Corporate restructurings in India present complex legal challenges and one key factor often is the stamp duty payable on court-sanctioned mergers, a popular method used for such restructurings. The uncertainty stems from different local stamp duty laws across states and notifications (some dating back to the pre-independence era) which cap the stamp duty amount payable or even exempt certain type of transactions.

A recent decision of the Delhi High Court in the case of Ambuja Cement Ltd. vs. Collector of Stamps, provides some much-needed clarity on stamp duty payable on a merger between two subsidiaries of a common parent pursuant to a court-sanctioned amalgamation scheme. The High Court extensively scrutinized the applicability of stamp duty on a scheme of amalgamation under the Indian Stamp Act, 1899, as well as the enforceability of a notification issued in 1937 exempting payment of stamp duty for intra group mergers in Delhi. This article examines the key issues, arguments, and implications of this landmark ruling.

Background

• Holcim (India) Private Limited (“Holcim India”) filed a writ petition against an order dated 7 August 2014 issued by the Collector of Stamps, Delhi (the “Collector”) imposing a stamp duty of INR 218.87 crores plus a penalty of INR 69 crores on the merger between Ambuja Cements India Private Limited (“ACIPL”) and Holcim India. The merger was sanctioned by the Delhi High Court in 2011 under Sections 391–394 of the erstwhile Companies Act, 1956.
• Holcim India is a wholly owned subsidiary of Holderind Investment Limited, Mauritius (“Holderind”). Prior to the merger, ACIPL was also a subsidiary of Holderind, with Holderind owning a 55% stake in ACIPL directly and the remaining 45% being held indirectly through Holcim India. ACIPL was set up as an investment company and only held shares of ACC Ltd. and Ambuja Cements Ltd., with no immovable property or active business operations.

• The dispute primarily revolved around whether (i) the merger order constituted a “conveyance” under Section 2(10) of the Indian Stamp Act, 1899 (“Act”); and (ii) the reliance placed by Holcim India on the exemption notification no. 13 dated 25 December 1937 (the “1937 Notification”), which inter alia exempts stamp duty on transfers between subsidiaries owned by a common parent company,is legally tenable.

Key findings

Nature of merger order – whether conveyance?

• The Court analysed in detail the definitions in Sections 2(10) and 2(14) of the Act, emphasizing their inclusive nature, and held that the present merger order, being a document effecting the transfer of property rights from ACIPL to Holcim India does qualify as an “instrument” and “conveyance” under the Act. The Court relied on previous rulings in the cases of Delhi Towers Ltd. v. G.N.C.T. of Delhi^[1] (the “Delhi Towers Case”), and Hindustan Lever v. State of Maharashtra^[2], where it was held that for purposes of imposition of stamp duty, it is immaterial whether the conveyance was by operation of law, statutory operation or by virtue of a private contract and a court-sanctioned amalgamation scheme does amount to a transfer inter vivos between two companies which is covered by the definition of “conveyance” under the Act.
• Holcim India argued that these judgements should be distinguished as they involved transfer of immovable property while in the present case the merger results only in transfer of moveable property (i.e., dematerialized shares) which specifically benefits from the exemption set out in Section 8A of the Act. The Court rejected this argument stating that there is no legal basis or judicial precedent for holding that in case of amalgamation, there is a difference between moveable and immoveable properties for the purpose of imposition of stamp duty and held that the merger would qualify as a conveyance under the Act.

Enforceability of 1937 Notification – still applicable?

• Holcim India argued that the merger was exempt from stamp duty under the 1937 Notification, which states that instruments evidencing transfer of property between companies limited by shares (as defined in the Indian Companies Act, 1913) will be exempt from stamp duty if:
• at least 90% of the issued share capital of the transferee company is in the beneficial ownership of the transferor company;
• transfer takes place between a parent company and a subsidiary, where one of which is the beneficial owner of not less than 90% of the issued share capital of the other; or
• transfer takes place between two subsidiary companies of which not less than 90% of the share capital is in the beneficial ownership of a common parent company.

It was contended that the merger between Holcim India and ACIPL, both subsidiaries of a common parent company (i.e., Holderind)satisfies the third condition and accordingly no stamp duty is payable even if the merger qualified as a conveyance under the Act.

• The Collector argued that the reliance placed on the 1937 Notification by Holcim India was misplaced as this notification had already been repealed when the Central Government extended Schedule IA of the Punjab Stamp Act to Delhi in 1958.
• The Court rejected the Collector’s argument and relying on the Delhi Towers Case held that the 1937 Notification was still valid and binding as of date. The Court also set aside the Collector’s demand order stating that the merger satisfied the ownership criteria specified in the 1937 Notification and was entitled to benefit from the stamp duty exemption.

Analysis

• Generally, in case of mergers, the courts (now the NCLT) direct the relevant parties to submit the scheme of amalgamation for adjudication to the relevant stamp authorities as part of its final order approving the merger. This results in merger orders (even those that may benefit from exemptions) inevitably ending up before the stamp authorities which then leads to a separate lengthy process/negotiation with the stamp authorities post the court process.
• This judgement is a welcome ruling that provides some much-needed clarity and relief for mergers involving group subsidiaries.While it is well settled that schemes of amalgamation (whether involving transfer of immoveable or moveable property or both) do qualify as conveyances for stamp duty purposes, the key takeaway here is the upholding of the 1937 Notification exemption for intra-group mergers.
• Despite the judgement in the Delhi Towers Case (which also upheld the 1937 Notification) in 2009, the stamp authorities in Delhi continued to refuse exemptions for intra-group mergers basis the 1937 Notification on the grounds that the same has been ‘repealed’ or there is ‘uncertainty’ regarding its enforceability leading to numerous disputes and delays in the stamping process. The fact that the Delhi High Court has now reiterated that the 1937 Notification is still valid, and binding will hopefully resolve these issues and allow eligible companies to take the benefit of the exemption provided. The possibility remains, of course, that the Government may expressly repeal the 1937 Notification in the future. However, we hope that this change is not brought about, and corporates will be allowed to continue to restructure their group holdings in a cost efficient manner.

Authors: Neville Golwalla – Partner; Gayatri Chadha – Managing Associate and Aanchal Kabra – Associate

Footnotes:

[1] (2009) SCC OnLine Del 3959

[2] (2004) 9 SCC 438

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