Circular imposing Stamp Duty on Mergers and Amalgamations in Tamil Nadu challenged, Madras HC issues notice

The Madurai Bench of the Madras High Court has issued notice in a petition challenging a circular issued last year by the Inspector General of Registration, Tamil Nadu, to impose stamp duty on mergers and amalgamations in the state..Justice V Bhavani Subbaroyan issued notice on Wednesday in the petition filed by alloy company, Harihar Alloys Private Limited (petitioner), through Advocates Naveen Kumar Murthi and S Varsha, challenging the 2018 circular as unlawful, arbitrary and unconstitutional..The petitioner-company had sought to merge two of its sister concerns, Harihar Dwellings Private Limited and Wellshine Investments and Financial Services Limited to streamline its business. To this end, it had also sought the sanction of the National Company Law Tribunal (NCLT) in 2018..While this representation seeking approval for amalgamation was pending before the NCLT, Chennai, the Inspector General of Registration in Tamil Nadu issued a circular in November 2018, stating that a scheme for mergers and amalgamations between companies falls under the definition of “conveyance” under the Stamp Act. Therefore, the circular informed that mergers and amalgamations would henceforth be subject to stamp duty..However, the petitioner company points out that neither the Stamp Act, 1899, nor any State amendment applicable in Tamil Nadu provides for including the transfer of properties of Companies under a scheme of amalgamation under the definition of the term “conveyance”..As far as the Indian Stamp Act, 1899 is concerned, the petitioner notes,.“Upon a bare reading of the provision [defining the term, “conveyance”], it is clearly seen that there is no mention of an order passed by the High Court or National Company Law Tribunal, sanctioning a scheme of amalgamation of companies order falling under the ambit of conveyance.“.On the other hand, there is no state amendment implemented in Tamil Nadu which has brought in mergers and amalgamations within the scope of the term “conveyance” to make it subject to stamp duty,.“Though the Tamil Nadu Stamp Act, 2013 was enacted by the State legislature, it has not received the assent of the President and hence, as on date, there is no law or statutory backing for imposition of stamp duty on schemes of amalgamation approved either by the High Court or the National Company Law Tribunal under the Companies Act, 1956, which has been superseded by the Companies Act of 2013.“.Therefore, the petition contends,.“Thus, it is submitted that for the purposes of levying Stamp Duty in Tamil Nadu, a Court order sanctioning a scheme of merger or amalgamation does not fall under the definition of Conveyance as it is the legislative intent to not include it.“.Inter alia, reference is also made to the cases of Shakti Insulated Wires Pvt. Ltd. v. Great View Properties Pvt. Ltd., M/S TT Krishnamachari & Co v. The Joint Sub Registrar and Srinidhi Industries Ltd. v Sub-Registrar to state that..“… the transfer of shares in a scheme of merger or amalgamation is by operation of Law as the transfer takes place only upon the sanctioning of the scheme by the Court … when the property of an erstwhile company stands vested in another company on account of merger or amalgamation of the two companies, there is no conveyance of property and so, the order merging or amalgamating the two companies would not amount to conveyance at all so as to require execution of any instrument chargeable with stamp duty.“.The petitioner further argues that the circular in question could also be faulted for wrongly relying on the Supreme Court judgment in Hindustan Lever & Anr vs State of Maharashtra & Anr. This case dealt with the Constitutional validity of a state amendment to the Bombay Stamp Act, 1958. In that case, the Court only looked into whether the state legislature could levy a stamp duty on mergers and amalgamations..However, in the absence of any such state amendment in Tamil Nadu, the petitioner contends that mergers and amalgamations cannot be made subject to stamp duty by the Inspector General of Registration. As noted in the petition, stamp duty is a form of indirect taxation. Therefore, it would also fall afoul of Artice 256 of the Constitution which lays down that taxes cannot be levied except by the authority of law..Additionally, the petitioner also points out that the circular does not take into account mergers and amalgamation between subsidiary companies. Reference in this regard is made to the Delhi High Court judgment in Sandy Estates Ltd. vs. Landbase India Ltd., which laid down that,.“No stamp duty would be leviable in any case to the transfer of assets between the transferor and the transferee companies when the transferor company is a 100 per cent subsidiary of the transferee company which is the parent company”..The absence of any prescribed method of valuation and the lack of rules for computation of stamp duty leviable for mergers and amalgamation is another ground raised to contend that the circular inquisition is absurd and vague. In view of these submissions, the petitioner company has argued.“If the circular is implemented it would cause serious financial detriment to companies that are contemplating the initiation of mergers and amalgamations in the future and it would also act as a detriment to effective corporate restructuring.“.It has, therefore, prayed that the High Court quash the circular as unconstitutional. The case has been posted to be taken up next on February 11..Image courtesy: Madras High Court website.