Every Friday, small chamber of Sub-Divisional Magistrate (SDM), Head Quarter located in a time-worn Government office building in Northern part of Delhi gets packed by corporate executives and professionals.  On this particular day of the week, only such matters as relate to Stamp Duty on corporate arrangements (mergers/ amalgamations/ demergers etc.) are listed for hearing.

Anxiety can be felt in each and every corner of the room, due to the high stakes involved.  The Stamp Duty amount demanded by the authorities is 3 per cent of the value of shares issued which in many cases is a ten-digit number!

The issue of Stamp Duty on corporate arrangements got settled way back in the year 2004 when the Supreme Court of India in the case of Hindustan Lever & Anr. vs. State of Maharashtra & Anr.^[1] (‘HLL case’) held that a High Court order approving scheme of corporate arrangement under Section 394 of the Companies Act, 1956 (‘Companies Act’) is a ‘conveyance’ and, hence, subject to Stamp Duty.

Even after the verdict of the Apex Court in HLL case, many corporates took a position that in the absence of an specific entry for corporate arrangements in the schedule to Indian Stamp Act, 1889 (‘the Stamp Act’), no Stamp Duty is payable in the State of Delhi (and also other States where the specific entry is absent in the applicable Stamp Duty schedule) on a Court order approving the scheme of arrangement.

Subsequently, the Delhi High Court in the case of Delhi Towers Ltd. v. G.N.C.T. of Delhi^[2] (Delhi Towers case), following the HLL case, laid down that even in the absence of an specific entry in the schedule of the Stamp Act, court orders approving a scheme of arrangement are subject to Stamp Duty on account of being a ‘conveyance’.

Thus, the Delhi Towers judgment slayed all the doubts as regards applicability of stamp duty on corporate arrangements.  However, due to the lack of effective assessment and recovery mechanism many court orders still remained unstamped.

Recently, the stamp duty authorities in Delhi realized huge revenue potential in the form of arrears of Stamp Duty.  They obtained details of mergers etc. from the office of the Registrar of Companies and issued notices to companies that had undertaken corporate arrangement under Section 394 of the Companies Act.

In the light of the judicial pronouncements, although it is not open for the Companies to contend that Court orders are not stampable, yet on the quantum of duty payable the liability could be reduced significantly on the basis of the following amongst other reasons:

• Separate values may be assigned with respect to the items taxable at different rates, for example in some States (e.g., Maharashtra) movable property is taxable at a rate lower than immovable properties. A segregation of the values pertaining to movable and immovable properties could result into lesser duty liability;
• Equity Shares to be transferred can be converted into demateralized (DMAT) form for claiming exemption from the duty under the Stamp Act.
• Exemptions can also be claimed with respect to units in Special Economic Zone or property owned by such units;
• Possibility of setting-off the duty paid in one State against the duty liability in another State can also be explored, depending on the Stamp Duty law applicable;
• In case of merger etc. between holding and its 100% subsidiary company it can be claimed that the value of consideration is nil, therefore, no stamp duty is payable in States where is levied with reference to the value of consideration;
• Exemption can be claimed under notification no. 1 dated 16 January 1937 and notification no. 13 dated 25 December 1937 with respect to corporate arrangements between the specified holding and subsidiary companies, subject to fulfillment of the prescribed conditions*;
• Options such as relocation of registered office, transfer of business through business transfer agreements or transfer of shares etc. may also be explored to save the Stamp Duty costs.

In order to resolve the ambiguities as regards the amount of stamp duty payable on corporate rearrangements, a proposal for amendment of the rate schedule and introduction of specific entry for corporate arrangement is pending before the Delhi Government for consideration.

It is desirable that a specific entry prescribing Stamp Duty rate for corporate arrangement is introduced in the respective Stamp Duty schedule by various States (including Delhi) with a capping on the amount of duty payable (e.g., Gujarat Stamp Duty schedule) and non-taxability of properties located outside the State (e.g., Bombay Stamp Duty schedule) to avoid double taxation.  Such an enactment, would bring more certainity as regards Stamp Duty costs involved in corporate arrangements and will enable the Companies to pay the duty on the self-assessment basis.

*In Delhi, Notification dated 16 January 1937 was reported to be withdrawn.  However, a reference made by stamp authorities as regards continuity of the Notification dated 25 December 1937 is pending before the Delhi Government.

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[1] (2004) 9 SCC 438

[2] (2009) 165 DLT 418 (DEL)