A two judge bench of the Supreme Court of India in Chief Controlling Revenue Authority v. Coastal Gujarat Power Ltd. (Civil Appeal No. 6054 of 2015 arising out of S.L.P. (C) No. 32319 of 2013) has set aside an order passed by the High Court of Gujarat on 3 December 2012 in Stamp Reference No. 1/2011, holding that a mortgage deed with security trustee to secure loans of multiple banks would be treated as distinct transactions and would be liable for stamp duty as if separate mortgage deeds were recorded for each bank (Supreme Court Judgment).
The High Court had observed that the stamp duty is payable on the instrument and not the transaction. As per the High Court the instrument was a mortgage deed between a borrower (mortgagor) and a security trustee (mortgagee). It was the security trustee alone who had the power to enforce the mortgage and not the banks. The High Court observed that Section 5 cannot be construed to empower the State to levy duty on the transaction as opposed to the instrument and since there is only one instrument creating mortgage in favour of the security trustee, the relationship between the thirteen lenders and the borrower was independent from that of the borrower and the security trustee.
The revenue authority challenged the High Court order claiming that combining the mortgage transactions into one instrument was for the sole purpose of evading stamp duty.
Gujarat had amended the Gujarat Stamp Act, 1958 in 2007. Prior to this amendment, the Gujarat Stamp Act, 1958 provided that any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which the separate instruments each comprising or relating to one of such matters would be chargeable under the Act. Post the amendment not only distinct matters but also distinct transactions came under the import of Section 5 of the Gujarat Stamp Act, 1958. Section 3 of the Bombay Stamp (Gujarat Second Amendment) Act, 2007 (Act. No. 11 of 2007) which came into effect from 1 April 2007 amended Section 5 of the Gujarat Stamp Act, 1958 as follows (changes in bold) -
“Section 5. Instruments relating to several distinct matters-
Any instrument comprising or relating to several distinct matters or distinct transactions shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters or distinct transaction would be chargeable under this Act.”
The debate over what ‘transactions’ and ‘matters’ occurring in the sections 4 and 5 of the Indian Stamp Act, respectively imply is a long drawn one. It can be traced to a 1933 judgment of the Allahabad High court. One of the majority judges, Justice King, mentions that “the expression ‘distinct matters’ is equivalent to distinct transactions.” Justice Benett, who gives one of the minority opinions questions, “having used the word ‘transaction’ in Section 4, when the Act comes to Section 5, if the meaning is ‘any instrument comprising or relating to several distinct transactions’ why is the word ‘transactions’ not used? Why is there a change to the word ‘matter’?” (see Ram Swarup vs Joti AIR 1933 All 321)
In Member, Board of Revenue v. Arthur Paul Benthall (AIR 1956 SC 35), Justice T. L. Venkatarma Aiyar, who wrote the majority opinion, observed, “it is not without significance that the legislature has used three different words in relation to the three sections, 'transaction' in section 4, 'matter' in section 5, and 'description' in section 6. Thus, ‘matter’ and ‘transaction’ were not the same.“
Gujarat realised that this debate might not end soon and came up with an amendment to ensure that it collects stamp duty in cases of distinct transactions as well as distinct matters. Thus, While pre-2007, separate stamp duty was payable only for distinct matters after 2007, separate stamp duty became payable for both distinct matters as well as distinct transactions.
Analysis
The Supreme Court seems to have “looked through” the borrowing arrangement instead of going by the “look at” approach propounded by it in the famous Vodafone tax case (2012). The dissecting approach followed by the Supreme Court can be deciphered from para 32 of the judgment which states, “had this borrower entered into a separate mortgage deed with these financial institutions in order to secure the loan there would have been a separate document for distinct transactions.“ In the present case, the company entered into five different loan documents (four external commercial borrowing documents with multi-lateral/export-import banks in Philippines, US, France and South Korea and a common rupee term loan documents from nine banks and financial institutions in India). The Supreme Court observed that entering into a single mortgage deed with security trustee was a colorable device to evade stamp duty and reduce the liability from INR 54.6 lacs to INR 4.2 lacs and held that though the mortgage deed in favour of the security trustee was one instrument, it would actually tantamount to thirteen different transactions.
While interpreting the interplay between an instrument and a transaction in the context of Section 5 of the Gujarat Stamp Act, 1958, the decision of Supreme Court in Chief Controlling Revenue Authority v. Coastal Gujarat Power Ltd. may have far reaching consequences on the settled jurisprudential principle of not going beyond the corporate veil. In the present case, it ignores the presence of a security trustee in the transaction and treats each and every beneficiary as a separate executant. This can have disastrous consequences in case of say, a child welfare trust, where beneficiaries might run into thousands unknown legal persons. And what about trusts which do not have a specific set of beneficiaries? The problem can be transported to similar situations like a mutual fund (investing on behalf of thousands of investors). Would an agreement between a mutual fund and say, a bank, be treated as being separate transactions per beneficiary-investor? The gravity of the problem is illustrated by a situation when mutual funds (or trusts) enter into a contract. They would surely have a bad time calculating the stamp duty with the permutations and combinations of beneficiaries/executants! What about a partnership firm, for that matter? Following the principle of Chief Controlling Revenue Authority v. Coastal Gujarat Power Ltd. it may be argued that any agreement between a firm and a third party must be treated as a way of evading stamp duty by all the partners! In a nutshell, if the reasoning is applied to other cases it would create a lot of litigation cesspool to what was considered well-settled jurisprudence.
Khaitan Comment
The Supreme Court Judgment, on the face of it, has serious implications for the banking community and business. On the face of it, given the background of this particular transaction (and other similarly placed transactions), such a view by the Supreme Court would further increase the cost of borrowing, also straining the cash-strapped Indian industry/businesses. However, if we scrutinize the judgment carefully it is evident that the Supreme Court verdict is, (a) fact-specific, and (b) State’s stamp-law-specific. The ratio of the judgment is primarily emanating from the fact that the ambit of Section 5 of the Gujarat Stamp Act, 1958 has been expanded to include ‘distinct transactions’, which essentially means that this judgment would be binding only to those (mortgage) transactions emanating in (i) Gujarat and such other similar States which have amended Section 5 to bring in ‘distinct transactions’ within the ambit of their state laws, and (ii) where the borrowing has been availed by executing multiple loan agreements as opposed to a single common consortium loan agreement.
Further, on the examination of other States’ stamp acts, there seems to be no other State that has amended the corresponding provision in its stamp duty law to bring within its ambit ‘distinct transactions’. In our considered view (assuming the law as propounded by Supreme Court to be the correct judicial interpretation of the legislative intent behind amending the Section 5 of the Gujarat Stamp Act, 1958), by virtue of the Supreme Court Judgment, all those borrowings (whether carried through the consortium lending or by way of separate loan agreements), which have only one instrument creating mortgage of a property in Gujarat to secure loans of multiple banks in favour of a security trustee acting for all the lenders, would be treated as distinct transactions and would be liable for payment of stamp duty in Gujarat as if separate mortgage deeds were recorded for each bank.
However, for other States in India, in the absence of provisions akin to Section 5 of Gujarat Stamp Act, 1958 charging “distinct transactions”, the Supreme Court Judgment will not have any adverse effect even though only one (mortgage) deed has been executed mortgaging a property within the State, to secure loans of multiple banks in favour of a security trustee acting for multiple lenders, provided the borrowing has been executed through a consortium lending.
We believe that the Coastal Gujarat case should at best be treated as an exception. This case cannot be the norm for the reason that different loan documents were executed along with a single mortgage deed. In most cases of consortium-lending, there is a single facility agreement basis the draft released by Indian Bankers’ Association and in those cases, in the absence of similar provision of law charging ‘distinct transaction’ in States other than Gujarat, the judgment of the Supreme Court may not be applicable.
The Coastal Gujarat case is also a fit case for review, under Article 137 of the Constitution of India as there seems to be an apparent mistake of fact, at the least. The Supreme Court in para 32 of the judgment states: “The borrower entered into separate loan agreements with 13 financial institutions”. As a matter of fact, there were only five different loan agreements and not thirteen. The borrower, on account of this mistake/error apparent on the face of the Supreme Court Judgment, has sufficient reason to prefer a review of the Supreme Court Judgment. Under Supreme Court Rules, 2013 (passed under Article 145 - rule making power of SC) a review petition should be filed within 30 days of judgment and as far as practicable it is to be presented to the same bench which gave the judgment.
As and when such review petition comes up for hearing again before the Supreme Court, on the larger and more important issue as to whether the instrument is to be treated as encompassing five transactions or a single transaction, one can only hope the Supreme Court follows the ‘look at’ approach and treats the instrument creating mortgage of a property to secure loans of multiple banks in favour of a security trustee acting for all the lenders as a single transaction as opposed to multiple transactions.
The High Court had observed that the stamp duty is payable on the instrument and not the transaction. As per the High Court the instrument was a mortgage deed between a borrower (mortgagor) and a security trustee (mortgagee). It was the security trustee alone who had the power to enforce the mortgage and not the banks. The High Court observed that Section 5 cannot be construed to empower the State to levy duty on the transaction as opposed to the instrument and since there is only one instrument creating mortgage in favour of the security trustee, the relationship between the thirteen lenders and the borrower was independent from that of the borrower and the security trustee.
The revenue authority challenged the High Court order claiming that combining the mortgage transactions into one instrument was for the sole purpose of evading stamp duty.
Gujarat had amended the Gujarat Stamp Act, 1958 in 2007. Prior to this amendment, the Gujarat Stamp Act, 1958 provided that any instrument comprising or relating to several distinct matters shall be chargeable with the aggregate amount of the duties with which the separate instruments each comprising or relating to one of such matters would be chargeable under the Act. Post the amendment not only distinct matters but also distinct transactions came under the import of Section 5 of the Gujarat Stamp Act, 1958. Section 3 of the Bombay Stamp (Gujarat Second Amendment) Act, 2007 (Act. No. 11 of 2007) which came into effect from 1 April 2007 amended Section 5 of the Gujarat Stamp Act, 1958 as follows (changes in bold) -
“Section 5. Instruments relating to several distinct matters-
Any instrument comprising or relating to several distinct matters or distinct transactions shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters or distinct transaction would be chargeable under this Act.”
The debate over what ‘transactions’ and ‘matters’ occurring in the sections 4 and 5 of the Indian Stamp Act, respectively imply is a long drawn one. It can be traced to a 1933 judgment of the Allahabad High court. One of the majority judges, Justice King, mentions that “the expression ‘distinct matters’ is equivalent to distinct transactions.” Justice Benett, who gives one of the minority opinions questions, “having used the word ‘transaction’ in Section 4, when the Act comes to Section 5, if the meaning is ‘any instrument comprising or relating to several distinct transactions’ why is the word ‘transactions’ not used? Why is there a change to the word ‘matter’?” (see Ram Swarup vs Joti AIR 1933 All 321)
In Member, Board of Revenue v. Arthur Paul Benthall (AIR 1956 SC 35), Justice T. L. Venkatarma Aiyar, who wrote the majority opinion, observed, “it is not without significance that the legislature has used three different words in relation to the three sections, 'transaction' in section 4, 'matter' in section 5, and 'description' in section 6. Thus, ‘matter’ and ‘transaction’ were not the same.“
Gujarat realised that this debate might not end soon and came up with an amendment to ensure that it collects stamp duty in cases of distinct transactions as well as distinct matters. Thus, While pre-2007, separate stamp duty was payable only for distinct matters after 2007, separate stamp duty became payable for both distinct matters as well as distinct transactions.
Analysis
The Supreme Court seems to have “looked through” the borrowing arrangement instead of going by the “look at” approach propounded by it in the famous Vodafone tax case (2012). The dissecting approach followed by the Supreme Court can be deciphered from para 32 of the judgment which states, “had this borrower entered into a separate mortgage deed with these financial institutions in order to secure the loan there would have been a separate document for distinct transactions.“ In the present case, the company entered into five different loan documents (four external commercial borrowing documents with multi-lateral/export-import banks in Philippines, US, France and South Korea and a common rupee term loan documents from nine banks and financial institutions in India). The Supreme Court observed that entering into a single mortgage deed with security trustee was a colorable device to evade stamp duty and reduce the liability from INR 54.6 lacs to INR 4.2 lacs and held that though the mortgage deed in favour of the security trustee was one instrument, it would actually tantamount to thirteen different transactions.
While interpreting the interplay between an instrument and a transaction in the context of Section 5 of the Gujarat Stamp Act, 1958, the decision of Supreme Court in Chief Controlling Revenue Authority v. Coastal Gujarat Power Ltd. may have far reaching consequences on the settled jurisprudential principle of not going beyond the corporate veil. In the present case, it ignores the presence of a security trustee in the transaction and treats each and every beneficiary as a separate executant. This can have disastrous consequences in case of say, a child welfare trust, where beneficiaries might run into thousands unknown legal persons. And what about trusts which do not have a specific set of beneficiaries? The problem can be transported to similar situations like a mutual fund (investing on behalf of thousands of investors). Would an agreement between a mutual fund and say, a bank, be treated as being separate transactions per beneficiary-investor? The gravity of the problem is illustrated by a situation when mutual funds (or trusts) enter into a contract. They would surely have a bad time calculating the stamp duty with the permutations and combinations of beneficiaries/executants! What about a partnership firm, for that matter? Following the principle of Chief Controlling Revenue Authority v. Coastal Gujarat Power Ltd. it may be argued that any agreement between a firm and a third party must be treated as a way of evading stamp duty by all the partners! In a nutshell, if the reasoning is applied to other cases it would create a lot of litigation cesspool to what was considered well-settled jurisprudence.
Khaitan Comment
The Supreme Court Judgment, on the face of it, has serious implications for the banking community and business. On the face of it, given the background of this particular transaction (and other similarly placed transactions), such a view by the Supreme Court would further increase the cost of borrowing, also straining the cash-strapped Indian industry/businesses. However, if we scrutinize the judgment carefully it is evident that the Supreme Court verdict is, (a) fact-specific, and (b) State’s stamp-law-specific. The ratio of the judgment is primarily emanating from the fact that the ambit of Section 5 of the Gujarat Stamp Act, 1958 has been expanded to include ‘distinct transactions’, which essentially means that this judgment would be binding only to those (mortgage) transactions emanating in (i) Gujarat and such other similar States which have amended Section 5 to bring in ‘distinct transactions’ within the ambit of their state laws, and (ii) where the borrowing has been availed by executing multiple loan agreements as opposed to a single common consortium loan agreement.
Further, on the examination of other States’ stamp acts, there seems to be no other State that has amended the corresponding provision in its stamp duty law to bring within its ambit ‘distinct transactions’. In our considered view (assuming the law as propounded by Supreme Court to be the correct judicial interpretation of the legislative intent behind amending the Section 5 of the Gujarat Stamp Act, 1958), by virtue of the Supreme Court Judgment, all those borrowings (whether carried through the consortium lending or by way of separate loan agreements), which have only one instrument creating mortgage of a property in Gujarat to secure loans of multiple banks in favour of a security trustee acting for all the lenders, would be treated as distinct transactions and would be liable for payment of stamp duty in Gujarat as if separate mortgage deeds were recorded for each bank.
However, for other States in India, in the absence of provisions akin to Section 5 of Gujarat Stamp Act, 1958 charging “distinct transactions”, the Supreme Court Judgment will not have any adverse effect even though only one (mortgage) deed has been executed mortgaging a property within the State, to secure loans of multiple banks in favour of a security trustee acting for multiple lenders, provided the borrowing has been executed through a consortium lending.
We believe that the Coastal Gujarat case should at best be treated as an exception. This case cannot be the norm for the reason that different loan documents were executed along with a single mortgage deed. In most cases of consortium-lending, there is a single facility agreement basis the draft released by Indian Bankers’ Association and in those cases, in the absence of similar provision of law charging ‘distinct transaction’ in States other than Gujarat, the judgment of the Supreme Court may not be applicable.
The Coastal Gujarat case is also a fit case for review, under Article 137 of the Constitution of India as there seems to be an apparent mistake of fact, at the least. The Supreme Court in para 32 of the judgment states: “The borrower entered into separate loan agreements with 13 financial institutions”. As a matter of fact, there were only five different loan agreements and not thirteen. The borrower, on account of this mistake/error apparent on the face of the Supreme Court Judgment, has sufficient reason to prefer a review of the Supreme Court Judgment. Under Supreme Court Rules, 2013 (passed under Article 145 - rule making power of SC) a review petition should be filed within 30 days of judgment and as far as practicable it is to be presented to the same bench which gave the judgment.
As and when such review petition comes up for hearing again before the Supreme Court, on the larger and more important issue as to whether the instrument is to be treated as encompassing five transactions or a single transaction, one can only hope the Supreme Court follows the ‘look at’ approach and treats the instrument creating mortgage of a property to secure loans of multiple banks in favour of a security trustee acting for all the lenders as a single transaction as opposed to multiple transactions.
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