Introduction
Just when one thought that the burning issue of stamp duty on merger schemes has been settled once and for all, a Bombay High Court decision has stoked the fire some more! To refresh, the Supreme Court and several High Court decisions have held that the order of High Court u/s.394 of the Companies Act sanctioning an amalgamation was a conveyance within the meaning of the term conveyance and was liable to stamp duty. A Transfer under a merger is a voluntary act of parties and it has all the trappings of a Sale. The Scheme sanctioned by Court is an instrument and the State has power to levy duty on a merger. Even in States where there is no express provision levying duty as on a merger, Courts have held that stamp duty is payable as on a conveyance.
Recently, the Full Bench of the Bombay High Court in the case of The Chief Controlling Revenue Authority vs. M/s. Reliance Industries Ltd, Civil Reference No. 1/2007 was faced with an interesting issue of stamp duty payable on an inter-state merger. In a case where a company registered in Gujarat merged with a company registered in Maharashtra would stamp duty be payable once or twice was the moot question?
Background to the Case
Reliance Petroleum Ltd, a Gujarat based company had merged into Reliance Industries Ltd, a Mumbai based company. The Stamp Acts of both Maharashtra and Gujarat had a specific provision levying duty on a Court Order sanctioning a Scheme of merger. In Maharashtra, the maximum duty on a Scheme of merger is Rs. 25 crore. Pursuant to the merger, Reliance Industries Ltd had paid a stamp duty of Rs. 10 crores in Gujarat and hence, paid only the balance of Rs. 15 crore in Maharashtra. Thus, it claimed that it was eligible for a set off of the duty paid in one State against the duty payable in another State. For this, it relied upon section 19 of the Maharashtra Stamp Act, 1958 (“the Act”) which provides that where any instrument described in Schedule-I to the Act and relating to any property situate or to any matter or thing done or to be done in Maharashtra is executed out of Maharashtra subsequently such an instrument / its copy is received in Maharashtra the amount of duty chargeable on such instrument / its copy shall be the amount of duty chargeable under Schedule-I less the duty, if any, already paid in any other State. Thus, similar to a double tax avoidance agreement, a credit is available for the duty already paid. It may be recalled that under the Act, stamp duty is leviable on an every instrument(not a transaction) mentioned in Schedule I to the Maharashtra Stamp Act, 1958 at rates mentioned in that Schedule – LIC vs. Dinannath mahade Tembhekar AIR 1976 Bom 395. If there is no instrument then there is no duty is the golden rule one must always keep in mind. An English decision in the case of The Commissioner of Inland Revenue vs. G. Anous & Co. (1891) Vol. XXIII Queen’s Bench Division 579 has held that held that the thing, which is made liable to stamp duty is the “instrument”. It is the “instrument” whereby any property upon the sale thereof is legally or equitably transferred and the taxation is confined only to the instrument whereby the property is transferred. This decision was cited by the Supreme Court in the case of Hindustan Lever Ltd vs. State of Maharashtra, (2004) 9 SCC 438. Hence, if no instrument is executed, there would not be any liability to stamp duty.
In Reliance’s case, the Revenue Department argued that it was the Court Order and not the Scheme which was liable for duty. Since there were two separate Court Orders, the duty paid on the Gujarat High Court’s Order was not eligible for set off against the duty payable on the Bombay High Court’s Order. These two Orders were not the same instrument and hence, no credit was available. On the other hand, the Company argued that it was the Scheme which was the instrument and not the Court Orders. Accordingly, since there was only one Scheme, a credit was available. Since both the transferor and the transferee company were required to secure sanctions separately, the Scheme and the Order of the Bombay High Court sanctioning the Scheme would not constitute an instrument or a conveyance, unless and until the Gujarat High Court had sanctioned the Scheme. This is because the Scheme would become effective and operative and the property would stand transferred and vested from the transferor to the transferee, only on the Gujarat High Court making the second order sanctioning the Scheme. In fact if the Gujarat 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. Accordingly on such sanction being granted by the Gujarat High Court, the parties were liable to pay stamp duty on the sanctioned scheme in Gujarat and then to pay stamp duty in Maharashtra subject to a rebate u/s. 19 for the duty already paid in Gujarat.
Court’s Order
The Bombay High Court upheld the stand of the Department and negated Reliance’s plea. It held that the duty is payable on a Court Order and not a Scheme. The Court relied upon the decision of the Supreme Court in Hindustan Lever vs. State of Maharashtra (2004) 9 SCC 438 which held that the transfer is effected by an order of the Court and the order of the Court sanctioning the scheme of amalgamation is an instrument which transfers the properties and would fall within the definition of section 2(l) of the Act, which includes every document by which any right or liability is transferred. In Hindustan Lever’s case, it was held that the point as to whether the stamp duty was leviable on the Court order sanctioning the scheme of amalgamation was considered at length in Sun Alliance Insurance Ltd. vs. Inland Revenue Commissioners 1971 (1) All England Law Reports 135. There it was observed that the order of the court was liable to stamp duty as it resulted in transferring the property and that the order of the court which results in transfer of the property would be an instrument liable to be stamped. The Bombay High Court further held that it was the settled position of law that in terms of the Act, stamp duty is charged on ‘the instrument’ and not on ‘the transaction’ effected by ‘the instrument’.
The Bombay High Court Order dated 7.6.2002 which sanctioned the merger would be the instrument and that was executed in Mumbai, i.e., in Maharashtra. The instrument was chargeable to duty and not the transaction and therefore even if the Scheme may be the same, i.e., transaction being the same, if the Scheme was given effect by a document signed in the State of Maharashtra it was chargeable to duty as per the Act. As per the Act, the taxable event was the execution of the instrument and not the transaction. If a transaction was not supported by execution of an instrument, there could not be a liability to pay duty. Therefore, essentially the duty was leviable on the instrument and not the transaction. Although the Scheme may be same, the Order dated 7.6.2002 being a conveyance and it being an instrument signed in State of Maharashtra, the same was chargeable to duty so far as State of Maharashtra was concerned. It further held that although there were two orders of two different High Courts pertaining to the same Scheme they were independently different instruments and could not be said to be same document especially when the two orders of different High Courts were upon two different Petitions by two different companies. When the scheme of the Act was based on chargeability on an instrument and not on transaction, it was immaterial whether it was pertaining to one and the same transaction. The instrument, which effected the transfer, was the Order of the Court issued u/s. 394(1) that sanctioned the Scheme and not the Scheme of amalgamation itself. It accordingly held that the transfer would take effect from the date the Gujarat High Court passed an order sanctioning the Scheme. In other words, after the Gujarat High Court passed an order sanctioning the Scheme on account of the order of the Bombay Hon’ble Court, the transfer in issue took place. It negated the contention that only a document, which ‘created right or obligation’ alone constituted an ‘instrument’ since the definition of the term ‘instrument’ was an inclusive and not an exhaustive definition. Thus, the term ‘instrument’ also included a document, which merely recorded any right or liability.
It thus concluded that section 19 of the Act providing double-duty relief was not applicable. The Order of the Bombay High Court related to property situated within Maharashtra and was also passed in Maharashtra and hence, a fundamental requirement of section 19, i.e., the instrument must be executed outside the State, was not fulfilled. While paying duty on the Bombay High Court Order dated 7.6.2002 rebate cannot be claimed for the duty paid on Gujarat High Court’s Order by invoking section 19 of the Act.
Repercussions of the judgment
This judgment of the Bombay High Court will have several far reaching consequences on the spate of cross-country business restructuring. Emboldened by this decision, other States would also start demanding stamp duty on mergers involving companies from more than one state Companies would now have to factor an additional cost while considering mergers. The same would be the position in the case of a demerger. An interesting scenario arises if instead of a merger, one considers a slump sale of a business involving companies located in two states. In such an event if a conveyance is executed for any property, then there would only be one instrument. Here it is very clear that section 19 would apply and the duty paid in one state would be allowed as a set off in the other. Thus, depending upon the mode of restructuring the duty would vary. Is that a fair proposition? Also, while companies located in the same state would get away with a single point taxation, those in two or more states suffer an additional burden. Does this not throw up an arbitrage opportunity of having the registered offices of all companies party to the merger in the same state as opposed to having separate registered offices? Would that not lead to a larger loss of revenue for the state from which the office is shifted out as compared to the small gains it would have made from the stamp duty on merger. One wishes that the law is implemented and interpreted in a manner that does not encourage such manoeuvring.
Conclusion
One can only submit that the decision of the Bombay High Court needs a reconsideration otherwise the entire pace of mergers and demergers would be retarded in the Country. With mergers being neutral from an income tax as well as indirect tax perspective, stamp duty is the single biggest transaction cost. This decision would see a huge increase in the duty costs.
