Understanding the stamp duty implications of mergers

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Understanding the stamp duty implications of mergers

The Chief Controlling Revenue Authority and ANRs vs.M/s Reliance Industries Limited Mumbai and ANR
20 May 2016

Introduction

This update analyzes the recent decision of the High Court of Judicature at Bombay (Bombay High Court) in The Chief Controlling Revenue Authority and Anr. vs. M/s Reliance Industries Limited Mumbai and Anr. relating to the payment of stamp duty in cases of mergers and amalgamations. The judgment rules on two major issues:

: Whether in the case of a merger or an amalgamation, the instrument that will be chargeable with stamp duty is (i) the court order approving such merger or amalgamation or (ii) the underlying scheme of merger or amalgamation.

: In the event that the order requires the approval of the Bombay High Court and the High Court of another state, whether it is possible to set-off the amount of stamp duty paid in such other state against the stamp duty payable in Maharashtra.

Facts

  • Reliance Industries Limited (RIL), with its registered office in Maharashtra, and Reliance Petroleum Limited (RPL), with its registered office in Gujarat, entered into a scheme of amalgamation (Scheme) pursuant to Sections 391 to 394 of the Companies Act, 1956 (Companies Act).
  • Section 391 of the Companies Act requires that the High Court(s) having territorial jurisdiction over the registered offices of both the transferor and transferee companies will need to approve the scheme of amalgamation.
  • Consequently, RIL and RPL approached the Bombay High Court and the High Court of Gujarat (Gujarat High Court) for the sanction of the Scheme.
  • The Bombay High Court approved the Scheme through an order dated 7 June 2002 (Bombay Order) and the Gujarat High Court approved the Scheme through an order dated 13 September 2002 (Gujarat Order).
  • RIL paid stamp duty of INR 10 crore on the Gujarat Order. RIL and RPL then presented the Bombay Order and the Gujarat Order before the Superintendent of Stamps, Mumbai (Stamp Authority) for the adjudication of the stamp duty payable in Maharashtra. In the adjudication proceedings, RIL argued that the maximum stamp duty payable on the Bombay Order under the provisions of the Maharashtra Stamp Act, 1958 (Stamp Act) was INR 25 crore.
  • Since RIL had already paid a sum of INR 10 crore in Gujarat, it contended that it was entitled to set-off this amount against the duty payable in Maharashtra. Thus, the duty payable should amount to INR 15 crore.
  • The Stamp Authority rejected this contention and directed the payment of the entire amount of INR 25 crore. RIL appealed against this order before the Chief Controlling Revenue Authority, Maharashtra, which dismissed the appeal and upheld the direction of the Stamp Authority.
  • RIL subsequently filed an application to the Stamp Authority asking to refer this matter to the Bombay High Court, which was also rejected. Consequently, RIL filed a writ against this rejection before the Bombay High Court, which referred the matter back to the Stamp Authority with the direction to decide the application after hearing the parties.
  • The Stamp Authority once again rejected the application, leading to RIL filing another writ before the Bombay High Court.

Judgements

  • The Bombay High Court upheld the established principle of law that the instrument chargeable with stamp duty in cases of merger is the order of the High Court. The Bombay High Court reasoned that a merger is only operative once the approval of the court has been accorded and the scheme would have no effect otherwise.
  • The Bombay High Court reached this conclusion relying on the decision of the Honorable Supreme Court in Hindustan Lever vs. State of Maharashtra.2 The Bombay High Court also relied on its earlier judgment in Li Taka Pharmaceuticals Ltd. & Anr. vs. State of Maharashtra.
  • The Bombay High Court further held that the Bombay Order was executed in the state of Maharashtra and so became chargeable with stamp duty under the Stamp Act. The Bombay High Court held that the instrument is liable to stamp duty rather than the transaction and consequently RIL must pay stamp duty on the Bombay Order. Although the Bombay Order and the Gujarat Order pertain to the same Scheme, they are distinct instruments and are chargeable with stamp duty in both states.
  • The Bombay High Court further held that in cases where the approval of a scheme is required from multiple High Courts, the transfer of assets and liabilities pursuant to the scheme shall take effect only once approval is received from all such High Courts.
  • In relation to the set-off sought by RIL for the payment of stamp duty on the Bombay Order, the Bombay High Court held that Section 4 of the Stamp Act was inapplicable since it applied only to a set of transactions specifically set out in that section. Section 4 of the Stamp Act provides for the payment of stamp duty on the “principal instrument” in a transaction where multiple instruments are employed to complete the transaction. However, the transactions set out in the section do not include a merger or an amalgamation.
  • The Bombay High Court clarified that the set-off provisions under Section 19 of the Stamp Act are only available on instruments that have been brought into Maharashtra after being executed outside the state.

Implications

Companies will now be required to pay stamp duty on court orders from the Bombay High Court approving schemes of merger and/or amalgamation even if they have paid stamp duty on a court order passed by any other High Court approving the same scheme.

No set-off will be allowed in case stamp duty is paid on the orders of other High Courts approving the same scheme. This is because the instrument on which stamp duty is payable is the order approving the scheme and not the scheme itself. This may impact the costs involved in mergers and amalgamations that involve companies with registered.