Wednesday, April 13, 2016

Stamp Duty on Inter-State Amalgamations

[This post is slightly longer than our usual posts. I would like to thank a reader for drawing attention to a judgment that is the subject matter of this post]

Stamp duty on schemes of amalgamation undertaken through sections 391 to 394 of the Companies Act, 1956 have tended to experience a great deal of controversy, as we have previous discussed on this Blog (here, here and here). A recent judgment of the Bombay High Court may have stoked it further. While it is now more or less settled that schemes of amalgamation are subject to stamp duty in most states, the question of quantum of stamp duty (especially where companies involved in the amalgamation are incorporated in more than one state) was left open. This judgment seeks to answer that question.

Court’s Decision

In Chief Controlling Revenue Authority v. Reliance Industries Limited,[1] a Full Bench of the Bombay High Court was concerned with the amalgamation of Reliance Petroleum Limited (RPL) into Reliance Industries Limited (RIL), whereby the assets, liabilities and entire undertaking of RPL were to be transferred to and vested in RIL. While RPL was incorporated in the state of Gujarat, RIL was incorporated in Maharashtra. For this reason, the High Courts of both the states were seized of the matter, and passed separate orders sanctioning the scheme after the companies complied with the necessary formalities. While the Bombay High Court passed its order (on a petition by RIL) on June 7, 2002, the Gujarat High Court passed its order (on a petition by RPL) subsequently on September 13, 2002. After both the orders were passed, RIL paid a stamp duty of Rs. 10 crores in the State of Gujarat on the order passed on the Gujarat High Court. Given that the stamp duty of a maximum of Rs. 25 crores was payable in Maharashtra on the amalgamation, RIL took up the contention that it only needed to pay Rs. 15 crores, claiming credit for the Rs. 10 crores that it had already paid in Gujarat. The revenue authorities in Maharashtra refused to accept this position, and instead sought full stamp duty. After a series of appeals, the revenue authorities in Maharashtra preferred a reference to the Bombay High Court to decide on the questions of law.

The Court identified the questions for consideration as follows:

1. Whether a scheme sanctioned between the 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 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?

2. 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?

3. Whether in a scheme, compromise or arrangement sanctioned under Section 391 and 394 of the Companies Act where registered office of the two companies are situated in two different States, the Company in state of Maharashtra is entitled for rebate under Section 19 in respect of the stamp duty paid on the said scheme in another State?

4. Whether for the purpose of Section 19 of the Act 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?

The Court decided as follows on these questions.

1.         Scheme or Court Orders? One document or two?

This question is probably the most important one, as the answer to this largely determines the answers to the questions to follow. It is clear that stamp duty is payable on an “instrument” and not a transaction. Consequently, the issue relates to what constitutes an “instrument” in relation to a court-approved amalgamation. The Court noted: “The issue in short is whether the scheme of arrangement between the parties which has been sanctioned by the court is the instrument or the order of the court sanctioning the scheme is the instrument as parties are ad-idem that stamp duty is payable on an instrument.”

In answering this question, the Court referred to the previous line of cases dealing with stamp duty on amalgamations, including Hindustan Lever v. State of Maharashtra, (2004) 9 SCC 438 and Li Taka Pharmaceuticals v. State of Maharashtra, 1996 (2) Mah. L.J. 156. These cases support the proposition that the transfer in case of an amalgamation is effected by an order of the court, which is the instrument for purposes of the Bombay Stamp Act. It found that the scheme of amalgamation itself cannot be an “instrument” as it has no force unless and until it is sanctioned by the court. Accordingly, the Court took the “execution” of an instrument in an amalgamation to be the signature of the High Court on an order sanctioning the amalgamation. Since the Bombay Stamp Act requires that an instrument executed within the State be stamped “before or at the time of execution or immediately thereafter or on the next day following the execution”, the provision was not complied with as required in the present case. The Court took issue with the fact that although the Bombay High Court order preceded that of the Gujarat High Court, the parties proceeded to pay stamp duty in Gujarat before addressing the stamp duty payment in Maharashtra, thereby contravening the chronology of the respective court orders.

The Court ultimately concluded on this issue that in a scheme of amalgamation involving two companies, there would be two instruments each of which would be liable to stamp duty. It stated:

21        Although the two orders of two different high courts are pertaining to same scheme they are independently different instruments and can not be said to be same document especially when the two orders of different high courts are upon two different petitions by two different companies. When the scheme of the said Act is based on chargeability on instrument and not on transactions, it is immaterial whether it is pertaining to one and the same transaction. The duty is attracted on the instrument and not on transaction.

In other words, what is relevant for purposes of payment of stamp duty is the court order, which represents the “instrument” and not the scheme (which does not have any standing of its own without the court’s order).

2.         Whether the Two Court Orders are Incidental

Since the orders of the two courts relate to a common scheme of amalgamation, the question arose as to whether they are incidental, and whether it was sufficient to stamp the “principal instrument”, being the order of the Gujarat High Court. This argument was not accepted by the Court as section 4 of the Bombay Stamp Act that deals with incidental instruments is specific only to some types of agreements such as development agreement, sale, mortgage or settlement. The Court found that the present case did not fall within any of these categories.

3.         Inter-State Document and Credit for Stamp Duty Paid

Section 19 of the Bombay Stamp Act provides that where a document executed outside a State is subsequently brought into the State, stamp duty would have to be paid on that instrument after giving appropriate credit (i.e. set-off) to duty that has already been paid in another state. Since the Court had already concluded in relation to item (1) above that an amalgamation comprises two court orders, what was relevant for purposes of considering the stamp duty liability in Maharashtra was the order of the Bombay High Court. Since the order of that court was signed in Maharashtra, it was “executed” within the State, due to which the provisions of section 19 would not apply.

For these reasons, the Court concluded as follows (in a nutshell):

1.         A scheme of amalgamation between two companies is not a document chargeable to stamp duty;

2.         An order passed by the court, which effects the transfer, would be a document chargeable to stamp duty;

3.         If there are two High Courts involved, then the High Court “which sanctions the Scheme passed under Section 394 of the Companies Act, will be the instrument chargeable to stamp duty”.

4.         The orders of different courts sanctioning the scheme are not “incidental” orders. Each order is an “instrument”, and that the scheme along cannot be chargeable to stamp duty.

5.         When the orders are passed in different states, section 19 will not apply as the order in respect of a company in a state is passed within that state itself.


At one level, the decision of the Court is understandable as seeks to address a somewhat controversial issue by engaging in a technical interpretation of the Bombay Stamp Act. While it adheres closely to such an interpretation of individual provisions, and is arguably satisfactory in respect of the same, the end result is counterintuitive, and one wonders whether a more purposive interpretation of the statute would have resulted in a different outcome.

First, let us begin with a rather basic analysis. An instrument is a legal document that conveys property from one person to another. A transfer of property can be effected through a document that is executed between two parties, and there can be no dispute that it must be stamped as one single document. In the alternative structure, the same transfer of property can be achieved through a scheme of arrangement, in which case the transferor and transferee would be companies. A scheme of arrangement is also a consensual arrangement that is initiated by the two companies involved in the transfer, except that in this case the specific process prescribed under sections 391 to 394 of the Companies Act, 1956[2] must be followed, which include obtaining the approval of the relevant classes of shareholder and creditors as well as the sanction of the relevant High Courts. The import of the judgment under discussion is that although a transfer by way of a private contractual arrangement constitutes one “instrument” for purposes of stamp duty, if the same transfer is achieved through a scheme of arrangement under the Companies Act it could constitute two instruments for purpose of stamp duty, neither of which is incidental to the other. If there are more companies involved in a scheme of arrangement, then there would be as many instruments as there are companies. This, to my mind, results in an unintended consequence.

Second, moving further, if one were to consider the disputes involved in the earlier cases discussed above, the question was whether the order of a court in a scheme of arrangement would be a “conveyance” for the purposes of charging stamp duty. While there was some initial hesitation, the position now seems to be a resounding yes, not just from the judiciary but also from the legislature in states such as Maharashtra and Gujarat which have amended their stamp duty legislation to include orders of the court as being “conveyance”. Hence, any doubt regarding the chargeability of stamp duty on a court-based scheme has been removed. What the judgment under discussion does is to extend this principle further to state that not only is the order a “conveyance”, but that each order of a court involved in a scheme of arrangement is chargeable to stamp duty. In other words, it extends the earlier line of judgments that levy stamp duty by enhancing the magnitude of payment of stamp duty. This it does so by means of its textual interpretation of the Bombay Stamp Act.

Third, the Court in this case was admittedly dealing with an inter-state amalgamation. If one were to apply this principle to intra-state amalgamations, the same issue could arise. For example, let us assume the amalgamation relates to two companies within the same state. Even here, the companies have to file individual petitions, and obtain sanctions of the court independently. It is a different matter that the different petitions may be heard together for the sake of convenience. In such a case too, the question of multiple “instruments” would apply. Do parties have to pay stamp duty on one instrument? If so, which one? If not, applying the present judgments, would they have to pay stamp duty duty as if there are two instruments? This position lacks clarity.

Fourth, the Court’s observations also raise a timing issue. The Court states that the order of the Bombay High Court was issued on June 7, 2002, which itself constituted an instrument that is liable for stamp duty, although the order of the Gujarat High Court only came later. It also notes that RIL ought to have paid with reference to the date of the Bombay High Court order, without having regard to the Gujarat High Court proceedings. This is bound to cause severe practical difficulties. For example, it would require a party (A) to pay stamp duty on an order granted by one of the courts (X) without having any certainty that the scheme would be approved in respect of the other party (B) by the other court (Y). If court Y does not sanction the scheme, there is no transfer while A would have already incurred an obligation to pay stamp duty. This is again an unintended consequence of treating a transfer by way of a scheme of arrangement as two instruments representing the orders of the two High Courts involved.

In all, the decision of the Bombay High Court magnifies the stamp duty on a scheme of amalgamation. Granted that parties should not resort to schemes of arrangement as a means of evading stamp duty that would have otherwise been payable on a transfer through a private contractual arrangement between the parties. The present approach would have the effect of penalizing parties for choosing a scheme of arrangement (which is a more transparent process with greater shareholder and creditor protection) than a private sale (which does not confer those benefits).

It is difficult to argue against the textual interpretation of the Bombay Stamp Act that the Court indulged in. The effect of a scheme of arrangement has been a thorny issue elsewhere too. For example, in The Oriental Insurance Co. Ltd. v. Reliance National Asia Re Pte. Ltd., [2008] SGCA 18, the Singapore Court of Appeal took note of the differing approaches followed by courts regarding schemes of arrangement. While the English approach embodied in the Privy Council decision of Kempe v. Ambassador Insurance Co., [1998] 1 WLR 271 took the view that a scheme of arrangement derived its efficacy purely from statute and operated as a “statutory contract”, the Australian approach stated that the scheme of arrangement derived its efficacy from the order of the court and that it in fact operated as an order of the court. After considering both these approaches, the Singapore courts opted for the Australian one treating the scheme as an order of the court.

In this sense, the Bombay High Court’s view is consistent with the above. But, its application without having regarding to the objects and purpose of chargeability of stamp duty would lead to an incongruous outcome.

[1] Civil Reference No. 1 of 2007, judgment dated March 31, 2016.
[2] The parallel provisions under the Companies Act, 2013 are yet to take effect.


Anonymous said...

One important aspect that one could look upon is even if one High Court has sanctioned the scheme and not making the same dependent/conditional upon the outcome of the other High Court involved, then in such a scenario one can reasonably argue and treat the same as an 'instrument' (going by the literal construction). However, that does not amounts to 'conveyance' as no actual transfer & vesting can be made effective till the other High Court sanctions the scheme. Hence, it can be argued that no stamp duty is payable in such a scenario.
Shivank Arora

ranjodh jaswal said...

After paying stamp duty, whether paying registeration fee is requried to pay for doing mutation under section 394 orders of High Court.