One of the major issues in M&A transactions is related to the implication of stamp duty, which was unsettled and a cloud of uncertainty had been looming over it since a long time. It has been settled by various judicial pronouncements that the order passed by the National Company Law Tribunal (“NCLT”) sanctioning a Scheme of Arrangement is an instrument and accordingly stamp duty is to be levied on this instrument.

Brief of the constitutional provisions:

The power to make laws including levy of stamp duty is provided to the Parliament and the Legislatures of States vide Article 246 of the Constitution of India. The Parliament has exclusive power to levy stamp duty in respect of items mentioned in Entry No. 91 of List – I of the 7th Schedule i.e. the Union List. Further the Legislatures of States has exclusive power to levy stamp duty items mentioned in Entry No. 63 of List – II of the 7th Schedule i.e. the State List. In respect of items mentioned in Entry No. 44 of List – III i.e. the Concurrent list, the Parliament and the Legislatures of States have power to levy stamp duty on instruments which are outside the ambit of Entry 91 and Entry 63 above.

Instrument:

It is the instrument that is exigible to Stamp duty. As per the Indian Stamp Act, 1899 (“Act”), “Instrument” includes every document by which any right or liability is created, transferred or extinguished. In the case of mergers and amalgamations, it is the order of the NCLT sanctioning the Scheme which is the instrument on which stamp duty is levied.

Nature of instrument:

Under a Scheme of Arrangement, property is transferred from one person to another person, and accordingly falls within the ambit of the term “Conveyance” as defined under the Act. As per the Act, Conveyance includes every instrument by which property, whether movable or immovable, is transferred inter vivos. It includes all such transfer of properties which is not otherwise specifically provided for by Schedule I of the Act.

Rate of Stamp Duty:

The rate of Stamp Duty on merger and amalgamations differs from state to state. While certain States have amended to the definition of conveyance by including within its ambit the transactions under Section 230-232 of the Companies Act, 2013 and have provided specific entry regarding rate of stamp duty in respect of the order of the NCLT sanctioning a Scheme of Arrangement. Some of the States that have prescribed specific rates of stamp duty on amalgamation have been provided in the following table:

On the other hand, in the absence of a specific rate of stamp duty, stamp duty is generally levied under the Article “Conveyance”. For instance, in the NCT of Delhi, stamp duty is levied at the rate of 3% on the consideration amount set forth in the instrument i.e. the NCLT Order.

Apart from mergers and amalgamation, there are other forms of business restructuring such as slump sale or slump exchange wherein property is transferred from one entity to another entity and cash/shares/securities is given / issued or allotted in consideration thereof. Undoubtedly, slump sale or slump exchange involve conveyance of property, and the rate of stamp duty on such transactions would be levied under the Article “Conveyance” as provided in, the Indian Stamp Act, 1899 or such other stamp law prevailing in the States.

Exemption to Government companies

Section 8G of the Indian Stamp Act, 1899 inserted by Finance Act, 2021, provides that any instrument for conveyance or transfer of a business, asset or right in any immovable property from a Government company, its subsidiary, unit or joint venture by way of strategic sale, disinvestment, demerger, any scheme of arrangement; or; if such government company, its subsidiary or JV which is to be wound up, closed, struck off, liquidated or shut down, to another Government company or to the Central Government/State Government etc., after the approval of the Central Government/ State Government, as the case may be, shall not be liable to duty under the Indian Stamp Act, 1899.

Judicial Pronouncement:

1. In Li Taka Pharmaceuticals Ltd. V. State of Maharashtra & Ors., the Bombay High Court held that an order under Section 394 of the Companies Act, 1956, is founded or based upon a compromise and/or arrangement between two companies for transferring assets and liabilities of one company to another company, and such an order of the Court is an ‘instrument’.
2. Hon’ble Supreme Court in Hindustan Lever v. State of Maharashtra held that an order passed under Section 394 is an instrument and the Legislature has the power to levy stamp duty on the order of amalgamation.
3. The Hon’ble Delhi High Court in Delhi Towers Limited v. G.N.C.T. of Delhi held that merely because the Legislature has not amended the existing statutory provision with regard to Delhi to specifically include transfer of property under an Order approving a Scheme of Arrangement in the definition of conveyance, the same would not amount to an exclusion on applicability of the Act and chargeability to stamp duty thereon.
4. In Emami Biotech Limited & Other v. State of West Bengal, the Hon’ble High Court of Calcutta held that an order sanctioning a scheme of amalgamation answers to the description of the words “instrument” and “conveyance” within the meaning of the Stamp Act applicable in the State and is accordingly exisable to stamp duty.
5. In Chief Controlling Revenue Authority v. Reliance Industries Limited, the Bombay High Court held that where the amalgamation scheme is being approved by two different High Courts, each such approved scheme would be termed as an instrument on which stamp duty would be payable. It was also held that the stamp duty is payable as per the instrument and does not depend upon the value of the transaction being executed.
6. Delhi High Court in Holcim (India) Private Limited v. Collector of Stamps, Delhi, held that stamp duty would not be chargeable on an Order sanctioning a Scheme of Arrangement involving only transfer and vesting of shares in dematerialized form.

Finance Act, 2019:

With effect from 01.07.2020, in terms of Section 8A of the Finance Act, 2019, exemption from stamp duty is only limited to transfer of securities from a person to a depository or from a depository to a beneficial owner. In view of the provisions of Article 56A of Schedule I of the Act, where any shares are issued under a Scheme of Arrangement, then the rate of stamp duty on such issuance of shares is 0.005% of the value of shares.