two different States, requiring such Orders,
sanctioning the Scheme to be passed under Section 394 of the Companies
Act by two different High Courts, then in that event, the order of this High
Court which sanctions the Scheme passed under Section 394 of the
Companies Act, 1956 will be the instrument chargeable to stamp duty.
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. Whether the instrument in respect of amalgamation or compromise or
scheme between the two Companies is such a scheme, compromise or
arrangement and the orders sanctioning the same are incidental as the
computation of stamp duty and valuation is solely based on the scheme
and scheme alone?
Answer: The orders of the court, sanctioning a Scheme of amalgamation
are not just incidental orders even in accordance with the Scheme of the
Companies Act, 1956 laid down by Section 391 r/w, Section 394. Only after
the orders are passed by the Court, sanctioning the Scheme of
Amalgamation, such a scheme becomes operational and effective.
Computation of stamp duty and valuation does not make Scheme of
Amalgamation alone chargeable to stamp duty. The order is the
instrument.
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.Whether in a scheme, compromise or arrangement sanctioned under Sections
391 and 394 of the Companies Act, 1956 where Registered Offices of the two
Companies are situated in two different States, the Company in State of
Maharashtra is entitled for rebate under Section 19 in respect of the stamp duty
paid on the said scheme in another State?
Answer: The answer to this question will be in the negative for the reasons set
out in detail herein above.
Whether for the purposes of Section 19 of the Act, the scheme/compromise
/arrangement between the two Companies must be construed as document
executed outside the state on which the stamp duty is legally levied, demanded
and paid in another State?
Answer: Basically a scheme /compromise /arrangement between the two
companies is never a document chargeable to stamp duty, whether such a
document is executed in the State or outside the State of Maharashtra.
Moreover, in view of our conclusions above, Section 19 of the Act in any event,
has no application whatsoever.
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.
In summary, the decision of the Full Bench of Bombay High
Court amplifies the occurrence of the stamp duty on a scheme
of amalgamation. Granted that parties should not recourse to
the schemes of amalgamation/ arrangement as a means of
evading stamp duty that would have otherwise been payable
on a transfer through a private contractual arrangement
between the parties.
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Exemption Notification:
An Exemption can be claimed under Notification No. 1 dated 16th January, 1937 and
Notification No. 13 dated 25th December, 1937, issued in exercise of the powers conferred by
clause (a) of section 9 of the IS Act (II of 1899), the Governor General in Council was pleased
to remit the stamp duty chargeable under articles 23 and 62 of Schedule I to the IS Act (II of
1899), on instruments evidencing transfer of property between companies limited by shares
as defined in the Indian Companies Act, 1913, in following cases:–
where at least 90 per cent of the issued share capital of the transferee company is in the
beneficial ownership of the transferor company; or,
where the transfer takes place between a parent company and a subsidiary company one of
which is the beneficial owner of not less than 90 per cent of the issued share capital of the
other; or
where the transfer takes place between two subsidiary companies of each of which not less
than 90 per cent of the share capital is in the beneficial ownership of a common parent
company.
Provided that in each case a certificate is obtained by the parties from the officer appointed in
this behalf by the local Government concerned that the conditions above prescribed are
fulfilled.
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However in the States like Delhi, the State Government had withdrawn this stamp
.
duty exemption vide Notification dated 1st June, 2011 and a reference was made by
stamp authorities as regards continuity of the Notification dated 25th December,
1937.
The Hon’ble Delhi High Court ‘In Re: Chief Controlling Revenue’ on 17th January,
2019 held that,
“15. Having found the Reference not maintainable, if we still proceed to adjudicate
the Reference on merits, the same will defeat at least one of the reasons given by
us above for holding the Reference to be not maintainable.”
“16. Resultantly the Reference is disposed of as not maintainable and is returned.
Needless to state that this will not come in the way of CCRA seeking a fresh
Reference in an appropriate case coming before it including with respect to a
document or instrument of a class with respect to which Reference in abstract was
sought by way of this Reference.”
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.
The states of Maharashtra, Gujarat, Karnataka, Rajasthan,
Chhattisgarh, Madhya Pradesh and Andhra Pradesh have
already classified order of the Tribunal approving mergers in
the definition of “Conveyance” and made specific entries in
their state Stamp Laws and hence doesn’t follow the
Exemption Notification.
Hence, the Stamp duty being a state subject, an Exemption
Notification will apply only in those states where the State
Government follows above Notification of the Central
Government otherwise stamp duty would be applicable
irrespective of inter se relations of companies.
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The Stamp Duty Liability in Maharashtra:
As per the provisions of Article 25(da) of the Maharashtra Stamp Act, 1958
(the ‘MSA’) as amended by Maharashtra Stamp (Amendment &
Validation) Act, 2017, the Order of the Tribunal sanctioning the Scheme is
liable to stamp duty as follows:
10% of the aggregate of the market value of the shares issued/allotted
in exchange or otherwise and the amount of consideration paid,
subject to higher of:
5% of the true market value of the immovable property (located in the
State of Maharashtra) and 0.7% of aggregate of the market value of
the shares issued/allotted in exchange or otherwise and the amount of
consideration paid.
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In view of the aforesaid provisions, the broad calculation
of stamp duty payable would be determined by the
Adjudication officer as under:
Particulars INR.
Number of Shares issued by the Applicant Company X
Value of each Share (as on Appointed Date) Y
Total consideration (X+Y)
10% of total consideration (A)
5% of the market value of the immovable property (B)
0.7% of the total consideration (C)
Stamp Duty liability (higher of B & C,
however limited to A)
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. However, in view of the Notification No. Mudrank 2-2/875/CR-173/M-1
published in MGG Extra No. 124 Part IV-B at page no. 510 dated May 6,
2002 (the ‘Notification’) issued in exercise of power under Section 9 of the
MSA, it is provided that, in public interest with effect from May 1, 2002 the
maximum stamp duty chargeable is INR. 25/- crores.
Hence, the Adjudicating officer has to consider the application for the
adjudication under Section 31(1) of the MSA and issued necessary
adjudication order stating the maximum stamp duty liability in view of the
aforesaid provisions of the MSA i.e. (higher of B & C, however limited to
A) and as per the Notification i.e. not exceeding INR. 25/- cores, as the
case may be.
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Thank You !
PRESENTED BY:-
CRAWFORD BAYLEY AND COMPANY
ADVOCATES AND SOLICITORS
M&A TEAM
Mr. Sanjay R. Buch, Partner
Mr. Arvind Manohar, Senior Associate
Mr. Mohnish Bhasin, Associate
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Mr. Sanjay Buch, Partner
52, is a Senior Advocate & Solicitor also partnering in M/s. Crawford Bayley & Co.
Advocates & Solicitors, reputed law firm in existence since 1830. Mr. Buch is
practicing as a professional for past 26 years and has been witness to the sweeping
changes made in the Regulatory Environment.
He is practicing and advising in the areas of Business & Corporate laws,
Restructurings, Mergers and Acquisitions, Corporate laws. He is known for his
business acumen and practical approach in solving complex legal issues and resolving
business disputes.
Mr. Buch is also serving as a legal advisor and an Independent Director on the Boards
of a several reputed companies. He is also associated with National Stock Exchange’s
Steering Committee on Security Laws, Associated Chambers of Commerce and
Industry, Confederation of Indian Industries, Bombay Chamber of Commerce, Indo-
German Chamber of Commerce, Indo-American- Chamber, Indo-Italian Chamber,
Chamber of Tax Consultants, Forum of Free Enterprises and other such prestigious
institutions.
CONTACT DETAILS
Mr. Sanjay Buch, Partner
Email: [email protected]
Mob: 9820058507.
Mr. Arvind Manohar, Senior Associate
Email: [email protected]
Mob: 9757152142.
Address:
State Bank Buildings,
4thGate, 4thFloor, N.G.N Vaidya Marg,
Fort, Mumbai 400 023.
Telephone: +91 22 22663713/ 2660699/22660910/22660669.
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