“To raise revenue, the British Government adopted a fiscal measure by enacting the Stamp Act….” is the stately introduction to the Indian Stamp Act, 1899. Despite the passage of 117 years and several amendments at both the central and state levels, the stamp-duty legislative framework remains ambiguous in certain places.
It is no secret that corporates use mergers/de-mergers to reorganise legal structures for superior business outcomes, financial strength and tax efficiency. However, one of the key decision-drivers is the quantum of stamp-duty payable on any such reorganisation; for some corporates, fresh stamp-duty bills could be presented even 14 years after shareholders voted in favour of a merger. More about that in a moment.
The question of whether stamp-duty applies on a scheme of arrangement (scheme) under sections 391-394 of the Companies Act, 1956, is mostly resolved now, since several states have introduced a specific provision and formula in their laws and judicial support is reasonably clear. Further, in case of a merger of two companies located in different states, stamp-duty would typically be paid in one state while credit would be claimed in the other, and this was mostly accepted at the ground level.
However, a significant change of position was recently reported in case of a 2002-merger, of Reliance Petroleum Ltd (RPL) with Reliance Industries Ltd (RIL). RIL paid the maximum applicable stamp-duty of R10 crore in Gujarat, and sought credit for that duty against the amount of R25 crore payable in Maharashtra. However, RIL’s claim for credit /rebate of the
R10 crore duty paid in Gujarat was denied. A full bench of the Bombay High Court (BHC) recently ruled that no set-off would be available in Maharashtra for duty paid in Gujarat, meaning that RIL is required to pay the entire amount of R25 crore in Maharashtra, with no credit of the Rs 10 crore paid in Gujarat.
While the decision itself is technically sound, it merits a closer look because of its substantial impact on restructuring initiatives in the country. The essence of the issue could be generally framed as ‘if Co A sells a factory to Co B, there is one single instrument of transfer on which stamp duty is paid once; but if the factory is transferred by way of merger of Co A into Co B, there could be two instruments of transfer and two payments of stamp duty’. In this case, two
High Court orders were involved because RIL had its registered office in Maharashtra while RPL had its registered office in Gujarat—though both companies approved the same underlying scheme of merger, BHC ruled that two court orders mean two instruments, and therefore two separate stamp duty payments.
Arguments in defence were articulated by the company at two broad levels (i) the transfer and vesting of property occurs by virtue of the scheme, and therefore the scheme is the principal document on which duty should apply, and not the two court orders (whose job is to essentially approve the underlying scheme) and (ii) duty paid in Gujarat should be permitted to be off-set against duty payable in Maharashtra. And if there are two court orders, the latter of the two should be treated as the Principal Instrument, since transfer takes effect only after both orders were issued. BHC rejected the arguments, and held that (i) duty applies on the instrument (court order) and not on the underlying transaction (scheme), and (ii) no credit/ rebate of duty paid in Gujarat is permissible on technical grounds. This reverses the existing convention, where companies used to pay stamp duty in one state and claim set-off in the other, and opens the doors for fresh stamp-duty claims.
While the above arguments are well understood, the ruling nevertheless raises some new questions. For example, it says that RIL should have paid stamp-duty as soon as BHC approved the scheme (order of the BHC was issued prior to the order by GHC), because the transfer of property via merger is already approved, i.e., the order is complete in itself. And that one would have to wait for the order of GHC only to decide the timing of transfer. But if RIL paid stamp duty immediately upon approval of BHC and GHC had rejected the scheme, what would happen?
Think of it in a different way—assume that RIL and RPL both have their registered offices in Gujarat, but there are some properties of RPL in Maharashtra. In such a case, RIL would have paid stamp duty only in Gujarat and be perfectly eligible for a credit of such duty in Maharashtra when it transfers properties located in Maharashtra! Yes, there wouldn’t be a double stamp-duty cost because section 19 enables credit of stamp-duty paid in Gujarat in that situation. In other words, different stamp-duty consequences will arise for the same scheme of merger depending upon location of registered offices. Even if it’s technically correct, does it sound equitable?
If this ruling is not challenged/ reversed, one should expect demands from authorities across various states, and this will add to the burden of litigation that’s already at catastrophic levels. If nothing else, you will see companies shifting registered offices to a single state, before embarking on a scheme of merger/de-merger. Purely from a business perspective, this seems to be a whole lot of avoidable administrative effort and cost. The legal framework of the country should help corporates make a reliable budget for statutory costs of a transaction, so that they can focus on the principal objectives of growing revenues, creating jobs and increasing shareholder value. Instead, efforts will be focused on deciding the ‘form’ of transaction and situs of registered office, because the stamp-duty costs can swing in different ways irrespective of the underlying substance/ intent.
Co-authored with Ketan Malkan, director, BMR Advisors Nalam is partner, BMR Advisors. Views are personal