An importance of stamp duty in every financial transaction cannot be understated. Especially, when such key transactions is a corporate arrangement, for which stamp duty is required to be paid or else there may be severe repercussions. Let’s make an attempt to explore the complexities of paying stamp duty on merger / demerger transaction, starting with the landmark decision to clarify concept and critically analysing contentious stamping issues that have since been resolved to appropriate stamp duty rates in some states.
As per Section 232 of the Companies Act, 2013 (“CA 2013”) when an order sanctioning merger / demerger passed by the Tribunal under Section 232(4) of CA 2013 (“Merger / Demerger Order”), provides for transfer of any assets and/or liabilities, then, by virtue of that order, that assets shall be transferred to and vest in, and those liabilities shall be transferred to and become liabilities of, the transferee / resulting company; and in case of any property, if that order so directs, freed from any charge which is, by virtue of compromise or arrangement, to cease to have effect.
> Stamp Duty on Merger / Demerger Order
Even though the Merger / Demerger Order is not specifically mentioned as an instrument requiring stamping under the Indian Stamp Act, 1899 (“the ISA”), it is essential to pay requisite Stamp Duty to avoid any complications when registering properties in name of the transferee or resulting company. Therefore, paying Stamp Duty is a crucial factor to take into account when pursuing a merger / demerger, particularly in situations where the transferor company’s asset has a high value.
The Hon’ble High Courts of India have produced conflicting opinions concerning the applicability of Stamp Duty on the Merger / Demerger Order, but the Supreme Court of India has ruled that the Merger / Demerger Order is subject to payment of Stamp Duty.
The Hon’ble Supreme Court of India in case of ‘Hindustan Lever’[1], made the following observations:
“… the amalgamation scheme sanctioned by the Court would be an “instrument” within the meaning of Section 2(i). By the said “instrument” the properties are transferred from the transferor company to the transferee company, the basis of which is the compromise or arrangement arrived at between the two companies.”
The Hon’ble Supreme Court of India finally held that, “…the definition of “conveyance” in the Act was an inclusive definition and includes within its ambit an order of the High Court under section 394 of the Companies Act, 1956 and therefore it attracts stamp duty.”
The Hon’ble Bombay High Court in the case of ‘Li Taka Pharmaceuticals Ltd.’[2] made the following observations:
“An order under section 394 is founded or based upon compromise or arrangement between the two companies of transferring assets and liabilities of one company to another company known as “transferor-company” and that order is an “instrument” as defined under section 2(1) of the Bombay Stamp Act which includes every document by which any right or liability is transferred.”
The Hon’ble Calcutta High Court in the case of ‘Emami Biotech Limited’[3] held that “an order sanctioning a scheme of amalgamation or demerger under Section 394 of the Companies Act, answers to the description of the words “instrument” and “conveyance” within the meaning of the Stamp Act applicable in this State and is, accordingly, exisable to stamp duty.”
Hence, the legal principle governing the payment of Stamp Duty on the Merger / Demerger Order is therefore undeniably resolved and is no longer a “Dilemma.”
> Interstate Conflict of Stamp Duty
The Hon’ble Full Bench of the Bombay High Court seeks to respond to the question of the amount of stamp duty payable where companies participating in the merger are established in more than one state in its ruling in the case of ‘Reliance Industries Limited’.[4]
The Hon’ble Full Bench held that, “A scheme settled by two companies is not a document chargeable to stamp duty. An order passed by the Court sanctioning such a Scheme under Section 394 of the said Act, which effects transfer is a document chargeable to stamp duty. In case if the Registered Offices of the two Companies are situated in two different States, requiring such Orders, sanctioning the Scheme to be passed under Section 394 of the Companies Act by two different High Courts, then in that event, the order of this High Court which sanctions the Scheme passed under Section 394 of the Companies Act will be the instrument chargeable to stamp duty.”
This Bombay High Court ruling magnifies the application of the stamp duty on merger / demerger of the companies. It is understood that parties should refrain from using merger / demerger to avoid paying stamp duty that would otherwise be due on a transfer made pursuant to a private contract between the parties. The current strategy would penalise parties for opting for a plan of merger or demerger over a private sale, although it is a more transparent procedure with stronger shareholder and creditor protection.
Deducting the stamp duty already paid in one state from the stamp duty they were required to pay in another state as a result of the Merger / Demerger Order was another significant concession that companies started to make. The benefit of a rebate of stamp duty already paid from one state against the stamp duty payable in another state was, however, categorically disallowed by the Reliance Industry judgement, as discussed above.
> Exemption Notification:
According to Notifications No. 1 dated January 16, 1937, and No. 13, dated December 25, 1937, both of which were issued in the course of the exercise of the authority granted by Section 9(a) of the ISA, an Exemption may be requested.
The Indian Companies Act, 1913’s definition of a company limited by shares led the Governor General in Council to be delighted to remit the stamp duty owed under articles 23 and 62 of Schedule I to the ISA in the following circumstances:
(i) where at least 90% of the issued share capital of the transferee company is in the beneficial ownership of the transferor company; or,
(ii) where the transfer takes place between a parent company and a subsidiary company one of which is the beneficial owner of not less than 90% of the issued share capital of the other; or
(iii) where the transfer takes place between two subsidiary companies of each of which not less than 90% of the share capital is in the beneficial ownership of a common parent company.
As long as the parties in each case get a certification that the aforementioned conditions are met from the person designated in this regard by the local government in question.
However, the State Government of Delhi ended this exemption from paying stamp duty by a notification dated June 1, 2011, and stamp authorities cited the continued validity of the notification dated December 25, 1937.
The Hon’ble Delhi High Court in reference made by ‘Chief Controlling Revenue’[5] in January, 2019 held that, “15. Having found the Reference not maintainable, if we still proceed to adjudicate the Reference on merits, the same will defeat at least one of the reasons given by us above for holding the Reference to be not maintainable.”
As a result, since the stamp duty is a state subject, an exemption notification will only be applicable in the states where the state government complies with the central government’s notification; otherwise, the stamp duty would be applicable regardless of the inter-company relationships of the companies.
> The Stamp Duty Liability in Several States:
- Maharashtra:
As per the provisions of Article 25(da) of the Maharashtra Stamp Act, 1958 (the ‘MSA’) as amended by Maharashtra Stamp (Amendment & Validation) Act, 2017, the Merger / Demerger Order is liable to stamp duty as follows:
(i) 10% of the aggregate of the market value of the shares issued / allotted in exchange or otherwise and the amount of consideration paid, subject to higher of:
(ii) 5% of the true market value of the immovable property (located in the State of Maharashtra) and 0.7% of aggregate of the market value of the shares issued / allotted in exchange or otherwise and the amount of consideration paid.
Maximum Stamp Duty:
According to Article 25(da) of Schedule I to the MSA, the maximum payable stamp duty on the Merger / Demerger Orders in the state of Maharashtra as per the Notification No. Mudrank.2002/875/CR-173/M-1 dated 6th May, 2002 was INR 25 crores. The maximum stamp duty that can be paid on the Merger / Demerger Orders in the state of Maharashtra has been increased from INR 25 crores to INR 50 crores by the Notification No. Mudrank-2018/CR-115/M-1 (Dhoran) dated 16th March, 2020.
- Gujarat
As per the provisions of Article 20(d) of the Bombay Stamp Act, 1958 (may be called as the Gujrat Stamp Act, 1958) (the ‘GSA’), the Merger / Demerger Order is liable to stamp duty as follows:
(i) an amount equal to 1% of the aggregate amount comprising of the market value of share issued or allotted in exchange of or otherwise, or the face value of such shares, whichever is higher and the amount of consideration, if any, paid for such amalgamation, or
(ii) an amount equal to 1% of the true market value of the immovable property situated in the State of Gujarat of the transferor company, whichever is higher.
Maximum Stamp Duty:
According to Article 20(d) of Schedule I to the GSA, the maximum payable stamp duty on the Merger / Demerger Orders in the state of Gujarat vide Gujarat Stamp (Amendment) Act, 2013 came into effect from 10th April, 2013 is INR 25 crores.
- Karnataka
As per the provisions of Article 20(4) (i) & (ii) of the Karnataka Stamp Act, 1957 (the ‘KSA’), the Merger / Demerger Order is liable to stamp duty as follows:
(i) 3% on the market value of the property of the transferor company, located within the State of Karnataka and transferred to the transferee company; or
(ii) An amount equal to 1% of the aggregate value of shares issued or allotted in exchange, or otherwise and in case of subsidiary company, shares merged (or cancelled) with parent company and in addition, the amount of consideration if any, paid for such amalgamation; whichever is higher.
Exemption of Stamp Duty:
Amalgamation of sick companies with others, under the orders of Board of Industrial Finance and Reconstruction (BIFR) are exempted from the stamp duty under the provisions of Article 20(4) (i) & (ii) of the KSA.
- Tamil Nadu
As per the provisions of the order dated 1st March, 2019 issues by the Revenue Authorities in Tamil Nadu, the Merger / Demerger Order is liable to stamp duty as follows:
(i) 2% of the market value of the immovable property; or
(ii) 0. 6% of the aggregate market value of shares, whichever is higher.
- Telangana
As per the provisions of Article 20(d) of the Indian Stamp (Telangana Amendment) Act, 2021 (the ‘ISTA’), the Merger / Demerger Order is liable to stamp duty as follows:
(i) INR 2/- for every INR 100/- or part thereof of the market value of the immovable property located within the state of Telangana of the transferor company; or
(ii) INR 2/- for every INR 100/- or part thereof of the aggregate of the market value of shares issued or allotted in exchange, plus the amount of consideration, if any, paid for such amalgamation; whichever is higher.
Nevertheless, there are still a number of differences caused by regional stamp acts in the concerned Indian States, and the imposition of stamp duty will be based on these. Additionally, the Stamp Duty adjudication procedure varies from State to State too. Especially when the transferor companies has assets located in various states.
While some states that have adopted the ISA have made state amendments to levy stamp duty on the same, other states that have enacted their own stamp acts, such as Maharashtra, Gujarat, and Karnataka, have made specific provisions with regard to the payment of Stamp Duty on the Merger / Demerger Order in their Acts / Schedules. The remaining states, which do not have their own stamp laws or state amendments, have accepted the ISA and levy stamp duties in accordance with any decisions made by High Courts that apply to their states or with the ruling made by the Supreme Court in the Hindustan Lever case discussed above.
Therefore, despite the fact that the stamp duty on the Merger / Demerger Order is no longer a dilemma, it has certainly turned into an epigram.
[1] See In Re Hindustan Lever & Anr. vs State Of Maharashtra & Anr. (18 November, 2003) Supreme Court, R.C. Lahoti, Ashok Bhan, Appeal (civil) 8231, 8232, 9237 and 10208 of 1996.
[2] See In Re Li Taka Pharmaceuticals Ltd. vs State Of Maharashtra And Other (19 February, 1996) AIR 1997 Bom 7, 1998 91 CompCas 871 Bom.
[3] See In Re Emami Biotech Limited And Anr. [2012] 18 taxmann.com 170 (Calcutta).
[4] See In Re Chief Controlling Revenue Authority, Maharashtra State v. Reliance Industries Limited, 2016 SCC OnLine Bom 1428 (March 31, 2016).
[5] See In Re Chief Controlling Revenue Authority, Delhi (17 January, 2019) Delhi High Court, Sanjiv Khanna J, R. S. Endlaw J., Jayant Nath J., O. Ref. No.2/2016.
Disclaimer: “The information provided in this article is for general informational purposes only. While an author tries to keep the information up-to-date and correct, there are no representations or warranties, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information. Any views or interpretations described in this article are the author’s personal thoughts and do not constitute legal or other professional advice. You may discover there are other views or interpretations to accomplish the similar end result.”
Author Bio
Could you please tell me what will be the maximum stamp duty applicable in the State of Chhattisgarh