18 April, 2016
It is a settled position in law that stamp duty is charged on 'the instrument' and not on 'the transaction' effected by 'the instrument. Further, the Hon’ble Bombay High Court (the “BHC”) in one of the landmark cases (Li Taka Pharmaceuticals Ltd. vs. State of Maharashtra and other 1996(4)BomCR100) held that "the amalgamation Scheme sanctioned by the Court would be an instrument within the meaning of Sec 2(l) of the Bombay Stamp Act".
Considering the fact that the stamp duty in India is a state subject, it has always been interesting to understand the implications of stamp duty on the order sanctioning a Scheme of Arrangement/ Amalgamation where such order has been passed by different courts, based on the registered office of the companies involved as part of the scheme.
Recently, (The Chief Controlling Revenue Authority, Maharashtra State, Pune, & others v/s. Reliance Industries Limited, Mumbai and others – Civil Reference no.1 of 2007 in Writ Petition no.1293 of 2007 in Reference Application no.8 of 2005), by way of an order dated March 31, 2016 (the “RIL Case”), the BHC noted that the Scheme of Amalgamation, being one transaction, shall not have any effect unless sanctioned by the court and in this case, there were two High Courts – one being BHC and the other being the Gujarat High Court. Since the implications of stamp duty are on an instrument and not on transaction, there would be separate stamp duty implications, both in the state of Maharashtra and State of Gujarat, where the registered offices of transferor and transferee companies were situated. However, the BHC, inter alia held that stamp duty paid in another state (read Gujarat in this case) would not be available for remission/ reduction/ set-off under Section 19 of the Maharashtra Stamp Act, 1958 (the “MSA”).
One of the questions before the BHC in the RIL case was whether the stamp duty paid in another state was available for remission under the MSA, to which the BHC responded in negative.
The companies in the RIL case, amongst others relied on the judgments of the Hon'ble Supreme Court in Hindustan Lever vs. State of Maharashtra (Hindustan Lever and Anr. vs. State of Maharashtra and Anr. 2004(106(1))BOMLR557) and of the BHC in Li taka Pharmaceutical case wherein it was held that the scheme sanctioned by the High Court would be an instrument within the meaning of section 2(i) as by such 'instrument' the properties are transferred from the transferor company to the transferee company.
The judgment comes as great dismay to companies who up till last month, believing the Scheme to be the instrument of conveyance, have been paying the stamp duty in one state and seeking set-off/ deduction of stamp duty in another under Section 19 of the MSA. It has created a situation of double jeopardy wherein the transferor company as well as the transferee company both have to independently bear the burden of payment of stamp duty for the same Scheme without claiming any set off or deduction.
It would not be wrong to state that the present judgment would have certain impact on the M&A transactions of like nature in India unless the verdict in the RIL Case is challenged successfully or where the state legislature provides a clarificatory relief. Also, it would be interesting to see the fate of different schemes, involving the same subject matter which have already been approved by the Courts.
In light of the said RIL judgment, the prospective M&A transactions, especially the scheme matters would have to be restructured in different manner so as to address the stamp duty implications favourably.
Prem Rajani, Partner, Rajani Associates