[Deepika Shori and Madhusudan Bose are Advocates at PRA Law Offices]
Stamp duty is ordinarily payable on transfer of movable and immovable properties, and several other specified transactions under stamp duty law. Corporate transactions such as mergers, amalgamations, slump sales and the like are naturally liable to stamp duty because they involve transfer of properties between two entities.
However, would stamp duty be payable on the conversion of a public company into a private company? Moreover, would such conversion need to be registered with the Sub-Registrar under the Registration Act, 1908?
The Government of Himachal Pradesh seemed to consider it necessary to pay stamp duty and registration charges on a conversion from a public company to a private company. Its Revenue has, over several years, consistently taken the view that stamp duty would be payable on the value of properties held by a company, if there is change in constitution of the company from a public company to private company (and vice versa). It has been reliably learnt that the State Government has been collecting stamp duty and registration fees on such a change in the constitution of companies that owned properties in the State.
The position taken by the State Government has been intriguing. This is because the conversion of a public company into a private company does not involve the transfer of properties between two distinct entities. Unlike mergers and amalgamations, where the transferor entity transfers its properties to a resulting company and then dissolves, a conversion does not involve transfer of properties between two entities. Rather, the same company that operated as a public company is accorded the status of a private company with no discontinuity in the legal existence of the converted entity.
The longstanding position taken by the Government of Himachal Pradesh was finally assailed before the High Court of Himachal Pradesh in Reckitt Benckiser (India) Private Limited v State of H.P. The decision of High Court, passed on 29 February 2020, would help put to rest the controversies surrounding the imposition of stamp duty on change in constitution of companies in the State of Himachal Pradesh.
In the above case, the petitioner company, Reckitt Benckiser, was incorporated as a public limited company under the Companies Act, 1913. Its name was changed to Reckitt Benckiser (India) Limited on 18 December 2000. It subsequently converted itself into a private limited company and its name changed to Reckitt Benckiser (India) Private Limited on 13 May 2015. Accordingly, the Registrar of Companies, NCT of Delhi and Haryana issued a fresh certificate of incorporation with the changed name was granted.
Reckitt Benckiser owned a factory comprising both land and building in Solan, Himachal Pradesh. It applied to the Deputy Commissioner, Solan District for change of its name in the revenue records by addition of the word “Private” in its name. By way of order dated 20 February 2019, the Deputy Commissioner held that stamp duty and registration fees have to be charged “on the value of assets sought to be transferred from one company to another company”. The Deputy Commissioner relied on certain previous circulars issued by the Principal Secretary, Government of Himachal Pradesh in this regard. Aggrieved by order passed by the Deputy Commissioner, Reckitt Benckiser challenged the impugned order by way of a writ petition before the High Court of Himachal Pradesh.
Arguments before the High Court
The counsel for Reckitt Benckiser argued that the impugned order is without jurisdiction and has been passed without application of mind. This is because no stamp duty or registration fees is payable on mere change in name of a company by addition of the word “private” to its name. Counsel argued that the order is contrary to the provisions of the Indian Stamp Act, as stamp duty is payable on “instruments” for transfer of assets and properties as mentioned in Schedule-I of the Indian Stamp Act. However, no transfer of assets takes place on conversion of a public company to a private company. In case of conversion, the entity that existed prior to the conversion subsists even after the conversion without any discontinuity. This is evident from the master data maintained by the Ministry of Corporate Affairs on www.mca.gov.in. Conversion, in essence, merely involves a change in name of a company and the Principal Secretary, Government of Himachal Pradesh had, in the past, clarified that no stamp duty is payable upon change in name of a company.
Further, since there is no transfer of immovable property, no instrument is required to be compulsorily registered under the provisions of Registration Act and therefore registration fees are also not payable.
The State Government, on the other hand, argued that the present case is not a case of mere change of name, but rather a case of conversion of public limited company to private limited company; hence, stamp duty is chargeable under section 3 of the Indian Stamp Act, 1899.
Rejecting the arguments made by the Government of Himachal Pradesh, the High Court observed that there is no entry in the Schedule to the Indian Stamp Act, 1899 which makes an instrument for conversion of a public company to a private company chargeable to stamp duty. The High Court appears to have relied on the fact that the conversion of a public company to a private company essentially involves addition of the word “private” in the name of the company. Therefore, there is no question of existence of an instrument for transfer of assets. Further, if no such instrument exists, the question of compulsory registration of an instrument also does not arise.
The High Court quashed the order of the Deputy Commissioner to the extent that it required payment of stamp duty and registration fees upon conversion of a public company to a private company.
The decision of the High Court of Himachal Pradesh would certainly be welcomed by companies whose application for mutation had been pending for payment of stamp duty and registration fees. Himachal Pradesh is home to almost all major pharmaceutical and FMCG companies in India who have set up manufacturing plants in the designated tax free zones in the State.
The decision of High Court of Himachal Pradesh would help expedite the process of mutation of title with the Revenue Department of the State. How the State Government would deal with cases where it had wrongly claimed stamp duty in the past is a different matter altogether.
– Deepika Shori & Madhusudan Bose