[This post is
slightly longer than our usual posts. I would like to thank a reader for
drawing attention to a judgment that is the subject matter of this post]
slightly longer than our usual posts. I would like to thank a reader for
drawing attention to a judgment that is the subject matter of this post]
Stamp duty on schemes of
amalgamation undertaken through sections 391 to 394 of the Companies Act, 1956
have tended to experience a great deal of controversy, as we have previous
discussed on this Blog (here,
here
and here).
A recent judgment of the Bombay High Court may have stoked it further. While it
is now more or less settled that schemes of amalgamation are subject to stamp
duty in most states, the question of quantum of stamp duty (especially where
companies involved in the amalgamation are incorporated in more than one state)
was left open. This judgment seeks to answer that question.
amalgamation undertaken through sections 391 to 394 of the Companies Act, 1956
have tended to experience a great deal of controversy, as we have previous
discussed on this Blog (here,
here
and here).
A recent judgment of the Bombay High Court may have stoked it further. While it
is now more or less settled that schemes of amalgamation are subject to stamp
duty in most states, the question of quantum of stamp duty (especially where
companies involved in the amalgamation are incorporated in more than one state)
was left open. This judgment seeks to answer that question.
Court’s
Decision
Decision
In Chief Controlling
Revenue Authority v. Reliance Industries Limited,[1] a Full Bench of the Bombay
High Court was concerned with 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 June 7, 2002, the Gujarat High Court passed its
order (on a petition by RPL) subsequently on September 13, 2002. After both the
orders were passed, RIL paid a stamp duty of Rs. 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 Rs. 25 crores was payable in Maharashtra on the
amalgamation, RIL took up the contention that it only needed to pay Rs. 15
crores, claiming credit for the Rs. 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 Bombay High
Court to decide on the questions of law.
Revenue Authority v. Reliance Industries Limited,[1] a Full Bench of the Bombay
High Court was concerned with 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 June 7, 2002, the Gujarat High Court passed its
order (on a petition by RPL) subsequently on September 13, 2002. After both the
orders were passed, RIL paid a stamp duty of Rs. 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 Rs. 25 crores was payable in Maharashtra on the
amalgamation, RIL took up the contention that it only needed to pay Rs. 15
crores, claiming credit for the Rs. 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 Bombay High
Court to decide on the questions of law.
The Court identified the questions
for consideration as follows:
for consideration as follows:
1. Whether a
scheme sanctioned between the two companies under Section 391 and 394 of the Companies
Act is one and 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 Offices of the two Companies
are situated in two different states?
scheme sanctioned between the two companies under Section 391 and 394 of the Companies
Act is one and 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 Offices of the two Companies
are situated in two different states?
2. 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?
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?
3. Whether in a
scheme, compromise or arrangement sanctioned under Section 391 and 394 of the Companies
Act where registered office 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?
scheme, compromise or arrangement sanctioned under Section 391 and 394 of the Companies
Act where registered office 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?
4. Whether for
the purpose 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?
the purpose 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?
The Court decided as follows on
these questions.
these questions.
1. Scheme or Court Orders? One document or
two?
two?
This question is probably the most
important one, as the answer to this largely determines the answers to the
questions to follow. It is clear that stamp duty is payable on an “instrument”
and not a transaction. Consequently, the issue relates to what constitutes an
“instrument” in relation to a court-approved amalgamation. The Court noted: “The
issue in short is whether the scheme of arrangement between the parties which
has been sanctioned by the court is the instrument or the order of the court
sanctioning the scheme is the instrument as parties are ad-idem that stamp duty
is payable on an instrument.”
important one, as the answer to this largely determines the answers to the
questions to follow. It is clear that stamp duty is payable on an “instrument”
and not a transaction. Consequently, the issue relates to what constitutes an
“instrument” in relation to a court-approved amalgamation. The Court noted: “The
issue in short is whether the scheme of arrangement between the parties which
has been sanctioned by the court is the instrument or the order of the court
sanctioning the scheme is the instrument as parties are ad-idem that stamp duty
is payable on an instrument.”
In answering this question, the
Court referred to the previous line of cases dealing with stamp duty on
amalgamations, including Hindustan Lever
v. State of Maharashtra, (2004) 9 SCC 438 and Li Taka Pharmaceuticals v. State of Maharashtra, 1996 (2) Mah. L.J.
156. These cases support the proposition that the transfer in case of an
amalgamation is effected by an order of the court, which is the instrument for
purposes of the Bombay Stamp Act. It found that the scheme of amalgamation
itself cannot be an “instrument” as it has no force unless and until it is
sanctioned by the court. Accordingly, the Court took the “execution” of an
instrument in an amalgamation to be the signature of the High Court on an order
sanctioning the amalgamation. Since the Bombay Stamp Act requires that an
instrument executed within the State be stamped “before or at the time of
execution or immediately thereafter or on the next day following the
execution”, the provision was not complied with as required in the present case.
The Court took issue with the fact that although the Bombay High Court order
preceded that of the Gujarat High Court, the parties proceeded to pay stamp
duty in Gujarat before addressing the stamp duty payment in Maharashtra,
thereby contravening the chronology of the respective court orders.
Court referred to the previous line of cases dealing with stamp duty on
amalgamations, including Hindustan Lever
v. State of Maharashtra, (2004) 9 SCC 438 and Li Taka Pharmaceuticals v. State of Maharashtra, 1996 (2) Mah. L.J.
156. These cases support the proposition that the transfer in case of an
amalgamation is effected by an order of the court, which is the instrument for
purposes of the Bombay Stamp Act. It found that the scheme of amalgamation
itself cannot be an “instrument” as it has no force unless and until it is
sanctioned by the court. Accordingly, the Court took the “execution” of an
instrument in an amalgamation to be the signature of the High Court on an order
sanctioning the amalgamation. Since the Bombay Stamp Act requires that an
instrument executed within the State be stamped “before or at the time of
execution or immediately thereafter or on the next day following the
execution”, the provision was not complied with as required in the present case.
The Court took issue with the fact that although the Bombay High Court order
preceded that of the Gujarat High Court, the parties proceeded to pay stamp
duty in Gujarat before addressing the stamp duty payment in Maharashtra,
thereby contravening the chronology of the respective court orders.
The Court ultimately concluded on
this issue that in a scheme of amalgamation involving two companies, there
would be two instruments each of which would be liable to stamp duty. It
stated:
this issue that in a scheme of amalgamation involving two companies, there
would be two instruments each of which would be liable to stamp duty. It
stated:
21 Although the two orders of two different
high courts are pertaining to same scheme they are independently different instruments
and can not be said to be same document especially when the two orders of
different high courts are upon two different petitions by two different companies.
When the scheme of the said Act is based on chargeability on instrument 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.
high courts are pertaining to same scheme they are independently different instruments
and can not be said to be same document especially when the two orders of
different high courts are upon two different petitions by two different companies.
When the scheme of the said Act is based on chargeability on instrument 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.
In other words, what is relevant
for purposes of payment of stamp duty is the court order, which represents the
“instrument” and not the scheme (which does not have any standing of its own
without the court’s order).
for purposes of payment of stamp duty is the court order, which represents the
“instrument” and not the scheme (which does not have any standing of its own
without the court’s order).
2. Whether the Two Court Orders are
Incidental
Incidental
Since the orders of the two courts
relate to a common scheme of amalgamation, the question arose as to whether
they are incidental, and whether it was sufficient to stamp the “principal
instrument”, being the order of the Gujarat High Court. This argument was not
accepted by the Court as section 4 of the Bombay Stamp Act that deals with
incidental instruments is specific only to some types of agreements such as
development agreement, sale, mortgage or settlement. The Court found that the
present case did not fall within any of these categories.
relate to a common scheme of amalgamation, the question arose as to whether
they are incidental, and whether it was sufficient to stamp the “principal
instrument”, being the order of the Gujarat High Court. This argument was not
accepted by the Court as section 4 of the Bombay Stamp Act that deals with
incidental instruments is specific only to some types of agreements such as
development agreement, sale, mortgage or settlement. The Court found that the
present case did not fall within any of these categories.
3. Inter-State Document and Credit for
Stamp Duty Paid
Stamp Duty Paid
Section 19 of the Bombay Stamp Act
provides that where a document executed outside a State is subsequently brought
into the State, stamp duty would have to be paid on that instrument after
giving appropriate credit (i.e. set-off) to duty that has already been paid in
another state. Since the Court had already concluded in relation to item (1)
above that an amalgamation comprises two court orders, what was relevant for
purposes of considering the stamp duty liability in Maharashtra was the order
of the Bombay High Court. Since the order of that court was signed in
Maharashtra, it was “executed” within the State, due to which the provisions of
section 19 would not apply.
provides that where a document executed outside a State is subsequently brought
into the State, stamp duty would have to be paid on that instrument after
giving appropriate credit (i.e. set-off) to duty that has already been paid in
another state. Since the Court had already concluded in relation to item (1)
above that an amalgamation comprises two court orders, what was relevant for
purposes of considering the stamp duty liability in Maharashtra was the order
of the Bombay High Court. Since the order of that court was signed in
Maharashtra, it was “executed” within the State, due to which the provisions of
section 19 would not apply.
For these reasons, the Court
concluded as follows (in a nutshell):
concluded as follows (in a nutshell):
1. A scheme of amalgamation between two
companies is not a document chargeable to stamp duty;
companies is not a document chargeable to stamp duty;
2. An order passed by the court, which
effects the transfer, would be a document chargeable to stamp duty;
effects the transfer, would be a document chargeable to stamp duty;
3. If there are two High Courts involved,
then the High Court “which sanctions the Scheme passed under Section 394 of the
Companies Act, will be the instrument chargeable to stamp duty”.
then the High Court “which sanctions the Scheme passed under Section 394 of the
Companies Act, will be the instrument chargeable to stamp duty”.
4. The orders of different courts
sanctioning the scheme are not “incidental” orders. Each order is an “instrument”,
and that the scheme along cannot be chargeable to stamp duty.
sanctioning the scheme are not “incidental” orders. Each order is an “instrument”,
and that the scheme along cannot be chargeable to stamp duty.
5. When the orders are passed in different
states, section 19 will not apply as the order in respect of a company in a
state is passed within that state itself.
states, section 19 will not apply as the order in respect of a company in a
state is passed within that state itself.
Implications
At one level, the decision of the
Court is understandable as seeks to address a somewhat controversial issue by
engaging in a technical interpretation of the Bombay Stamp Act. While it
adheres closely to such an interpretation of individual provisions, and is
arguably satisfactory in respect of the same, the end result is counterintuitive,
and one wonders whether a more purposive interpretation of the statute would
have resulted in a different outcome.
Court is understandable as seeks to address a somewhat controversial issue by
engaging in a technical interpretation of the Bombay Stamp Act. While it
adheres closely to such an interpretation of individual provisions, and is
arguably satisfactory in respect of the same, the end result is counterintuitive,
and one wonders whether a more purposive interpretation of the statute would
have resulted in a different outcome.
First, let us begin with a rather basic
analysis. An instrument is a legal document that conveys property from one
person to another. A transfer of property can be effected through a document
that is executed between two parties, and there can be no dispute that it must
be stamped as one single document. In the alternative structure, the same transfer
of property can be achieved through a scheme of arrangement, in which case the
transferor and transferee would be companies. A scheme of arrangement is also a
consensual arrangement that is initiated by the two companies involved in the transfer,
except that in this case the specific process prescribed under sections 391 to
394 of the Companies Act, 1956[2] must be followed, which
include obtaining the approval of the relevant classes of shareholder and
creditors as well as the sanction of the relevant High Courts. The import of
the judgment under discussion is that although a transfer by way of a private
contractual arrangement constitutes one “instrument” for purposes of stamp
duty, if the same transfer is achieved through a scheme of arrangement under
the Companies Act it could constitute two instruments for purpose of stamp duty,
neither of which is incidental to the other. If there are more companies
involved in a scheme of arrangement, then there would be as many instruments as
there are companies. This, to my mind, results in an unintended consequence.
analysis. An instrument is a legal document that conveys property from one
person to another. A transfer of property can be effected through a document
that is executed between two parties, and there can be no dispute that it must
be stamped as one single document. In the alternative structure, the same transfer
of property can be achieved through a scheme of arrangement, in which case the
transferor and transferee would be companies. A scheme of arrangement is also a
consensual arrangement that is initiated by the two companies involved in the transfer,
except that in this case the specific process prescribed under sections 391 to
394 of the Companies Act, 1956[2] must be followed, which
include obtaining the approval of the relevant classes of shareholder and
creditors as well as the sanction of the relevant High Courts. The import of
the judgment under discussion is that although a transfer by way of a private
contractual arrangement constitutes one “instrument” for purposes of stamp
duty, if the same transfer is achieved through a scheme of arrangement under
the Companies Act it could constitute two instruments for purpose of stamp duty,
neither of which is incidental to the other. If there are more companies
involved in a scheme of arrangement, then there would be as many instruments as
there are companies. This, to my mind, results in an unintended consequence.
Second, moving further, if one were to consider
the disputes involved in the earlier cases discussed above, the question was
whether the order of a court in a scheme of arrangement would be a “conveyance”
for the purposes of charging stamp duty. While there was some initial
hesitation, the position now seems to be a resounding yes, not just from the
judiciary but also from the legislature in states such as Maharashtra and
Gujarat which have amended their stamp duty legislation to include orders of
the court as being “conveyance”. Hence, any doubt regarding the chargeability
of stamp duty on a court-based scheme has been removed. What the judgment under
discussion does is to extend this principle further to state that not only is
the order a “conveyance”, but that each order of a court involved in a scheme
of arrangement is chargeable to stamp duty. In other words, it extends the
earlier line of judgments that levy stamp duty by enhancing the magnitude of
payment of stamp duty. This it does so by means of its textual interpretation of
the Bombay Stamp Act.
the disputes involved in the earlier cases discussed above, the question was
whether the order of a court in a scheme of arrangement would be a “conveyance”
for the purposes of charging stamp duty. While there was some initial
hesitation, the position now seems to be a resounding yes, not just from the
judiciary but also from the legislature in states such as Maharashtra and
Gujarat which have amended their stamp duty legislation to include orders of
the court as being “conveyance”. Hence, any doubt regarding the chargeability
of stamp duty on a court-based scheme has been removed. What the judgment under
discussion does is to extend this principle further to state that not only is
the order a “conveyance”, but that each order of a court involved in a scheme
of arrangement is chargeable to stamp duty. In other words, it extends the
earlier line of judgments that levy stamp duty by enhancing the magnitude of
payment of stamp duty. This it does so by means of its textual interpretation of
the Bombay Stamp Act.
Third, the
Court in this case was admittedly dealing with an inter-state amalgamation. If
one were to apply this principle to intra-state amalgamations, the same issue
could arise. For example, let us assume the amalgamation relates to two
companies within the same state. Even here, the companies have to file individual
petitions, and obtain sanctions of the court independently. It is a different
matter that the different petitions may be heard together for the sake of
convenience. In such a case too, the question of multiple “instruments” would apply.
Do parties have to pay stamp duty on one instrument? If so, which one? If not,
applying the present judgments, would they have to pay stamp duty duty as if
there are two instruments? This position lacks clarity.
Court in this case was admittedly dealing with an inter-state amalgamation. If
one were to apply this principle to intra-state amalgamations, the same issue
could arise. For example, let us assume the amalgamation relates to two
companies within the same state. Even here, the companies have to file individual
petitions, and obtain sanctions of the court independently. It is a different
matter that the different petitions may be heard together for the sake of
convenience. In such a case too, the question of multiple “instruments” would apply.
Do parties have to pay stamp duty on one instrument? If so, which one? If not,
applying the present judgments, would they have to pay stamp duty duty as if
there are two instruments? This position lacks clarity.
Fourth, the
Court’s observations also raise a timing issue. The Court states that the order
of the Bombay High Court was issued on June 7, 2002, which itself constituted
an instrument that is liable for stamp duty, although the order of the Gujarat
High Court only came later. It also notes that RIL ought to have paid with
reference to the date of the Bombay High Court order, without having regard to
the Gujarat High Court proceedings. This is bound to cause severe practical
difficulties. For example, it would require a party (A) to pay stamp duty on an
order granted by one of the courts (X) without having any certainty that the
scheme would be approved in respect of the other party (B) by the other court
(Y). If court Y does not sanction the scheme, there is no transfer while A would
have already incurred an obligation to pay stamp duty. This is again an
unintended consequence of treating a transfer by way of a scheme of arrangement
as two instruments representing the orders of the two High Courts involved.
Court’s observations also raise a timing issue. The Court states that the order
of the Bombay High Court was issued on June 7, 2002, which itself constituted
an instrument that is liable for stamp duty, although the order of the Gujarat
High Court only came later. It also notes that RIL ought to have paid with
reference to the date of the Bombay High Court order, without having regard to
the Gujarat High Court proceedings. This is bound to cause severe practical
difficulties. For example, it would require a party (A) to pay stamp duty on an
order granted by one of the courts (X) without having any certainty that the
scheme would be approved in respect of the other party (B) by the other court
(Y). If court Y does not sanction the scheme, there is no transfer while A would
have already incurred an obligation to pay stamp duty. This is again an
unintended consequence of treating a transfer by way of a scheme of arrangement
as two instruments representing the orders of the two High Courts involved.
In all, the decision of the Bombay
High Court magnifies the stamp duty on a scheme of amalgamation. Granted that
parties should not resort to schemes of 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. The present approach would have the effect of
penalizing parties for choosing a scheme of arrangement (which is a more
transparent process with greater shareholder and creditor protection) than a
private sale (which does not confer those benefits).
High Court magnifies the stamp duty on a scheme of amalgamation. Granted that
parties should not resort to schemes of 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. The present approach would have the effect of
penalizing parties for choosing a scheme of arrangement (which is a more
transparent process with greater shareholder and creditor protection) than a
private sale (which does not confer those benefits).
It is difficult to argue against
the textual interpretation of the Bombay Stamp Act that the Court indulged in.
The effect of a scheme of arrangement has been a thorny issue elsewhere too.
For example, in The Oriental Insurance Co.
Ltd. v. Reliance National Asia Re Pte. Ltd., [2008] SGCA 18, the Singapore
Court of Appeal took note of the differing approaches followed by courts
regarding schemes of arrangement. While the English approach embodied in the
Privy Council decision of Kempe v. Ambassador
Insurance Co., [1998] 1 WLR 271 took the view that a scheme of arrangement derived
its efficacy purely from statute and operated as a “statutory contract”, the
Australian approach stated that the scheme of arrangement derived its efficacy
from the order of the court and that it in fact operated as an order of the
court. After considering both these approaches, the Singapore courts opted for
the Australian one treating the scheme as an order of the court.
the textual interpretation of the Bombay Stamp Act that the Court indulged in.
The effect of a scheme of arrangement has been a thorny issue elsewhere too.
For example, in The Oriental Insurance Co.
Ltd. v. Reliance National Asia Re Pte. Ltd., [2008] SGCA 18, the Singapore
Court of Appeal took note of the differing approaches followed by courts
regarding schemes of arrangement. While the English approach embodied in the
Privy Council decision of Kempe v. Ambassador
Insurance Co., [1998] 1 WLR 271 took the view that a scheme of arrangement derived
its efficacy purely from statute and operated as a “statutory contract”, the
Australian approach stated that the scheme of arrangement derived its efficacy
from the order of the court and that it in fact operated as an order of the
court. After considering both these approaches, the Singapore courts opted for
the Australian one treating the scheme as an order of the court.
In this sense, the Bombay High
Court’s view is consistent with the above. But, its application without having
regarding to the objects and purpose of chargeability of stamp duty would lead
to an incongruous outcome.
Court’s view is consistent with the above. But, its application without having
regarding to the objects and purpose of chargeability of stamp duty would lead
to an incongruous outcome.