Introduction Stamp duty is often considered to be a major cost in modern-day trade and commerce. Added to this is the fact that the dual-model of Central and State Stamp Acts offer a unique stamp duty arbitrage opportunity. All of this makes for a heady cocktail of innovative stamp duty planning, counter responses by the State revenue authorities and equally novel judgments by the Courts.
Through this article, let us examine one such issue, that of stamp duty on mortgage deeds, and some recent interesting developments in this field.
History Lessons
Before understanding the present-day developments, let us first brush up our basics on stamp duty which are relevant for setting the ground for this issue.
Stamp Duty is a subject of both the Central and the State Government. This dichotomy exists because of a provision in the Constitution of India. Often a question arises, which Act applies – the Indian Stamp Act, 1899 or the Maharashtra Stamp Act, 1958.
Stamp Duty is leviable in Maharashtra on every instrument mentioned in Schedule I to the Maharashtra Stamp Act, 1958 (“the Act”) at rates mentioned in that Schedule, provided the instrument is executed in Maharashtra. A copy of an instrument whether by way of a fax or otherwise of the original instrument shall also be charged with full duty in Maharashtra in all cases where the original though chargeable with duty, has not been stamped. However, if the original has been duly stamped, then the Maharashtra Stamp Act provides that a duplicate or a counterpart will be stamped with a maximum duty of Rs. 100.
Duty is only levied on an instrument and that too provided the Schedule mentions rates for it. The definition of the term instrument has been amended to incorporate an electronic record as defined under the Information Technology Act, 2000. This definition defines an electronic record to mean data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated microfiche. Thus, even a document in the form of an electronic record is liable to be stamped. Hence, even a scanned copy of the original would be liable. What happens if a scanned copy is saved on a cloud storage is an interesting question – can it be said that the image has entered the State if the cloud server is not physically present in the State? Would mere viewing of the image be treated as an entry? These are issues which present posers similar to taxation of e-commerce transactions.
U/s. 18 of the Act, every instrument mentioned in Schedule I is liable to duty in Maharashtra if it is executed at any other place but it relates to property situated in Maharashtra and such instrument is received in the State. The Act further provides that if any instrument is chargeable with duty but it is executed outside Maharashtra then it may be stamped within 3 months of the instrument entering the State of Maharashtra.
U/s. 19 of the Act, if an instrument pertaining to property located within the State is executed outside the State but a copy of the same is received in Maharashtra, then the differential duty would be payable on the copy whenever it is received in Maharashtra.
At first, both sections 18 and 19 appear to be overlapping and dealing with the same issue. Moreover, while section 18 states that the instrument would be chargeable with the entire duty once received in Maharashtra, section 19 states that the differential would be paid once it enters the State. Is there some inconsistency? The position would be clear if one reads section 18 as applying to a case where the instrument is executed abroad, i.e., outside both Maharashtra and India, but section 19 as applying where the instrument is executed outside Maharashtra but within India. Hence, in the first case, where the instrument is executed abroad, there is no credit for any duty paid abroad since no duty was paid in India. However, in the second case, where the instrument has been executed within India but outside Maharashtra, then a credit for the duty paid in any other State of India is available. Thus, section 18 is the larger provision while section 19 may be considered to be a sub-set of section 18 of the Act.
If one instrument covers several instruments or several distinct matters then the duty would be the aggregate of all the duties chargeable on each separate instrument. However, if for executing one transaction, several instruments are executed, then only the principal instrument would be liable to duty and the other instruments would be chargeable with a duty of Rs. 100 only. This is a very important distinction which needs to be kept in mind ~ if one transaction is covered in several instruments, the duty is only once at the highest duty which would be chargeable in respect of any of the instruments employed, but if one instrument comprises more than one transaction within itself, then the duty on that one instrument would be then aggregate of all instruments.
Stamp Duty on Mortgage Deed – Duty Shopping!
The Supreme Court in Union of India vs. Azadi Bachao Andolan, 263 ITR 706 (SC) has upheld the concept of Treaty Shopping in the context of income-tax. Could such a view also be taken in the context of stamp duty? Can a company incorporated in one State decide to execute a deed in another State in order to save on precious stamp duty?
This question is put in sharper perspective when viewed in the context of say, a mortgage deed. Several Indian companies have borrowed heavily. This is all the more true for certain sectors, such as, infrastructure, realty, steel, etc. It is trite that alongwith debt comes creation of a security in favour of the lenders such as banks, financial institutions etc. Creation of a security involves execution of a mortgage deed. Executing a Mortgage entails payment of stamp duty and herein lies the possible tax saving!
A mortgage deed by way of deposit of title deeds attracts a stamp duty under the Maharashtra Stamp Act @ 0.2% of the amount secured subject to a maximum of Rs. 10 lakh. This is one of the most popular ways of creating a mortgage, especially in the real estate and infrastructure sector. Alternatively, a mortgage deed under which possession of property is not given attracts duty @ 0.5% of the amount secured again subject to a maximum of Rs. 10 lakh. .
The corresponding stamp duty figures for these two mortgage instruments, if executed in the State of Delhi would be 0.5% subject to a cap of Rs. 50,000 and 0.2% subject to a ceiling of Rs. 2 lakh, respectively.
Thus, for a single mortgage document, the savings for a company based in Mumbai executing a mortgage deed in Delhi, could range between Rs. 8 lakh to 9.50 lakh. Multiply this amount by several mortgage deeds for multiple lenders (more on that later) and there could be a substantial saving!
However, as discussed above, the moment a copy of such a mortgage deed executed in Delhi by a Mumbaibased company pertaining to property located in Mumbai enters Mumbai, the copy itself would be liable to the differential duty.
The decision of the Bombay High Court in M/s. Win-NQuiz Company Limited vs. The Authorized Officer, Bank of Baroda, 2011 (5) Bom. CR 69 is apposite on this issue. Here a mortgage deed was executed in Kolkata for a flat in South Mumbai. The instrument was impounded when presented as evidence in Mumbai since it was under stamped as per the Maharashtra Stamp Act. The Division Bench of the Bombay High Court held that where an instrument relating to property situated in the State is executed outside Maharashtra and it is subsequently received in Maharashtra, then the amount of duty chargeable on the instrument is to be the duty chargeable under Schedule I on a document of like description executed in Maharashtra less the amount of duty, if any, already paid under any other law in force in India.
Further, in L&T Finance Ltd vs. M/s. Saumya Mining Ltd, ARBP/290/2014, the Bombay High Court by its Order dated 8th July, 2014, has held that the stage of paying differential stamp duty gets triggered only when the instrument or a copy is brought into the State and not until then. Once the Act gets triggered the parties have a maximum of 3 months to set the defect right.
One for All?
Remember the motto of Alexandre Dumas’ 3 Musketeers – One for All! What if there is one deed for all lenders? Say in a mortgage deed a security is created in favour of one trustee for a consortium of lenders, would stamp duty be payable as if it is only one instrument or is it duty as on one instrument multiplied by the number of lenders in the consortium? At first blush, one may be tempted to say that duty is never on a transaction and always on an instrument and hence, since there is only one mortgage deed executed in favour of one trustee by one borrower, albeit for the benefit of several lenders, the duty should only be once. Well if you thought as this Author did, then you too were wrong according to a decision of the Supreme Court!
The decision of the Supreme Court in Chief Controlling Revenue Authority vs. Coastal Gujarat Power Ltd., Civil Appeal No. 6054 of 2015, Order dated 11th August, 2015 is very singular. To better appreciate the ratio it is necessary to first indulge a bit in the brief facts of this important judgment. A company needed financial assistance for setting up a Power Project and for that purpose it secured assistance from 13 lenders. The 13 lenders all financial institutions formed a consortium as a trust and executed a security trustee agreement appointing one banker as the lead trustee, called the security trustee. The company executed a mortgage deed with the security trustee mortgaging its immovable property assets as mentioned in the deed. The document was stamped with duty as applicable to one mortgage deed. However, the Revenue Authority claimed that the duty should have been paid 13 times over on the same instrument since there were 13 separate lenders.
The Supreme Court held that the company had formed the consortium and had executed the present mortgage instead of several distinct instruments of mortgage with the sole purpose of evading stamp duty and that the company had availed financial assistance from 13 lenders for its project and consequently, the company was required to execute mortgage deed in favour of the 13 lenders. However, in order to avoid payment of stamp duty on each mortgage deed, the company got the lenders to form a consortium and appointed one security trustee. Thus, in substance, the mortgage deed between the trustee on behalf of the lenders and the company was actually a combination of 13 mortgages dealing with the company and such lenders.
Hence, the Court held that the company could not be allowed to evade payment of stamp duty by forming a consortium. Further, the instrument in question relates to several distinct matters or distinct transactions inasmuch as the company availed distinct loans from 13 different lenders. Hence, it was manifest that the instrument of mortgage came into existence only after separate loan agreements were executed by the borrower with the lenders with regard to separate loan advanced by those lenders to the company borrower. The mortgage deed recited at length as to how and under what circumstances the property was mortgaged with the security trustee for and on behalf of lender banks. Altogether 13 banks lent money to the mortgagor, details of which were described in the deed and for the repayment of that money, the borrower entered into separate loan agreements with 13 financial institutions. Had this borrower entered into a separate mortgage deed with these financial institutions in order to secure the loan, there would have been a separate document for distinct transactions. Accordingly, it could safely be regarded as 13 distinct transactions, each liable to stamp duty even though the instrument was only one. Thus, the Apex Court upheld the stand of the revenue that the correct amount of duty was the duty payable on one mortgage deed multiplied by 13!
This decision substantially pushes up the duty liability for companies. Now, in the example discussed above, if a Mumbai-based company were to try to select Delhi as a jurisdiction, the savings could be as high as Rs. 8.5 lakh * 13 (assuming there are 13 lenders) = Rs. 1.10 crore.
Enhanced Powers
The 2015 Amendment Act has amended the Maharashtra Stamp Act, 1958 giving more powers of inspection to the Collector. If he has reason to believe that there is an evasion of duty by fraud or omission, then he may call for any registers, books, records, electronic device, electronic record, CD, disk, papers, etc. He can also enter any premises and impound any documents. Further, the maximum penalty for evasion of duty has been doubled to four times the duty evaded. Thus, an inspection for suspected evasion could lead to severe consequences.
Conclusion
The constant see-saw between companies on the one hand and the revenue department on the other hand to save valuable stamp duty reminds one of the famous nursery rhyme (albeit with a little tweak):
“To Market, to Market, to save Stamp Duty,
Home Again, Home Again, sans any Booty!!”
