The issue of applicability of stamp duty to a scheme of arrangement (merger/ amalgamation, demerger, reconstruction or otherwise) effected with the sanction of the High Court under sections 391 to 394 of the Companies Act, 1956 has always been a vexed one. As regards stamp duty legislation more generally, several states have enacted their own stamp duty laws while the remaining states are governed by the Indian Stamp Act, 1899.
Stamp duty is usually levied on various instruments, including a “conveyance”. Although various states may define the expression differently, one example is contained in the Indian Stamp Act, 1899, which defines “conveyance” in Section 2 Sub-section (10) as including “a conveyance on sale and every instrument by which property, whether movable or immovable is transferred inter vivos …”.
The definition of “conveyance” in stamp duty laws did not historically include the order of a High Court under a scheme of arrangement in an express manner, and as a matter of practice court orders sanctioning schemes of arrangement were never liable for payment of stamp duty. In the last two decades, however, several states began amending their stamp laws to expressly include orders of the court approving a scheme of amalgamation under section 394 of the Companies Act within the definition of “conveyance”. Consequently, at present, the seven states of Maharashtra, Gujarat, Karnataka, Rajasthan, Chattisgarh, Madhya Pradesh and Andhra Pradesh have included a High Court order (approving a scheme of amalgamation under section 394 of the Companies Act) within the definition of “conveyance” in their stamp laws. As far as these states are concerned, the position regarding liability of stamp duty on arrangements is somewhat clear, although the rates of stamp duty as well as the basis of computation differ even among those states. To that extent, while there is little doubt regarding computation of stamp duty on schemes of arrangement among companies within a single such state, the issue can be somewhat compounded if the companies involved are registered in different such states.
Matters become further complicated when we examine other states that do not expressly include High Court orders on amalgamation within the definition of “conveyance”. The Indian Stamp Act, 1899, which applies to several states in India (other than those discussed in the preceding paragraph) is one such legislation without an express inclusion for a scheme of arrangement. Predictably, that has resulted in a great amount of uncertainty in cases that involve amalgamation of companies registered in states governed by the Indian Stamp Act. Multiplicity of High Court rulings pointing in different directions has only added to the confusion.
In order to briefly set out the lay of the land (without in any way attempting to be exhaustive), it would be useful to examine some of the leading cases. The Bombay High Court was first confounded with this issue in Li Taka Pharmaceuticals Ltd. v. State of Maharashtra, AIR 1997 Bom 7, wherein it held that “even prior to the amendment [in the Bombay Stamp Act expressly including an order of amalgamation], a conveyance would include every instrument by which the property is transferred to or vested in another person inter vivos” and that the amendment was only with a view to set to rest any doubts and to clarify and explicitly state that an order of amalgamation was already included in the definition of conveyance by implication.
The development of case law in West Bengal has been somewhat mixed. A single judge of the Calcutta High Court held in Gemini Silk Limited v. Gemini Overseas Limited
, 2003 53 CLA 328, that an order sanctioning a scheme of amalgamation under section 394 is covered by the definition of “conveyance” under the Indian Stamp Act and therefore liable to stamp duty. That was the case even though “conveyance” was not defined to expressly include an order of amalgamation. Subsequently though, a Division Bench of the Calcutta High Court adopted a contrary view in Madhu Intra Limited v. Registrar of Companies
, (2006) 130 Comp. Cas. 510, where it was held that an order of amalgamation was not subject to stamp duty, because it did not fall within the definition of a “conveyance”; moreover even if such an order were to be taken as a “conveyance” or an “instrument” the transfer of assets and liabilities effected thereby is purely by operation of law
. The Division Bench even went to the extent of expressly setting aside the order and judgment of the single judge in the Gemini Silk
More recently, the Delhi High Court in Delhi Towers Ltd. v. G.N.C.T. of Delhi
, was not persuaded by the Division Bench ruling in Madhu Intra
. The Delhi High Court instead adopted the previous reasoning in Li Taka Pharmaceuticals
and Gemini Silk
, and in a comprehensive judgment held that an order of the High Court approving a scheme of amalgamation would be liable to stamp duty even in the absence of an express inclusion of such orders within the definition of “conveyance”. Moreover, the court also noted that stamp duty should be computed on the basis of the consideration paid for the amalgamation, which is reflected in the value of the shares allotted by the amalgamated company in exchange for the amalgamation. Hence, the value of the individual properties being transferred is immaterial to the computation of the stamp duty.
All of these go to demonstrate the lack of uniformity in the applicability of stamp duty on schemes of arrangement in states where the Indian Stamp Act, 1899 operates. In order to remedy this situation, the Union Ministry of Finance has decided to follow the path adopted by the seven states and to amend Section 2(10) to include the following within the definition of “conveyance”: “(iii) every order made by the High Court/Tribunal under Section 394 of the Companies Act, 1956 in respect of the amalgamation or reconstruction of companies; and every order made by the Reserve Bank of India under section 44 A of the Banking Regulation Act, 1949 in respect of amalgamation or reconstruction of Banking Companies;” This has been set out in draft amendments
to the Indian Stamp Act that have been approved by the Ministry of Finance.
Such an amendment is welcome as it will put to rest the differing views expressed by the Delhi and Calcutta High Courts and introduce a greater level of certainty, although it would increase the cost of implementing mergers and other forms of reconstruction (which would have to be factored in by parties at the planning stage). If enacted, these amendments would ensure that stamp duty is applicable on schemes of arrangement (such as mergers and other forms of restructuring) in almost all states. However, elements of uncertainty and disparity are set to continue. Although the proposed amendments will only make orders of courts on schemes of arrangement chargeable to stamp duty, the actual rates of stamp duty (and the modes of computation thereof) are still left to individual states to determine. To that extent, the exercise of determining and factoring in stamp duty as a cost element in a merger transaction would continue to be cumbersome, especially in transactions involving companies whose registrations span different states.