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Stamp duty: Achilles’ heel of M&A deals

12 April, 2016

Any M&A activity in India has to find its way through an intricate maze of regulatory complexities. Stamp duty is one of the major compliance formalities that make successful commercial closures of M&A deals a nightmarish challenge for M&A lawyers and investment bankers.

Things only get worse in the case of listed entities. It’s high time the government rationalised stamp duty provisions. Ease of doing business should be a priority even for deals happening on the home turf. It shouldn’t be reduced to a ‘showcase initiative’ to lure overseas players alone.

Let’s examine the stamp duty process in the guiding light of the definitions. Stamp duty is chargeable on the conveyance of properties. Being a state subject, the definition of conveyance differs from state to state. Obviously, the question of set-offs, remissions and deductions arises – of stamp duty paid under an order passed by one High Court against stamp duty payable under an order passed by another for the same scheme – in cases where the registered office of the transferor and transferee are situated in different states. What seems obvious has been made a matter of furious debates and academic interpretations by practitioners and experts alike.

A case in point is the scheme of amalgamation between Reliance Industries Ltd (whose registered office is in Mumbai) and Reliance Petroleum Ltd (whose registered office is in Gujarat) which filed petition for scheme sanction before respective High Courts—Bombay High Court and Gujarat High Court. Both courts passed respective orders after which RIL submitted both orders for adjudication of stamp duty with superintendent of stamp (headquarters in Mumbai)

RIL claimed that maximum stamp duty of Rs 25 crore (payable under Article 25(da) of the Bombay Stamp Act, 1958) be reduced by the amount of stamp duty already paid in Gujarat, thereby making the net liability Rs 15 crore. But the stamp duty authorities of Maharashtra rejected the set-off claim and asked for payment of entire Rs 25 crore payable on the order passed by the Bombay High Court.

RIL argued that only a document which creates right or obligation constitutes an ‘instrument’ under the Act. Hence, the scheme sanctioned by the court was an instrument within meaning of section 2(l) of the Act and not the court orders. Accordingly, the parties were hence liable to pay stamp duty on the sanctioned scheme (read with the two orders) in Gujarat and subsequently to pay stamp duty in Maharashtra subject to a rebate of duty already paid in Gujarat. Even if each order was treated as a separate instrument, it was for a single transaction; hence the parties have the discretion to deem any one instrument as the principal instrument. In this case, the parties deemed the order passed by the Gujarat High Court as the principal instrument.

On the other hand, it was contended that as per Section 17 of the Act, every document chargeable with duty is required to be adjudicated for stamp duty at the time of execution. Hence, the order passed by the Bombay High Court sanctioning the scheme was required to be stamped with duty as per the situation and circumstances on the day of its execution as per the Stamp Act. The stamp duty payable is on the instrument, not on the underlying transaction, it was argued. The court held that the question of set-off does not arise since relevant order for adjudication in Maharashtra is the order passed by Bombay High Court executed prior to stamp duty payment of Rs 10 crore in Gujarat.

On appeal by RIL, the full bench of the Bombay High Court held that the taxable event is the execution of the instrument and not the transactions. It also observed that its sanction order was not conditional in nature and that the provisions of Section 4 applied only on transactions related to development agreement, sale, mortgage or settlement.  The RIL transaction was neither of these categories. The court further held that the order passed by each High Court responsible for sanctioning the scheme is a separate instrument chargeable to stamp duty. Accordingly, stamp duty paid under an order passed by one High Court cannot be claimed as set-off/remission/ deduction against stamp duty payable on order passed by another.

Admittedly the order of the Bombay High Court sanctioning the scheme on a standalone basis cannot transfer and vest any property in the transferee company as provided under section 394(1) of the Companies Act, 1956. Transfer and vesting the property takes place only when the scheme is sanctioned by both the High Courts.

‘Instrument’ here would mean both the orders taken together.  And hence the case should squarely fall under the operation of Section 19 wherein RIL ought to have got rebate of duty already paid in Gujarat. 

Sadly, this verdict now imposes a huge cost burden on those parties entering into restructuring and M&A deals and having registered offices in different states, a common occurrence in a country like India.

The judgement also leaves another glaring space of ambiguity, apart from imposing a heavy cost burden on the M&A players: the time difference in the scheme sanction by High Courts of different states.

Imagine a liability arising in one state pursuant to a sanction order by the High Court of that state, but pending decision by the High Court of the other state, where it’s uncertain whether the scheme would be passed in the first place, or for that matter gets rejected for some reason.

Clearly, in the RIL and RPL case, the High Court should have adopted a progressive view, which is rather obvious whether in foresight or hindsight: the fact that court orders are two can’t deny (and dismiss) the fact that transaction is one. As a result, set-off for stamp duty paid in more than two states should be allowable as a foregone conclusion.

Consolidation is an effective route of business advancement. That’s precisely why an M&A deal is a common ripple in the waters of business. Ambiguous provisions like the disallowance of stamp duty set-offs in multi-state scenarios, more than burdening M&A parties with needless constraints, prove self-defeating in the context of the larger cause of the country’s economic development.

(Nitin Potdar is M&A partner at J. Sagar Associates. Views are personal). 


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Stamp duty: Achilles’ heel of M&A deals

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