06 December 2016

Stamp duty payable on scheme of Amalgamation

by Prashanth Shivadass

A recent Bombay High Court judgement [ see end note 1] sparked a debate amidst corporate lawyers on the issue of stamp duty payable on the order sanctioning the scheme of amalgamation where the transferor and transferee companies have registered offices in two different States in India.

Considering the decision, this article intends to capture the legal history of stamp duty payable on an order of a High Court under Section 391 of the Companies Act, 1956 (‘Act’).

In 1970, the Supreme Court in J.K. (Bombay) Pvt. Ltd. v. M/s New Kaiser-I-Hind-Spinning & Weaving Co. Ltd. [ see end note 2], examined if the scheme of amalgamation itself had some statutory operation. The Court held that the scheme has a binding effect on creditors and shareholders who dissented from or oppose the same being sanctioned and that it had a statutory force only in that sense. It was also observed that the ‘scheme’ could not be altered except by the sanction of the Court even if the shareholders and creditors acquiesce in such alteration. It was for this limited reason that the Court observed that the scheme would have statutory operation [ see end note 3].

Briefly, the Indian Stamp Act was adopted in the year 1899 as a Central Legislation to levy stamp duties across India, with States having the power to adopt the Act with amendments to suit them. The Act has been subsequently amended several times. The States also have the power to legislate their own Stamp Duty laws pursuant to List II and List III (the latter being concurrent) of Schedule VII of the Constitution of India. States which have individual legislations on the subject include Maharashtra, Karnataka and Kerala.

The Bombay Stamp Act, 1958 (‘Bombay Act’) when adopted, was similar to the provisions of the Indian Stamp Act, 1899. By way of Maharashtra Act No. 27/1985, Section 2(g) of the Act which defines ‘conveyance’, was amended. The amended Section reads as under:

  • 2(g) ‘conveyance’ includes, -
  • (i)…….
  • (ii)…….
  • (iii)……..
  • (iv)Every order made by the High Court under Section 394 of the Companies Act, in respect of amalgamation of companies;

by which property, whether movable or immovable, or any estate or interest in any property is transferred to, or vested in, any person, inter vivos, and which is not otherwise specifically provided for by Schedule I.”

For the sake of reference, the definition of ‘instrument’ under Section 2(l) of the Act includes every document by which any right or liability is created and transferred.

The significance of the amendment is that the term ‘conveyance’ now specifically includes, the High Court sanction order under Section 394 in the Bombay Act. This is not reflected in the Indian Stamp Act. The Karnataka Stamp Act, 1957 has a replica provision defining ‘conveyance’ whereas the Kerala Stamp Act has adopted the Indian Stamp Act definition.

The Bombay High Court in State of Maharashtra v. MS Builders (Pvt.) Ltd and Ors [ see end note 4 ] . held that the amendment in 1985 was merely declaratory and not a remedial one. It is only a clarification to accept the position as they stood prior to the amendment. Therefore, it is clear that the intention behind the legislation, even before the amendment, was to always ensure that a Section 394 sanction order is an ‘instrument’ for the purposes of law.

Yet again, the Bombay High Court in Li Taka Pharmaceuticals Ltd. v. State of Maharashtra & Ors. [ see end note 5 ], held that even prior to the amendment, a ‘conveyance’ would include every ‘instrument’ by which the property is transferred to or vested in any other person inter vivos. The Court also held that a sanction order under Section 394 is found or based upon compromise or arrangement between the two companies of transferring assets and liabilities of one company to another company. The order is an ‘instrument’ as defined under the Bombay Stamp Act which includes every document by which any right or liability is transferred.

The Supreme Court in Hindustan Lever v. State of Maharashtra (‘HL’) [ see end note 6 ] referred to various English and Indian judgements wherein it was held that an ‘instrument’ would include order of every Court (including an Industrial Tribunal) and was liable to stamp duty. The Court in HL held that the transfer is effected by an order of the Court, thus making the sanctioning order an ‘instrument’ which transfers properties. The Section 394 order would hence, fall within the definition of Section 2(l) of the Bombay Stamp Act which includes every document by which any right or liability is transferred.

However, in 2006, a Division Bench of the Calcutta High Court in Madhu Intra Limited & Anr. v. Registrar of Companies & Ors.[ see end note 7 ], declined to import the position adopted by the Bombay High Court in the Li Taka Pharmaceuticals and held that the transfer of assets and liabilities of a transferor company to the transferee company takes place on an order being made under sub-section (1) of Section 394 by operation of sub-section (2) of the Section 394 without any further act or deed and hence the order of the Court sanctioning the ‘scheme’ would not qualify to be an ‘instrument’ as the transfer is purely through operation of law.

This was once again an issue before the High Court of Delhi in Delhi Towers Ltd v. GNCT of Delhi in its decision in 2009 [ see end note 8 ], wherein the Court held that it has been the consistent view of the Supreme Court (considering HL) that the scheme of amalgamation (specifically, the Section 394 sanction order) was already covered under the definition of an ‘instrument’ and by virtue of this, a ‘conveyance’ under the un-amended Bombay Act.

It is interesting to note that High Court of Delhi, agreed with the position laid down by the Supreme Court in HL, opposing the view of the Calcutta High Court. This was, despite Delhi not having its own Stamp Act with a provision similar to the one in the Bombay Act. This goes to show that the intention behind the term ‘instrument’ was to always include a Section 394 sanction order and extends even to the Indian Stamp Act, 1899. This ‘instrument’ when executed would subsequently attract stamp duty.

We move to the next issue i.e., registered offices in different States within India which RIL seeks to answer. If an ‘instrument’ is liable to stamp duty (rates variable in different States), and a Section 394 order is an ‘instrument’, it is simply logical that it would attract a stamp duty. Therefore, if the amalgamating parties were in the same State, they would have to pay stamp duty of that State. RIL however dealt with a scenario of inter-State amalgamations i.e., two companies in different States.

The Court in RIL took it upon itself to clarify that on collective reading of Sections 391 and 394, an order sanctioning the scheme must be obtained by both transferor and transferee company. Therefore, it is mandatory for both companies to approach their respective jurisdictional High Court to obtain this order and on receipt of their Section 394 orders (even if their schemes are the same) from their High Courts must pay stamp duties as are relevant to those States. The reasoning – such a scheme of amalgamation must bind the dissenting members, as also, all the creditors of both companies and not just for effecting transfer of property, assets, etc.

This brings us to a peculiar issue – since there are two schemes and stamp duty is paid twice, would a claim for rebate hold water? In other words, if the scheme is executed outside the State A but is then subsequently given to the stamping authorities in State A, the party not only pays stamp duty in the State where it was executed, but also pays stamp duty in the State where the certified copy of the ‘instrument’ is received – the party could ask for a differential payment in the latter State owing to the full payment made in the first. For instance, Section 19 of the Bombay Stamp Act provides for a cumulative condition that if an ‘instrument’ is executed outside the State and subsequently received in Maharashtra, the party could pay a differential amount as stamp duty.

The Court in RIL held that this Section did not relate to a rebate per se and that the Bombay Act has no provision for rebate. The Companies Act requires the scheme to be sanctioned in each State therefore, the stamp duty is to be paid in each State. In any case, RIL did not satisfy the cumulative conditions laid out in Section 19 (since the order for one of the merging parties originated in Maharashtra) and was therefore not eligible for differential payment of stamp duty.

On the issue of valuation for the purposes of stamp duty, RIL does not give a clear indication. Fortunately, there is some clarity on this issue in Hanuman Vitamin Foods Pvt. Ltd. v. State of Maharashtra [ see end note 9 ], The Court herein held (on the aspect of what stamp duty should be payable) that what is transferred is a going concern and not assets and liabilities separately. As a going concern, what is the value of the property is to be taken into consideration. The valuation (as mentioned above), is on the basis of the share exchange ratio.

Additionally, the Court in HL held that the consideration for sale in a transaction like this is the shares. The share exchange ratio is decided based on number of factors including the value of net assets of the transferor and the transferee company. To arrive at this figure of net assets the liabilities must be set off against the gross value. The properties belong to the company and the company belongs to the shareholders. Once the shareholders of the transferee company receive the consideration it would be deemed as if the owner has received the consideration.

The RIL decision will now be tried and tested as the decision is pending hearing before the Supreme Court. However, with the enforcement of Companies Act, 2013, provisions relating to amalgamations in Sections 391-394 have now been reworked into Sections 230-234. Over time, the powers of the High Court under Sections 391-394 will be moved to the National Company Law Tribunal under the new regime. It remains to be seen if the sanction order passed by the National Company Law Tribunal (whether by the same bench or different benches) the same will also be treated the same way.

[ The author is Senior Associate, Corporate Practice, Lakshmikumaran & Sridharan, London ]

End Notes:

  1. Chief Controlling Revenue Authority v. Reliance Industries Limited, AIR 2016 Bom 108
  2. J.K. (Bombay) Pvt Ltd. v. New Kaiser-I-Hind-Spinning & Weaving Co. Ltd., AIR 1970 SC 1041
  3. Delhi Towers Ltd. v. G.N.C.T. of Delhi, CA No. 4662008 in Company Petition No. 50/2003
  4. State of Maharashtra v. M.S. Builders (Pvt.) Ltd., 1992 (1) Bom.C.R. 568
  5. Li Taka Pharmaceuticals Ltd. v. State of Maharashtra, AIR 1997 Bom 7
  6. Hindustan Level v. State of Maharashtra, (2004) 9 SCC 438
  7. Madhu Intra Limited v. Registrar of Companies, (2006) 130 ComCas 510 (Cal)
  8. Supra note 4
  9. Hanuman Vitamin Foods Pvt. Ltd. v. State of Maharashtra, 1992 (1) Bom CR 568


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