Stamp Duty
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This article is written by Pearl Narang, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.com. Here she discusses “Most Important Stamp Duty Exemptions for Holding and Subsidiary Companies”.

Introduction

129 Billion USD is the value of mergers and acquisitions involving Indian companies that happened in 2018. Companies go through a number of arrangements to survive in the market; they demerge, merge, acquire or amalgamate etc. Since all these arrangements impact the economy of the country in a significant way, they are regulated by a number of laws. Every scheme of arrangement requires the approval of the National Company Law Tribunal (NCLT). In addition to this, states also charge Stamp Duty on the documents that are required in these transactions. 

Why is Stamp Duty required?

Stamp Duty is a tax charged by the government on documents involved in a transaction. It is a great source of revenue for the government. The main purpose of Stamp Duty is that it provides evidentiary value to a document so that it can be enforced in the court of law. Not paying stamp duty makes an instrument legally invalid as it cannot be admitted as evidence in the court. 

It is also important that the documents are stamped to their correct value; failure to pay the correct value of Stamp Duty also renders the document legally invalid. 

Statute Regulating Stamp Duty in India 

The Indian Stamp Act, 1899 (hereinafter “Act”) is the statute which regulates the issues related to Stamp Duty in India. Stamp Duty is a subject on both Union and State list therefore; both Centre and State are empowered to makes laws on the matter. While some states have passed their own Stamp Act, most states follow the Act made by the Central government. 

According to this Act, Stamp Duty is levied on documents involved in a transaction and other specific instruments mentioned in the Act.

What are Instruments?

Instrument is defined in Section 2(14) of the Act as, every document through which a right or liability is created, extinguished or transferred.

Illustration: If “A” is the owner of a property and he sells it to “D”. “A” has transferred his vested legal rights in the property to “D”. To make this transaction possible, a document known as ‘Sale Deed’ is required. This ‘Sale Deed’ is an instrument, as rights are being transferred from “A” to “D”.

After the amendments made pursuant to The Finance Bill 2019, the definition of the instrument is expanded to include, an electronic document created for a transaction in a stock exchange or depository by which any right or liability is created, extinguished or transferred and any other document mentioned in Schedule 1.

What is Conveyance?

Conveyance is the act of transferring property from one person to others; it is an act through which one party transfers all the ownership rights in a property to another party. Conveyance is also a part of a number of corporate transactions. 

Stamp Duty for Companies

The Schedule 1 of Act lists the documents and the rate of Stamp Duty chargeable on them. There is no specific entry in the Schedule with regard to mergers, demergers or amalgamation of companies. It does not mean that no stamp duty is chargeable on them. The issue of how much Stamp Duty should be paid or if the Stamp Duty is to be paid at all in these transactions is subject to various judicial pronouncements. 

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From the incorporation of a company to transfer of shares, all these transactions involve instruments on which stamp duty is charged.  

In case of amalgamation, transfer of rights takes place between transferor and transferee. To make this transaction possible, an instrument is needed and hence the payment of stamp duty is required. 

Hindustan Lever & Anr vs State of Maharashtra & Anr

The Hon’ble Supreme Court has stated in this case that, the definition of “Conveyance” is an inclusive definition and includes within itself an order of the High Court under Section 394 of the Companies Act, and thus the order is subject to payment of stamp duty.

Gemini Silk Limited vs Gemini Overseas Limited

An order sanctioning a scheme of amalgamation is covered under the definition of the words “Instruments” and “Conveyance” under the Act and is therefore liable to Stamp Duty.

Stamp Duty for Holding and Subsidiary Companies

While amalgamation and mergers are subject to Stamp Duty, they are exempted from it if the transaction takes place between a holding and its subsidiary company.

The Central government issued a circular in 1937 by which it exempted payment of Stamp Duty on instruments that are involved in a transaction between companies limited by shares as defined in the Indian Companies Act, 1913.

According to Section 2(22) of the Companies Act, a company limited by shares refers to a company in which the liability of its shareholders is limited to the amount they have paid for their shares.  

The exemption granted by the circular is applicable in three cases:

  1. When the transferor company owns 90% of the issued capital of the transferee company, or 
  2. The transfer takes place between a holding a subsidiary company, or 
  3. When a transfer takes place between two subsidiary companies, and each of whose 90% shared capital is owned by a common parent company. 

Provided, 

In all these three cases, a certificate is obtained by parties from the officer appointed in this behalf by the local government that the above conditions are fulfilled. 

This exemption is only for those states, where the State government follows the Central government notification. 

The Delhi High Court in a case made an observation about the aforesaid circular and its validity. It stated that even though, this notification is of pre-independence era, it is not superseded by any law made by the parliament. To revoke this circular, specific repeal is required

Case Analysis

Delhi Towers Ltd v. GNCT of Delhi

Background: It has been a matter of great controversy that whether the stamp duty would be applicable in case of amalgamation or mergers, in other words, is amalgamation covered by the definition of “Conveyance” under the Act.

In light of this matter, some states have specifically approved court orders which approve an amalgamation under the definition of “Conveyance”. The states which have not approved such an order rely on judicial pronouncements.

The State of Delhi is one such example, which has not clearly specified if amalgamation is included under the definition of conveyance. The decision of Delhi High Court, in this case, is significant because Delhi is governed by The Indian Stamp Act as it does not have its own stamp act. 

Facts: 

  1. Delhi Towers Ltd., a real estate company had 15 other companies looking to merge with it. 
  2. These real estate companies were 100% subsidiaries of Delhi Towers Ltd.
  3. The companies proposed a scheme of amalgamation, under the scheme; all the undertakings will vest with Delhi Towers upon transfer, according to Section 394 of the Companies Act. 
  4. They obtained the order of a court under Section 391 and 394. 
  5. But the Delhi government rejected the mutation of companies stating the order was not valid as it was not stamped. 

Issues: 

In this case, the court dealt with two main issues. The issues are: 

  1. Whether the scheme of amalgamation is included under the definition of “Conveyance” under the act?

It was stated by the court that even though, a court order approving the scheme of amalgamation is not specifically mentioned under the definition of ‘Conveyance’ and ‘Instruments’ Both these definition start with the word ‘includes’ which shows that the scope of these definitions is wide is not restricted to the specific instruments mentioned in the Act. 

2. Whether the exemptions granted by the Central government notification applicable to the petitioner? 

The court stated that the 1937 circular issued by the Central government, which provides remission of the stamp duty in case of transfer of assets between parents and the holding company is still valid unless repealed.

Decision: This decision of Delhi High Court clearly states that a merger or amalgamation of a parent and its subsidiary company is exempted from the payment of stamp duty. A merger of two companies unrelated to each other would not fall within the ambit of the notification and thus is required to pay stamp duty.

Withdrawal of circular dated January 16, 1937

The notification was withdrawn by Delhi government, dated 1st June 2011. However, there is still no clarity whether the benefits of this notification will still persist in other states where the notification is not explicitly withdrawn.

Conclusion 

The exemption made by the circular is beneficial to companies as a transaction between a parent and its subsidiary company requires a number of contracts and the stamp duty required to be paid on those contracts can be very high.

References

  1. Indian companies log record $129 billion in M&A deals in 2018 (Sept. 22, 2019, 01:48 am)https://www.livemint.com/Companies/VD0HHHQHCUwiCjsxeTGCLN/Indian companies-log-record-129-bn-in-MA-deals-in-2018.html
  2. https://upload.indiacode.nic.in/showfile?actid=AC_CEN_2_2_00036_189902_1523339055436&type=rule&filename=stamp_act,_2019.pdf
  3.   (2004) 9 SCC 438
  4. 2003 53 CLA 328 Cal
  5.  Delhi Towers Ltd v. GNCT of Delhi [2009] 159 Comp Cas 129 (Delhi)
  6.  Merger with parent company won’t attract stamp duty in Delhi (Sept 22, 2019, 10:45 am)
    https://www.financialexpress.com/archive/merger-with-parent-co-wont-attract-stamp-duty-in-delhi/554539/
  7. https://taxguru.in/corporate-law/subsidiaries-merger-with-parent-company-not-exempt-from-stamp-duty.html

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