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Timestamp: 2019-04-18 21:13:18+00:00

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The advent of a new era of unprecedented economic growth, globalization and proliferation of commercial forces has led to a significant change in the corporate scenario. Indian Companies often take recourse to different schemes of arrangement while carrying out their business activities in order to face the competition posed by the international companies and carve a niche for them in the global market. Schemes of arrangements like mergers and demergers form an essential part of business strategy as they benefit from the operational synergy which purports that organizations perform better upon linking up with each other to form bigger business organizations. Since these arrangements have the potential to bring about far reaching consequences in the economy of a country, they are stringently regulated by the country’s legal framework. The regulations include imposition of taxes by the government like the stamp duty on the instruments relating to the transactions which inevitably take place during such deals. The corporate houses are naturally opposed to the idea of imposition of stamp duties as it substantially increases the costs involved in such deals. This paper attempts to examine the importance of levying of stamp duties and its implications on such schemes, the wide array of conflicting judicial pronouncements, subsequent legislative amendments and the more or less settled position in law at the moment.
Accordingly, the project is divided into 5 parts. Part II provides for the existing legal framework with respect to relevance of stamp duties and different schemes of arrangements as provided by the Companies Act, 1956 (hereinafter “Companies Act”). Part III seeks to establish the implications of stamp duty on such schemes and the varied judicial pronouncements. Part IV examines the exceptions to the imposition of stamp duty. Finally, Part V concludes along with suggestions so as to ensure the smooth functioning of the stamp regime in India.
Stamp duty is a tax on instruments and not on transactions.  Section 3 of the Indian Stamp Act (hereinafter “the Stamp Act”) prescribes what instruments are chargeable with stamp duty under the Act.
Section 2(11) defines “duly stamped” as stamped with the value and description of stamp required by the law in force when the instrument was executed or first executed.  The Finance (No. 2) Act, 2004 inserted the definition of “stamp” as any mark, seal or endorsement by any agency or person duly authorized by the State Government, and includes an adhesive or impressed stamp, for the purposes of duty chargeable under the Stamp Act.
Rates of Stamp Duty payable for different types of documents are as per Schedule I of the Act. The list includes all usual instruments like affidavit, lease, memorandum and articles of association of a company, bill of exchange, bond, mortgage, conveyance, receipt, debenture, share, insurance policy, partnership deed, proxy, shares etc.
States such as Gujarat, Maharashtra, Karnataka, Kerala and Rajasthan have their separate State Stamp Acts, while many States follow the Stamp Act. However, where stamp duty payable on certain transactions is not covered in the respective state stamp act, the state(s) refer to the stamp duty rates provided in the Stamp Act for such transactions.
States of Maharashtra, Gujarat, Karnataka, Rajasthan, Chattisgarh, Madhya Pradesh and Andhra Pradesh have resolved the matter to some extent by specifying that stamp duty is to be levied on court orders under sections 391-394 of the Companies Act.
2. Corporate Restructuring Through Schemes of Arrangement – Mergers, Takeovers, Etc.
The terms ‘merger’ and ‘takeover’ are not defined under the Companies Act, the Act broadly provides for the schemes of arrangement and corporate restructuring under sections 391 to 394. The precise definitions of these terms can be found in the Income Tax Act, 1961 (hereinafter “the IT Act”).
The terms ‘mergers’ and ‘amalgamations’ are used interchangeably and Section 2 (1B)  of the IT Act defines amalgamation as being inclusive of merger of two or more companies to form an amalgamated company whereby the properties and liabilities of the amalgamating company or companies become the property and liabilities of the amalgamated company upon amalgamation.
This concept was also lucidly explained by the Supreme Court in Saraswathi Industrial Syndicate v. CIT, Haryana,  as a process in which “two or more companies are fused into one by merger or one taking over another”.  In re: Telesound India Limited,  the Court opined that on amalgamation the transferor-company merges into the transferee- company shedding its corporate shell, but for all purposes remaining alive and thriving as part of the larger whole. In that sense the transferor-company does not die either on amalgamation or on dissolution without winding-up under sub-section (1) of section 394.
Takeover  means the acquisition by one company of control over another, usually by buying all or a majority of its shares. The result of a takeover is that the control of the company gets transferred from one group to another.
Apart from these well known and preferred forms of corporate restructuring, there exist other routes too including amalgamation that can be effected by the government in the national interest under section 396 of the Companies Act, reverse merger and demerger.
Demerger as defined under section 2(19AA)  of the IT Act means transfer of one or more of a company’s undertakings following a scheme of arrangement under sections 391 to 394 of the Companies Act.
There have been numerous and unending litigations regarding the controversy pertaining to the applicability of the stamp duty on such schemes. Indian Stamp Act is silent in this respect and this lack of legislative clarity results in a state of dilemma for the States following the Stamp Act. Certain States like Maharashtra, Gujarat, Rajasthan and Karnataka, however, have amended their respective state legislations to bring precision and the position stands thus, a court order under Sections 391-394 of the Company Act is stampable in these states.
The moot point, prima facie, is whether the court order sanctioning amalgamation is through a voluntary act or through the operation of law?
Consequently, whether the transfer of assets would fall within the purview of ‘conveyance’ as envisaged in the Act and thus subjected to stamp duty or not?
Various high courts across the country have expressed different opinions thereby creating two blocs purporting converse viewpoints on the subject matter.
In the case of Sailandra Kumar Ray v. Bank of Calcutta Limited,  the court held that since the amalgamation occurs pursuant to the court orders, it falls within the ambit of operation of law and is an involuntary act.
Thus, the first bloc opines that since the transfer of property takes place pursuant to the court order, it does not fall within the ambit of ‘conveyance’ as the property is vested on the transferee.
However, by looking at the definition of ‘operation of law’ as per Black’s law dictionary  which defines it as ‘the means by which a right or a liability is created for a party regardless of the party’s actual intent’, it can be clearly inferred that the aforementioned view is not in consonance with the given definition.
It is also imperative at this juncture to note that in the much celebrated case of Miheer. H. Mafatlal v. Mafatlal Industries Ltd,  the Supreme Court had laid down the broad contours of the jurisdiction of the Company Court and held that the Company Court’s jurisdiction to that extent is peripheral and supervisory and not appellate.
Subsequently, in the case of General Radio and Applicances Company Ltd and Others v. M.A.Khader (dead),  Apex court held that since amalgamation scheme is approved by the Court only based on the application of the companies, it cannot be held to be an involuntary transfer.
This view point is supported by the second bloc. It believes that the transfer of property pursuant to such a scheme of arrangement is basically putting into effect the agreement between two or more companies and the court is merely giving its stamp of approval, provided the scheme is not illegal or detrimental to the company and public interest in any form. Thus, it falls within the ambit of ‘conveyance’.
Section 2(g) of Bombay Stamp Act was amended in 1993 to provide that ‘conveyance’ would include every order made by the High Court under section 394 of the Companies Act in respect of amalgamation of companies.  The constitutionality of it was challenged before the Bombay High court in Li Taka Pharmaceuticals case.
The Division Bench of the Bombay High Court placed reliance on two pronouncements of the Supreme Court reported at CIT, A.P. v. Taj Mahal Hotel, Secundarabad  and State of Tamil Nadu v. Pyare Lal Malhotra,  on interpretation of inclusive or explanatory statutory provisions and accepted the submission that the amendment to the definition of “conveyance” in section 2(g) is by way of a clarification and effectuated only in order to clarify what was accepted in the provisions as they existed prior to the amendment. The amendment therefore was by way of clarification of an ambiguous provision.
The Court dismissed the petition and opined that order of amalgamation under section 394 is based upon a compromise or arrangement between two or more companies pursuant to which the whole or any part of the undertaking, property or liability of the transferor company gets transferred to and vested in the transferee company. Such a transfer takes place by the virtue of the court order. It further held that such an order would fall under the definition of conveyance as the basis for passing an order of amalgamation is the agreement between two or more companies.
In the year 2003, the Calcutta High Court in this case held that an order sanctioning a scheme of reconstruction amalgamation under section 394 is covered by the definition of the words ‘conveyance’ and ‘instrument’ under the Indian Stamp Act and therefore liable to stamp duty.
But the same Court in 2006 held a contrary view in the Madhu Intra case and set aside the judgment of learned company judge in the Gemini case. It is, however, pertinent to note here that the Supreme Court pronouncement in Hindustan Lever and Anr. v. State of Maharashtra and Anr,  was not placed before the Court in the case.
The Apex Court in Hindustan Lever case in 2004 supported the judgment of the Bombay High Court in Li Tika case. The Court observed that conveyance covers within its ambit transfer of property inter vivos, that is to say, transfer between living persons. Living persons include company or association or body of individual, whether incorporated or not.  Thus, it can be clearly inferred that a company, being a juristic person is capable of owning property and can also bring about its transfer.
The Hon’ble Court categorically held that the order sanctioning the amalgamation scheme is an instrument liable to be levied stamp duty and the state legislature is competent to impose the duty on the instrument and on the execution of the instrument.
It opined that in such a proceeding, the court merely plays a supervisory role and the very root of the order is based on the consent and desire of the parties involved. The Court conclusively held that definition of ‘conveyance’ was an inclusive one and includes within its ambit order of the Court under section 394 of the Companies Act, thereby, subjecting it to stamp duty even though it is not specifically included in Schedule I of the Stamp Act.
It further clarified that in the case of merger, only the value of net assets are liable for levying of stamp duty. The case of Hindustan Lever Employees Union v. Hindustan Lever Ltd.,  was also referred to wherein it was held that such an intended transfer is a voluntary act of the contracting parties and that the transfer has all the trappings of a sale.
Lastly, the Court also held that the amendments made by the states in their stamp duty laws which had the effect of including court orders passed under section 394 of the Companies Act was only to set at rest the doubts regarding the same and no new levy has been introduced.
In another recent case before the High Court of Allahabad, scheme of arrangement sanctioned by the Court was held to be conveyance and an instrument within the meaning of sections 2(10) and 2(14) of the Stamp Act as applicable in Uttar Pradesh.
There is no applicability of stamp duty to merger under Section 396 of the Companies Act which gives the power to the government to provide for amalgamation of companies in the national interest. This is by virtue of proviso 1 to Section 3 of the Stamp Act which purports to exempt any instrument executed by or on behalf of, or in favour of the government.
In T.T. Krishnamachari & Co. v. Joint Sub-Registrar-I and Anr,  it was held that no stamp duty is payable on an order issued by the Board for Industrial & Financial Reconstruction (BIFR) sanctioning the scheme as such an order aims at rehabilitating business and reviving a sick industrial company.
– Where at least 90% of the issued capital of the transferee company is in the beneficial ownership of the transferor company.
– Where the transfer takes place between two subsidiary companies each of which not less than 90% 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 by the parties, from the officer appointed in this behalf by the local government concerned, that the conditions above prescribed are fulfilled.
The applicability of stamp duty on a court order sanctioning the scheme of arrangement has been a controversial issue for sometime now.
Initially, the corporate world firmly held that such a court order does not get covered in the ambit of “conveyance” as defined under the stamp duty law, therefore no stamp duty is payable on the same.
In the light of subsequent amendments made by some states in their respective stamp legislations and judgments of various High Courts and the Supreme Court which made the definition of conveyance inclusive of such court orders, the corporate world firmly believed that stamp duty on such schemes of arrangement will only be levied on the specific states which have made such amendments.
Even after the pronouncement of the Hindustan Lever case, the above contention found faithful advocates as this judgment was made in the context of the Bombay Stamp Act only.
However, with the Delhi Towers judgment, the position more or less stands settled. Delhi is governed by the Stamp Act as it does not have a specific stamp legislation of its own. And in this case, it was clearly held that any scheme of arrangement involving transfer of property will involve payment of stamp duty. The stamp duty in Delhi will now be payable either on the value of net asset transferred or for conveyance in the absence of the specific entry.
Despite reiteration of the law by different High Courts, there are still impediments in the path of smooth application of the stamp duty in such mutation cases which need to be addressed.
The most significant and pressing of them is the calculation of the stamp duty on such schemes of arrangement especially considering the fact that different stamp duty laws are prevalent in different states. In the changing global scenario which fiercely advocates competition and the theory of survival of the fittest, the growth and expansion of Indian companies must be encouraged and the unnecessary obstacles that pave their way must be removed. Although the revenue derived from the levy of stamp duty for the state government forms a substantial part of their income, attention must be paid even to the corporate houses which need finances at their disposal to be able to undertake risks and expansionist policies in order to become a force to be reckoned with in the global economy.
Thus, a great need is felt for the basic law relating to stamp duties to be uniform throughout the country.
This will also put an end to the scenario wherein the corporate houses are forced to conclude deals in states where the rates of the stamp duty are minimal so as to not adversely affect their business deals.
Only a conclusively judicial pronouncement by the Supreme Court or an amendment to the Stamp Act can put an end to all the speculations and hardships faced by the corporate houses and make the Indian market a haven for all kinds of corporate deals and transactions.
"Implications of Stamp Duty." Parallelewelten.net. 11 2013. All Answers Ltd. 04 2019 <http://parallelewelten.info/free-law-essays/business-law/implications-of-stamp-duty-business-law-essay.php?vref=1>.
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