Karan Talwar, a Joint Partner at the Hyderabad office of Lakshmikumaran & Sridharan discusses the issue of stamp duty on demergers with specific reference to the State of Andhra Pradesh.
By Karan Talwar
The question: Much has been written about the issue of stamp duty on mergers and demergers. The primary legal question being whether court orders pertaining to such schemes under Sections 391 to 394 of the Companies Act, 1956 (“CA”) satisfy the definitions of “instrument” and “conveyance” within the meaning of the applicable Stamp Acts read with the relevant Schedules and hence are exigible to stamp duty. In essence “instrument” is viewed as any document whereby rights or liabilities are created, transferred or extinguished etc, whereas a “conveyance” as any instrument of sale or by which property is transferred inter vivos.
A brief history: In order to settle the question, Maharashtra was the first State to amend its stamp laws to comprehensively provide for imposition of stamp duty on schemes of amalgamation and reconstruction under Section 394 of the CA. The constitutional validity of the levy and the insertion of the reference to such schemes in the definition of conveyance was also upheld ultimately by the Supreme Court in Hindustan Lever v. State of Maharashtra[1]. It was observed that transfers pursuant to schemes of amalgamation have “all the trappings of a sale.” Interestingly, the Bombay High Court in the case of Li Taka Pharmaceuticals v. State of Maharashtra[2] also held that the amendments to the definition of “conveyance” as carried out to specifically include orders pertaining to schemes of amalgamation were only clarificatory. Consequently, even in the absence of any amendment the levy would be upheld.
Other States such as Gujarat, Andhra Pradesh, Karnataka and Rajasthan followed with amendments to the definitions of “conveyance” and insertion of relevant entries in the Schedules to the applicable Stamp Acts, each with their own version of the entry with differences in rates, and modes of assessment.
However, the High Courts of the States where specific entries have still not been provided for have delivered conflicting judgments.
A Division Bench of the Calcutta High Court in Madhu Intra v. Registrar of Companies[3] held that no stamp duty can be imposed on orders under Section 394 of the CA in the absence of a specific entry on the ground that such transfers are by operation of law. Pertinently, the Madras High Court in T.T.Krishnamachari v. Joint Sub-Registrar[4] relying on the decision in Madhu Intra, held that transfers pursuant to schemes approved by the Board for Industrial and Financial Reconstruction (“BIFR”) under the Sick Industrial Companies Act, 1985 (“SICA”) need not be stamped as there is no transfer by act of parties.
On the other hand the Allahabad High Court in Hero Motors v. State of UP[5], the Delhi High Court in Delhi Towers v. GNCT of Delhi[6] and most recently the Single Bench of the Calcutta High Court In the matter of Emami Biotech Limited[7] have, relying upon the decisions in the Hindustan Lever and Li taka case held that schemes of arrangement (be they mergers or demergers) satisfy the definition of “instrument” and “conveyance”. The contention that the transfers under such schemes are carried out by operation of law and not by act of parties, was rejected on the ground that the Court under Section 394 only performs a supervisory role and the terms of the transfer are largely decided by the shareholders of the companies in question and that such orders are based on the consent of the parties. The Supreme Court rulings in Haji SK. Subhan v. Madhorao[8] and Ruby Sales and Services v. State of Maharashtra[9] were also relied upon to hold that court orders can constitute ‘instruments’. It has been further held that the decision in Hindustan Lever was not placed before the Court in the Madhu Intra case and hence the observations in the latter have been disagreed with. Most particularly the Delhi Towers case clearly held that the absence of a specific entry does not mean that the legislature never intended that mergers and demergers be subjected to stamp duty.
While a final decision from the Supreme Court would provide much more clarity on the issue, the trend of the recent cases appears to be in favour of stamping orders of merger and demerger as conveyances even in the absence of a specific entry.
The law in AP: The A.P. Act No. 19 of 2005 dated 1.8.2005 inserted the words “every order made by the High Court under Section 394 of the Companies Act, 1956 (Central Act 1 of 1956) in respect of amalgamation or merger of companies)” in Section 2(10) of the Indian Stamp Act (ISA) as applicable in AP. Article 23(d) was inserted in Schedule 1-A to provide for stamping of “conveyance, so far as it relates to amalgamation or merger of companies under the order of the High Court under Section 394 of the Companies Act, 1956 (Central Act 1 of 1956)”. A rate of 2 % on the ‘market value’ of the property has been stipulated where ‘market value’ is deemed to be “the amount of the total value of the shares issued or allotted by the transferee company, either in exchange or otherwise, and the amount of consideration if any paid for such amalgamation or merger”. Conveyances in general on the other hand are subjected to stamp duty at the rate of 5% of the market value of the property.
It is interesting to note that there is no specific reference either in Section 2(10) or Article 23(d) to demergers. It would at first sight be inconceivable to take the view that the phrase ‘amalgamation or merger’ would encompass demergers. As held by the Supreme Court in Saraswati Industrial Syndicate v. CIT[10] “amalgamation is a blending of two or more existing undertakings into one undertaking, the share holders of each blending Company become substantially the share holders in the Company which is to carry on the blended undertakings”. A demerger on the other hand is considered as the very opposite of an amalgamation or merger. The said term simply put refers to a splitting up of a company into two or more by the transfer of properties from the demerging company into the resulting company or companies, where the demerging company still retains it’s existence. Given this conceptual difference, the High Courts in Jagran TV Pvt Ltd In Re[11] and Gallops Realty Pvt Ltd.[12] have also held that AS-14 which deals with Accounting Standards for Amalgamations does not apply to demergers.
The Peculiarity: It appears therefore unlikely that a demerger could fall within the amendments as brought in by the Government of AP by way of the Amendment Act quoted above. The Registrar of Companies in Hyderabad is however insisting while taking on record Form 21 (the necessary form for filing orders of Courts) that the appropriate stamp duty be paid. The Sub-registrars in practice are presently issuing letters stating that stamp duty on such transactions is payable under Article 23(d) at the rate of 2%.
Writ Petitions bearing Nos. 592/2010 and 4703/2011 have been filed in the High Court of Andhra Pradesh challenging the imposition of the levy of 2% under Article 23(d) on the ground that the said entry does not cover demergers. Interim orders have also been obtained in WPMP Nos. 730/2010 and 5818/2011 respectively wherein the demand of stamp duty has been stayed pending final disposal.
However, in light of the recent decisions that are being delivered by High Courts across the country wherein stamp duty on orders of mergers and demergers is being imposed under the general definition of “conveyance” even in the absence of specific entries, coupled with conceptual difference between mergers and demergers. It appears that there is even a peculiar possibility wherein demergers in AP may charge stamp duty at the rate of 5% under the general conception of a conveyance since fiscal statutes are interpreted strictly and APs amended entry makes no specific reference to demergers. It would be interesting to see as to how the question of stamp duty on demergers is ultimately resolved in AP; whether by charging nothing at all, or treating the mergers on par with demergers and subjecting them to 2% stamp duty, or charging stamp duty at the rate of 5% on par with other forms of Conveyance.
The AP experience shows that even after insertion of specific entries questions as to the scope of such entries remain. However, questions of legal interpretation aside, there seems to be no policy basis for treating the rates of stamp duty on mergers and demergers differently. A legislative amendment expressing the Government of AP’s intent clearly would conclusively resolve the matter.
Karan Talwar is a Joint Partner at the Hyderabad office of Lakshmikumaran & Sridharan. The views expressed in this article are the personal views of the author and not of the firm. It is informational and not an expression of opinion or advice.
[1] 2004 (9) SCC 438
[2] AIR 1997 Bom 7
[3] (2006) 130 Comp Cas 510
[4] (2008)144 Comp Cas 708
[5] CMWP No. 41811 of 2006 in orders dated 6.4.2007 and 23.01.2009
[6] CA No. 466/2008 dated 4.12.2009
[7] CP No.627/2011 dated 8.2.2012
[8] AIR 1962 SC 1230
[9] 1994 (1) SCC 531
[10] AIR 1991 SC 70
[11] (2009) 150 Comp Cas 532 (All)
[12] (2009) 150 Comp Cas 596 (Guj)
