Tag Archive for: subsidiary merger

– Payal Agarwal, Associate (payal@vinodkothari.com)

The confusion around stamp duty implications arise time and again on account of the same being a ‘state’ subject. In the context of amalgamation, the complexity is  heightened due to the presence of certain notifications issued by the Central Government in the pre-independence era, the validity of which is ambiguous as on date. There have been a plethora of judgements, including, by the Apex Court, to clarify that an order of amalgamation is an instrument of conveyance, and hence, covered by Article 23 of Schedule I under the Indian Stamp Act, 1899 (such other Article as may be relevant as per the respective State laws on stamp duty). 

However, vide the two notifications issued by the Central Government in 1937 (hereinafter referred to as the “1937 Circulars”), certain exemptions were  extended on the stamp duty implications on amalgamation upon satisfaction of certain conditions. Here, it is to be noted that the first notification dated 16th January, 1937 has been withdrawn w.e.f. 1st June, 2011 by the Lieutenant Governor of Delhi NCT. The second notification dated 25th December, 1937 applies only to the province of Delhi. No official notification has been issued w.r.t. the repeal of the second notification. However, the exemptions provided under the said notification has also not been made a part of the amended Schedule I issued to the Indian Stamp Act, 1899 as also, the Schedule w.r.t. stamp duty as adopted by various states. In view of the same, a question exists on the validity of the exemptions given under the 1937 Circular. 

The matter has also been made a part of certain judicial pronouncements. In this article, we attempt to discuss the same. 

Exemptions provided under the 1937 Circular

The first 1937 Circular provides an exemption from stamp duty implications in the following manner (text extracted from the rulings discussed below): 

“To remit the stamp duty chargeable under Article 23 and 62 of Schedule 1 to the said Act on instruments evidencing transfer of property between companies limited by shares as defined in the Indian Companies Act, 1913 in cases –

(i) Where at least 90 per cent of the issued share capital of the transferee company is in the beneficial ownership of the transferor company, or

(ii) Where the transfer takes place between a parent company and a subsidiary company one of which is the beneficial owner of not less than 90 per cent of the issued share capital of the order, or

(iii) Where the transfer takes place between two subsidiary companies in each of which not less than 90 per cent of the share capital is in the beneficial ownership of a common parent company:

Provided that in each case a certificate is obtained by the parties from the officers appointed in this behalf by the Local Government concerned that the conditions above prescribed are fulfilled.”

In the context of Delhi, the said circular was withdrawn, although exemption was provided on similar lines, except that the reference to “stamp duty chargeable under Article 23 and 62 of Schedule 1 to the said Act” is not included in the said second 1937 Circular. The second 1937 Circular reads as below:

“Instrument evidencing transfer of property between companies limited by shares as defined in the Indian Companies Act, 1913, in a case where:

(i) at least 90 per cent of the issued share capital of the transferee company is in the beneficial ownership of the transferor company, or

(ii) where the transfer takes place between a parent company and a subsidiary company one of which is the beneficial owner of not less than 90 per cent of the issued share capital of the other, or

(iii) where the transfer takes place between two subsidiary companies of each of which not less than 90 per cent of the share capital is in the beneficial ownership of a common parent company:

Provided that a certificate is obtained by the parties to the instrument from the officer appointed in this behalf by the Chief Commissioner of Delhi that the conditions above prescribed are fulfilled.”

Validity of the exemptions provided under the 1937 Circulars 

The question w.r.t. the validity of the 1937 Circulars, in the state of Delhi, was examined by the Delhi High Court in the matter of Delhi Towers Limited vs GNCT of Delhi, 2009 SCC OnLine Del 3959. In this regard, reference is made to Article 372 of the Constitution of India, which provides that “….all laws in force in the territory of India, immediately after the commencement of the Constitution shall continue to be in force therein, until altered or repealed or amended by a competent legislature or any other competent authority.” 

The principle as stated in the said ruling is based on various authoritative pronouncements of the Apex Court on the effect of Article 372 of the Constitution. Based on the same, the following principle can be drawn w.r.t. the validity and continuance of a pre-independence existing law: 

“The binding legal principle laid down in the above precedents thus is that applicability of a pre-constitution law is not conditional upon the making of an adaptation or a modification in the post-constitution law for its continued applicability. A pre- constitution law also does not require a specific adoption as has been urged on behalf of the respondent herein. Repeal thereof however has to be specific.”

The Delhi High Court, thus, concluded that the notification dated 25th of December, 1937 is applicable and binding. Reference was also made to a previous judgment of the Delhi High Court in the context of January 1937 Circular in the matter of Sandy Estates Ltd. vs. Landbase India Ltd., 1997 VI AD (Delhi) 981, wherein the validity of said circular was upheld.   

Recently, in Ambuja Cement Ltd. vs Collector of Stamps, Delhi, decided on 6th November, 2024, the validity of the 1937 Circular has been upheld with reference to the decision of the High Court in Delhi Towers Ltd (supra).  

Whether the 1937 Circular is valid only in Delhi or applies to other states as well? 

It is to be noted that the second 1937 Circular explicitly applies to the province of Delhi and has no relevance for other states. However, the explicit withdrawal of the first 1937 Circular vide the 2011 notification was also limited to the province of Delhi, therefore, going by the principles laid down in Delhi Towers Ltd (supra) w.r.t. pre-constitution laws, the same cannot be considered to have been withdrawn, without any express stipulation in this regard. 

In Gemini Silk Limited vs Gemini Overseas Limited, (2003)114 CompCas92, the validity of the 1937 Circular was upheld by the Calcutta High Court. However, post the passage of a decade from the above order, in another ruling by the same Court, in the matter of Emami Biotech Limited, (2012)170 CompCas212 (Cal), it was held that the benefit under the 1937 Circular is no longer available.  This was based on the premise that the 1937 Circular pertained to Article 23 of Schedule I, however, vide a state amendment, the said Article, pertaining to ‘conveyance’ has been shifted to Schedule IA. 

“The State says that Article 23, which applies to a conveyance, does not figure in Schedule I to the Stamp Act applicable in this State (West Bengal). Indeed, Article 23 which is relevant for the present purpose, falls under Schedule IA as relevant in this State. There can be no manner of doubt that in Article 23 no longer forming a part of Schedule I to the Stamp Act as applicable in this State and being included in Schedule IA thereto, the benefit under the 1937 notification is no longer available as the State Legislature by an overt act has taken it outside the purview of Schedule I without the State Government having extended the remission under the 1937 notification.” 

Rationale behind exemptions under 1937 Circular

The exemptions under the 1937 Circular pertain to such business restructuring where at least 90% of the shareholding remains common, that is, the companies are under the same ownership and control. Such arrangements, in effect, do not result in any “conveyance”, since there is no movement of property from one person to another, rather, the transfer rather results in changing the indirect ownership of assets into a direct ownership in most cases. 

There are a number of exemptions under other applicable laws for transactions between a holding company and its wholly owned subsidiary. For instance, a fast-track approval process is specified for mergers between holding and wholly-owned subsidiary under the Companies Act; related party transactions between holding and wholly-owned subsidiaries are exempt from approval requirements; 

In Associated Clothiers Ltd. vs Union of India, AIR 1957 P&H 261, the intent of the 1937 Circular has been expressed in the following manner: 

“The notification of 1937 is designed to facilitate reconstruction of a company or amalga-mation of two companies which are more or less under the same ownership so that they should be able to re-arrange their affairs without being saddled with liability for payment of stamp duties…”

Therefore, in view of the intention of the exemptions covered under the 1937 Circular, there does not seem to be a reason to withdraw the exemptions through specific State amendments or otherwise.