Any Mergers & Amalgamations in India is such a complex process involving various regulators at various point of time and with different mindsets. Stamp Duty being the last step in Merger & Amalgamation, has most of the times in our experience, for companies who have executed the restructuring process rigorously have made then land in a fix in terms of cost. It comes to the company as quite a shock, that Stamp Duty can be the highest component of an entire transaction of Mergers & Amalgmation but yet occupies the least time during the structuring exercise as it at the end of the road. The entire cost of Mergers & Amalgmation transaction has gone haywire when the actual calculations of Stamp duty payable are received by the companies. The current updates add to the worries for companies going through interstate restructuring.
Recently three-judge bench of the Hon’ble Bombay High Court in Civil Reference filled by Chief Controlling Revenue Authority, Maharashtra State, Pune in the matter of Chief Controlling Revenue Authority, Maharashtra State, Pune and Superintendent of Stamp (Headquarters), Mumbai v Reliance Industries Limited, Mumbai and Reliance Petroleum Limited, Gujarat has clarified the stamp duty applicability on inter-state amalgamation. The High Court observed that a scheme settled by two companies is not a document chargeable to stamp duty but it is an order passed by the Court sanctioning a scheme of amalgamation under Section 394 of the Companies Act, 1956 which effects transfer is a document chargeable to stamp duty. Further, it has been held if the registered offices of the two Companies are in two different States the order of the Court which sanctions the scheme to be passed under Section 394 of the Companies Act, 1956 will be the instrument chargeable to stamp duty and the benefit of remission, rebate or set-off as per provisions of section 19 of Bombay Stamp Act, 1958 now the Maharashtra Stamp Act cannot be claimed against stamp duty paid pursuant to the order of the High Court of another state.
Brief History of the Case
- Reliance Industries Limited (RIL), having its registered office in Maharashtra and Reliance Petroleum Limited (RPL), having its registered office in Gujarat entered into a scheme of amalgamation under Sections 391 to 394 of the Act pursuant to which the entire undertaking of RPL was proposed to be merged into RIL.
- The Board of Directors of Reliance Industries Limited and Reliance Petroleum Limited approved the Scheme of Amalgmation on 3rd March 2002.
- The Act requires the Scheme of Amalgamation be approved by High Courts having territorial jurisdiction over the Transferor Company and the Transferee Company (in this case Gujarat and Maharashtra and respectively).
- On 7 June 2002, the Bombay HC passed an order sanctioning the scheme (Bombay Order) in the case of the Transferee Company. On 13 September 2002, the Gujarat High Court passed an order sanctioning the scheme in the case of the Transferor Company.
- RIL paid stamp duty of Rs 10 Crores on Order in the state of Gujarat.
- On 16 October 2002, RIL submitted Order for adjudication of stamp duty.It was contended that the maximum stamp duty payable under the Bombay Stamp Act, 1958 for the Bombay Order was Rs 25 Crores and since stamp duty of Rs 10 Crores has already been paid on Gujarat Order RIL was entitled to remission,rebate or set-off as per provisions of section 19 of Bombay Stamp Act,1958 to the extent of Rs 10 Crores.The Superintendent of Stamp (Head Quarter),Mumbai rejected the submission and directed RIL to pay the entire stamp duty amount of Rs 25 Crores on the Bombay High Court Order.
- RIL and RPL appealed against the adjudication order of the Superintendent of Stamps (Head Quarter), Mumbai to the Chief Controlling Revenue Authority, Maharashtra (CCRA) who rejected the appeal.
- RIL filed an application with CCRA to file a reference before the Bombay HC for its opinion under Section 54 of Bombay Stamp Act as it involved a serious and substantial question of law.This application was also rejected by CCRA.
- Being left with no other remedy RIL filed a writ petition with Bombay High Court.Bombay High Court vides its order dated 22-06-2006 remitted the matter back to CCRA to decide the reference application a fresh after hearing both sides.
- CCRA once again rejected the reference application against which RIL filed freshly written petition with Bombay High Court.The Bombay High Court vide its order dated 1-3-2007 requested RIL to deposits the balance amount of deficit stamp duty of Rs 10 Crores and directed CCRA to make reference application to this court under Section 54(2) of Bombay Stamp Act,1958.
- The following issues have been referred in reference application filed by CCRA under Section 54 of Bombay Stamp Act, 1958.
- Whether a scheme sanctioned between 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 the 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?
- 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?
- Whether in a scheme, compromise or arrangement sanctioned under Section 391 and 394 of the Companies Act, 1956 where registered office of the two companies are situated in two different states, the company in the state of Maharashtra is entitled for rebate under Section 19 in respect of the stamp duty paid on the said scheme in another state?
- Whether for the purpose of Section 19 of the Bombay Stamp Act, 1958 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?
Submission of Companies
A document which creates right or obligation can only constitute an ‘instrument’ under the Bombay Stamp Act, 1958 as per Section2(l)
An “instrument” could be chargeable to duty as a “Conveyance” under sec.2(g), only if it is a document by which property whether movable or immovable, or any estate or interest in any property is transferred to, or vested in, any other person. The Scheme becomes effective/operative only when both the application/Petition are filed by the Transferor Company and the Transferee Company have resulted in the Scheme being sanctioned by the Court. In the case of Hindustan Lever Vs. State of Maharashtra (reported in (2004) BCR 767), the Hon’ble Supreme Court has held in the context of sec.2(g)(iv) that “the amalgamation scheme sanctioned by the court would be an instrument within the meaning of section 2(i). By the said “instrument” the properties are transferred from the transferor co. to the transferee company………” and In Litaka Pharma’s case (Reported in (1996) 4 BCR 100) Hon’ble Court had also earlier held that “the amalgamation Scheme sanctioned by the Court would be an instrument within the meaning of sec 2(l)”. It is Scheme that is instruments and not order because the Scheme would become effective & operative and the property would stand transferred and vested from the transferor to the transferee only when the Gujarat High Court makes the second order sanctioning the Scheme. In fact, if the second High Court had not sanctioned the Scheme, the same would not have become operative and there would be no transfer or vesting of property in the transferee company. Section 4(2) of Bombay Stamp Act entitles the parties to determine for themselves which of the instruments shall be deemed to be the principal instrument. The parties were accordingly entitled in law to treat the Gujarat High Court order as the Principal instrument and offer to pay the highest duty thereon subject a to rebate under Section 19 of the Bombay Stamp Act, 1958 for duty already paid on Gujarat order. The revenue had always levied stamp duty on only one of the orders as the principal instrument and has treated the transferor company order as a principal instrument and has levied stamp duty on the order of the Transferor Company. Thus in view of the Companies the instrument is the Scheme which has been sanctioned by the court.
Submission of CCRA
All instruments as per the scheme of Bombay Stamp Act 1958, covered under Schedule-1 are chargeable with stamp duty. In the present case, an instrument in question is the order dated 7.6.2002 passed by Bombay High Court. As per Section 2 g(iv), the order dated 7.6.2002 is liable to duty under Article 25(da) of schedule-1 of the Bombay Stamp Act 1958. As per Section 17 of the Bombay Stamp Act,1958 every document is chargeable with duty is required to be charged with duty at the time of execution and therefore, the order dated 7.6.2002 is required to be stamped with duty as per the situation and circumstances on the day of its execution.The stamp duty is levied on the instrument and not on the transaction. Section 19 applies only when an instrument chargeable under stamp duty in schedule-I and relates to any property situated or to any in matter or thing done or to be done in this State is executed out of the State and subsequently such instrument or a copy of the instrument is received in this State. As the instrument submitted for adjudication in this State is the order dated 7.6.2002 and which has been executed in the State prior to payment of stamp duty of Rs.10 crores in Gujarat, the question of taking benefit of section 19 does not arise. Section 19 provides for contingency in which instrument is executed outside the State and then brought into the State. In this case, as the instrument is the order dated 7.6.2002 passed by this court within the State of Maharashtra, the question of being brought into the State does not arise. Hence the question applicability of Section 19 does not arise at all. Thus in view of CCRA, the instruments are the order of court sanctioning the scheme.
Decision of High Court
A scheme settled by two companies is not a document chargeable to stamp duty. An order passed by the Court sanctioning such a Scheme under Section 394 of the Companies Act, 1956 which effects transfer is a document chargeable to stamp duty. In case if the Registered Offices of the two Companies are situated in two different States, requiring such Orders, sanctioning the Scheme to be passed under Section 394 of the Companies Act by two different High Courts, then in that event, the order of this High Court which sanctions the Scheme passed under Section 394 of the Companies Act will be the instrument chargeable to stamp duty.
The orders of the court, sanctioning a Scheme are not just incidental orders even in accordance with the Scheme of the Companies Act laid down by Section 391 r/w Section 394. Only after the orders are passed by the Court the scheme becomes operational and effective. Computation of stamp duty and valuation does not make Scheme alone chargeable to stamp duty. The order is the instrument.
The provisions of Section 19 of the Bombay Stamp Act, 1958 wrt to set off and remission of duties does not apply as the order was already in Mumbai and executed in Mumbai. As per Section 19 of the Act where a document is executed outside the state and is subsequently brought into the state stamp duty would have to be paid on that instrument after giving setting off duty that has already been paid in another state. In this particular instance, rebate cannot be claimed by Reliance Industries Limited for having paid stamp duty in the State of Gujarat as the instrument in question was order dated 7-6-2002 executed by Bombay High Court and originated in Maharashtra and stayed in Maharashtra. The facts that Bombay High Court was passed before Gujarat High Court order and stamp duty of Rs 10 Crores is paid on Gujarat High Court and not on Bombay High Court takes away the benefit of Section 19 of the Bombay Stamp Act,1958.
A scheme/compromise/arrangement between the two companies is never a document chargeable to stamp duty whether such a document is executed in the State or outside the State of Maharashtra. Moreover, in view of conclusions above, Section 19 of the Bombay Stamp Act, 1958 in any event, has no application whatsoever.
This decision has failed to consider the purpose of Mergers & Acquisitions as it will have a huge impact on total transaction cost in the case of amalgamation involving group companies as in a single amalgamation, the stamp duty payment may have to be paid twice or thrice depending on where the group companies are located. The judgement leaves ambiguity of the timing difference in the scheme sanction by High Courts of different states. It’s high time the government rationalised stamp duty provisions by making it a Central Act and avoid such kind of mishaps. This could prove self-defeating move in the context of a motto of ease of doing business and may affect the larger cause of the economic development of our country.