2025 (5) TMI 777 - HC - Companies Law

Proper basis for levy of stamp duty on a Scheme of Arrangement - demerger of Consumer Mobile Business of TTML/transferor company into Petitioner/transferee company as a going concern - stamp duty under Article 25 (da) of the Maharashtra Stamp Act 1958 should be computed on the enterprise value or net worth of the demerged undertaking or on the market value of shares issued and allotted in exchange plus any consideration paid - HELD THAT - The Collector of Stamps has thus proceeded to determine the stamp duty payable on the Scheme of Arrangement on the net worth of demerged undertaking of consumer mobile business unit of TTML. While doing so it has relied upon joint valuation report of M/s. S. R. Baltiboy Co. LLP and Walker Chandiok Co. LLP dated 19 December 2017. It appears that Petitioner had appointed Walker Chandiok Co. LLP as its valuer and TTML has appointed M/s. S.R. Baltiboy Co. LLP as its valuer. Both the valuers have submitted joint valuation report for the purpose of determining the Share Entitlement Ratio to be placed before the Board of Directors of both the Companies. Both the valuers apparently worked independently. They calculated valuation of Consumer Mobile Business of TTML by using Comparable Companies Market/Transaction Multiple (CCM) method whereas the method of Market Price (MP) was adopted for valuing the Petitioner since its shares were well traded. Considering the provisions of Article-25 (da) (ii) of the Stamp Act the Collector ought to have determined the market value of shares issued and allotted in exchange by the Petitioner. However the order passed by the Collector of Stamp does not indicate that any attempt is made for computing the stamp duty on the basis of the market value of shares of Petitioner issued and allotted in exchange to the equity shareholders of TTML. Instead the Collector of Stamps seems to have erroneously concentrated on enterprise value or net worth of consumer mobile business unit of TTML while computing the stamp duty chargeable on Scheme of Arrangement. Perusal of Article-25 (da) (ii) would indicate that the same does not recognise the concept of computation of stamp duty on the basis of enterprise value or net worth of the demerged undertaking - In the present case it appears that no separate consideration is paid under the Scheme of Arrangement and the value of shares of the Petitioner issued and allotted to TTML actually forms consideration paid under the Scheme. The Collector of Stamps appears to have erroneously computed 0.7% stamp duty on enterprise value or net worth of consumer mobile business unit of TTML. The Collector of Stamps has grossly erred in adjudicating the stamp duty payable on Scheme of Arrangement by taking into consideration net worth of demerged undertaking of consumer mobile business unit of TTML. Article 25 (da) (ii) does not contemplate levy of stamp duty on net worth of the demerged undertaking. In that view of the matter the Collector of Stamps could not have assumed that market value of shares issued/allotted within the meaning of Article 25 (da) (ii) would be net worth of the demerged undertaking - the Collector of Stamps has grossly erred in computing the stamp duty leviable on the Scheme of Arrangement by taking into consideration net worth of consumer mobile business unit of TTML. The Collector ought to have computed stamp duty payable on aggregate market value of shares issued and allotted in exchange plus consideration paid for the transaction. Since no separate consideration is paid under the Scheme the value of shares allotted by the Petitioner to the equity shareholders of TTML would alone form the entire consideration for the Scheme. Conclusion - For calculation of stamp duty on Schemes of Arrangement involving demerger the statutory formula prescribed in Article 25 (da) must be strictly followed. The market value of shares issued and allotted plus any consideration paid is the proper basis and enterprise value or net worth of the demerged undertaking cannot be substituted. Petition allowed.

Summary

The core legal issues considered in this judgment revolve around the proper basis for levy of stamp duty on a Scheme of Arrangement involving demerger of a consumer mobile business unit from one company to another. Specifically, the Court examined:

(a) Whether the stamp duty under Article 25 (da) of the Maharashtra Stamp Act, 1958, should be computed on the enterprise value or net worth of the demerged undertaking, or on the market value of shares issued and allotted in exchange plus any consideration paid;

(b) Whether the gross debt of the transferor company (TTML), particularly liabilities related to spectrum license fees, should be deducted from the enterprise value in determining the market value for stamp duty purposes;

(c) Whether the Collector of Stamps and the Chief Controlling Revenue Authority (CCRA) had jurisdiction and authority to re-interpret the Scheme of Arrangement sanctioned by the National Company Law Tribunal (NCLT) and to disregard the valuation and share entitlement ratio approved by shareholders and NCLT;

(d) The validity of the orders passed by the Collector of Stamps and CCRA in confirming a high stamp duty demand based on net worth rather than market value of shares issued.

On the first issue concerning the applicable legal framework, Article 25 (da) of the Maharashtra Stamp Act, 1958, prescribes the stamp duty payable on amalgamation, merger, demerger, arrangement, or reconstruction of companies sanctioned by the NCLT or other competent authorities. The provision stipulates a normal duty of 10% on the aggregate market value of shares issued or allotted in exchange plus any consideration paid, subject to a cap. The cap is the higher of:

(i) 5% of the true market value of immovable property located in Maharashtra of the transferor company; or

(ii) 0.7% of the aggregate market value of shares issued or allotted in exchange plus consideration paid.

In the case of reconstruction or demerger, the duty chargeable shall not exceed these amounts.

The Court emphasized that the statute mandates computation of stamp duty on the market value of shares issued/allotted plus consideration paid, and does not contemplate levy on enterprise value or net worth of the demerged undertaking.

Regarding the Collector of Stamps' and CCRA's interpretation, the authorities had computed stamp duty at Rs. 7,38,99,000/- by applying 0.7% to the enterprise value or net worth of the consumer mobile business unit of TTML at Rs. 1055.70 crores. They rejected the petitioner's contention that gross debt of Rs. 950 crores should be deducted, thus reducing the market value of shares to Rs. 105.70 crores. The Collector reasoned that the enterprise value already accounted for liabilities, including debts, and thus no separate deduction was warranted. The CCRA confirmed this view on appeal.

The petitioner challenged this approach, submitting that the Collector and CCRA erred in equating enterprise value with market value of shares issued/allotted for stamp duty purposes. The petitioner argued that the valuation report clearly showed that the enterprise value included gross debt, which must be deducted to arrive at the true equity value. Consequently, the market value of shares issued was substantially lower, and stamp duty should have been calculated on that basis. The petitioner further contended that the Scheme of Arrangement sanctioned by the NCLT, including the share entitlement ratio and valuation principles, must be respected and cannot be reinterpreted by the revenue authorities.

In analyzing these contentions, the Court examined the valuation reports prepared by two independent chartered accountancy firms appointed by the respective companies. Both valuers used the Comparable Companies' Market/Transaction Multiple method and agreed on the enterprise value range and gross debt amount. The equity value per share of TTML was computed after deducting gross debt, resulting in a much lower valuation than the enterprise value.

The Court noted that the Scheme of Arrangement, approved and sanctioned by the NCLT, explicitly provided for issuance of shares by the petitioner company to TTML shareholders at a ratio reflecting the equity value after accounting for liabilities. The share allotment ratio and valuation were commercial decisions accepted by the shareholders and the NCLT.

The Court held that the Collector of Stamps erred in ignoring the market value of shares issued and allotted in exchange and instead basing the stamp duty on the net worth or enterprise value of the demerged undertaking. The statutory provision under Article 25 (da) does not support such an approach. The stamp duty must be computed on the market value of shares issued/allotted plus consideration paid, not on enterprise value or net worth.

The Court rejected the Respondents' argument that the Collector had jurisdiction to discover hidden consideration or recharacterize the transaction beyond the valuation and share entitlement ratio approved by the NCLT. The Court observed that no finding was recorded by the Collector or CCRA regarding any hidden consideration, nor was any such plea made in the affidavits. The Court emphasized that the adjudicating authority cannot disregard the valuation principles adopted by the companies and sanctioned by the NCLT or apply a different basis for levy of stamp duty than prescribed by the statute.

Regarding the contention about spectrum license fees being erroneously treated as debt, the Court found that this argument was neither pleaded nor recorded in the impugned orders and thus could not be entertained. The Court held that the license fees payable to the Government, which formed part of liabilities in the valuation report and Scheme, were rightly considered in the valuation process. It was a commercial decision of the shareholders and NCLT, which the Collector could not override.

The Court also reiterated the settled legal principle that orders of administrative and quasi-judicial authorities must be tested on the basis of reasons recorded in the order itself and cannot be supplemented by affidavits or oral submissions. The absence of findings or pleadings on hidden consideration or erroneous debt treatment was fatal to the Respondents' arguments.

Applying the law to the facts, the Court concluded that the correct basis for stamp duty computation was the market value of shares issued and allotted by the petitioner to TTML shareholders, which amounted to approximately Rs. 33.92 crores. The 0.7% stamp duty on this amount was Rs. 23,75,088. The 5% stamp duty on true market value of immovable property of TTML located in Maharashtra was Rs. 1,86,70,450, which was higher. Therefore, the stamp duty payable under Article 25 (da) was Rs. 1,86,70,450, which the petitioner had already paid.

Accordingly, the Court set aside the orders of the Collector of Stamps and the CCRA that demanded stamp duty based on enterprise value/net worth and held that the stamp duty payable on the Scheme of Arrangement was Rs. 1,86,70,450.

Significant holdings include the following verbatim excerpts and core principles:

"Article 25 (da) (ii) does not contemplate levy of stamp duty on net worth of the demerged undertaking. The computation needs to be done on the basis of market value of shares issued and allotted in exchange plus the actual consideration paid under the Scheme."

"The adjudicating authority cannot travel beyond the contours of the methodology prescribed in Article-25 (da) (ii). It cannot employ different basis for determining stamp duty leviable on a particular instrument."

"The Collector of Stamps cannot sit in appeal over this commercial wisdom of shareholders of both the companies and which is accepted by the NCLT and assume that TTML was actually worth more than what is accepted by the shareholders and NCLT."

"Validity of orders passed by the administrative and quasi-judicial authorities must be tested on the touchstone of reasons recorded in the order. It is not permissible to supplement reasons by filing Affidavits before the Court."

In sum, the Court established the principle that for stamp duty on Schemes of Arrangement involving demerger, the statutory formula prescribed in Article 25 (da) must be strictly followed. The market value of shares issued and allotted plus any consideration paid is the proper basis, and enterprise value or net worth of the demerged undertaking cannot be substituted. The Court reaffirmed the binding effect of NCLT-sanctioned valuation and share entitlement ratios and curtailed the revenue authorities' power to recharacterize or reassess the transaction beyond the statutory framework.