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This article has been authored by Surabhi Srinivasan, a 4th year student from Symbiosis Law School, Hyderabad.
Introduction
Mergers are an excellent tool for the consolidation of resources and the growth of the company. As the scope of doing business is ever-expanding, amalgamations across states are now a common occurrence.
Payment of stamp duty is quintessential to complete a merger. The era of the Companies Act 2013 had introduced many changes. Pertinently, cross-border mergers are now allowed, and mergers are currently approved by National Company Law Tribunal (NCLT) instead of the respective High Courts. Stamp duty payment is essential as instruments (the scheme of a merger in this case) will be inadmissible in court as evidence if there occur any disputes regarding the merger. The payment of stamp duty is instrumental for the merger to be valid in the eyes of the law.
There is no uniform stamp duty levied across the country. The amount paid varies from state to state according to the contents of the Stamp Act, followed by the respective state. By virtue of the provisions of their respective Stamp Acts, certain states offer a set-off of payment of stamp duty in case of inter-state amalgamations. This principle was highlighted and further elucidated in the case of Chief Controlling Revenue Authority, Maharashtra State, Pune and Superintendent of Stamp (Headquarters), Mumbai v Reliance Industries Limited, Mumbai and, Reliance Petroleum Limited, Gujarat. However, in this case, as the parties did not meet specific requirements specified by the respective states' stamp acts, such a rebate was not granted.
Interplay between Stamp Duty and Mergers & Acquisitions
Stamp Duty as a concept is essentially a form of tax that is being paid for a specific transaction. The need for this form of tax is to authenticate the documents of the transaction. The power to levy Stamp Duty is enshrined in the Constitution of India under both the Union list as well as the State List, thereby conferring subject matter jurisdiction on states as well as the union. Owing to this fact, various states including but not limited to Maharashtra, Karnataka, Gujarat has their own Stamp Acts, apart from the Indian Stamp Act, while other states have chosen to promulgate the Indian Stamp Act along with state amendments. This divide in legislature pertaining to Stamp Duty is causing hassle, especially in mergers and acquisition transactions.
As Stamp Duty is levied on the Instrument and not the transaction, in cases that come under the purview of Section 394 Companies Act,1956 or Section 232 Companies Act, 2013 the instrument on which the Stamp Duty is chargeable is the order by the court or tribunal which sanctions the transaction. Stamp Acts by Maharashtra and Karnataka refer to only Section 394 Companies Act, 1956.
The scheme of arrangements consists of a transfer of property and assets it comes under the ambit of conveyance and therefore the order of the court is considered an instrument.
The journey for the scheme of arrangement to be recognized as an instrument and bring it under the ambit of conveyance has been a task for the courts, to date only specific state Stamp Acts refer to Section 394.
What The Reliance Case Has Failed to Address?
The Reliance Industry case indeed assuaged an intrinsic question regarding inter-state mergers, wherein the Court clarified that the transferor company, as well as the transferee company, must obtain orders from the courts in their respective states nonetheless it did not seek to clarify as to why Stamp Duty must be paid twice, once in each state.
Though, the court answered the queries regarding rebate by stating that the Bombay Stamp Act did not contain any provision pertaining to the rebate. Hence, it was not applicable in the current case it did not make any observations regarding cases wherein a particular states Stamp Act contains provisions for rebate.
Additionally, the case has failed to take into consideration various instances such as in cases of inter-state amalgamation or demerger if there is no property or asset being transferred from one state to another, then would Stamp Duty be levied twice?
Should The Concept of One Nation, One Stamp Duty Be Adopted?
In July 2020, there was a recommendation made to the Finance Minister to enforce a ‘One nation, One Stamp Duty’concept in cases of Mergers & Acquisitions. The rationale behind this was to ensure that in cases of inter-state transactions the levying of stamp duty would be uniform.
In the current scenario, in instances of inter-state transactions relating to mergers & acquisitions, stamp duty is levied in both states in accordance with the respective states. However, the rates vary in certain states owing to the degree of autonomy and this creates a burden on the transferor. As can be seen from the Reliance Industry case, it is apparent that having a plethora of statutes with various rates in regards to Stamp Duty is only hampering the transactions and causing confusion.
Owing to the pandemic and the fluctuation in the economy, mergers and acquisitions have become more and more frequent by the day, more so inter-state mergers.
Conclusion
A thing as simple as Stamp Duty has taken the corporate world by storm. The levying of Stamp Duty in cases of mergers and acquisition has been one of the most debated over topics; right from the cases of Li Taka Pharmaceutical Vs. State of Maharashtra & Hindustan Lever Vs. State of Maharashtra to Delhi Towers Ltd V. GNCT Of Delhi wherein the very aspect of whether a scheme of arrangement is an instrument and comes within the scope of conveyance was argued. Through the years it has been settled that the order by the court sanctioning the amalgamation/merger is indeed an instrument and conveyance is applicable on the same. Nonetheless, new issues cropped up owing to the various Stamp Acts adopted by different states, and to this day the corporate world faces those issues, especially in cases of inter-state mergers. In order for the issues to be thoroughly assuaged It is highly recommended that there indeed be uniformity with respect to levying of Stamp Duty across the country.