The Implications of a Deemed Transfer Clause on Stamp Duty payable on an Asset Purchase Agreement for Sale of Goods
03 November 2023
The Court of Appeal’s decision in Pemungut Duti Setem v Havi Logistics (M) Sdn Bhd (CA No. W1(A)-488-07/2022) concerned the stamp duty payable on an Asset Purchase Agreement (“APA”) whereby Havi Logistics (M) Sdn Bhd (“Respondent”) agreed to purchase certain assets and liabilities of Martin Brower Sdn Bhd for the purchase price of USD2,491,491.55.
The assets purchased by the Respondent under the APA included, inter alia, fixed assets, inventory and the rights and liabilities under the business contracts listed in the relevant schedules to the APA (“Acquired Assets”). The APA explicitly excluded any goodwill.
The Collector of Stamp Duty (“Appellant”) initially assessed the APA with ad valorem duty of RM399,196 under item 32 of the First Schedule to the Stamp Act 1949 (“the Act”). On the Respondent’s appeal, the High Court held that the APA should be assessed at RM10.00 under item 4 of the First Schedule to the Act.
The Court of Appeal’s Decision
The Appellant appealed against the High Court’s decision seeking to uphold the initial assessment based on section 21(1) and item 32 of the First Schedule to the Act. However, it conceded that "inventory" was exempt by virtue of the exception to section 21(1) of the Act.
The Appellant’s appeal was allowed by the Court of Appeal, albeit not for the reasons put forth by the Appellant.
Conveyance on sale
The Court of Appeal referred to item 32(a) of the First Schedule to the Act which provides for ad valorem duty to be payable in respect of a “conveyance, … transfer… on sale of any property (except stock, shares, marketable securities and accounts receivable or book debts…)”
The Court then referred to the definition of “conveyance on sale” in section 2 of the Act which states:
““conveyance on sale” includes every instrument and every decree or order of any Court, whereby any property, or any estate or any interest in any property, upon the sale thereof is transferred to or vested in a purchaser or any other person on his behalf or by his direction.”
According to His Lordship Azizul Adnan, JCA who delivered the unanimous decision of the Court of Appeal, “The definition (of conveyance on sale) makes it clear that an instrument by which property or any interest therein is transferred on the sale of such property or interest would be regarded as a conveyance on sale.”
As clause 2.3(c)(i) of the APA provided that “… title to the Acquired Assets (is to pass as of and at Closing) and all risk of loss as to the Acquired Assets shall be deemed to have passed to the Purchaser and deemed delivered at the place at which the Acquired Assets are located …”, this meant that title and risk to the Acquired Assets passed automatically at closing under the deeming provision in the clause. As the APA did not contemplate any separate action being undertaken by the parties to transfer title, the APA is the instrument by which title to the Acquired Assets passed. That being the case, the APA constituted a “conveyance on sale” within the meaning of the Act and would be dutiable under item 32(a) of the First Schedule.
Justice Azizul observed that “… had the closing provisions in clause 2.3(c)(i) not relied upon a deeming provision, but simply stated that the property and risk in the Acquired Assets passed to the respondent (as purchaser) upon its taking physical possession of such assets, then it would have been abundantly clear that the Asset Purchase Agreement would not have constituted an instrument of conveyance which was subject to ad valorem duty.”
The Respondent’s contention that the APA could not be considered a conveyance on sale as the passing of title and risk did not occur upon the execution of the APA but sometime later at closing was rejected by the Court of Appeal. The case of Ridgeway Nominees v IRC  All ER 354 was cited by the Learned Appeal Judge as authority for the proposition that an instrument of conveyance would be dutiable even though it was expressed to be subject to certain conditions and may never be completed.
The Court of Appeal concluded that the foregoing was sufficient to allow the Appellant’s appeal but nevertheless proceeded to address section 21(1) of the Act, as its proper construction may have far-reaching consequences.
Section 21(1) of the Act
The Appellant had contended that by reason of section 21(1), the APA was dutiable under item 32(a) of the First Schedule to the Act as though it was a conveyance on sale even if no property or interest was transferred or conveyed by the APA.
Section 21(1) of the Act reads as follows:
“Any contract or agreement made in Malaysia under seal or under hand only, for the sale of any equitable estate or interest in any property whatsoever, or for the sale of any estate or interest in any property except lands, tenements, hereditaments, or heritages, or property locally situate out of Malaysia, or goods, wares or merchandise, or stock, or marketable securities, or any ship or vessel, or part interest, share or property of or in any vessel, shall be charged with the same ad valorem duty, to be paid by the purchaser, as if it were an actual conveyance on the sale of the estate, interest or property contracted or agreed to be sold.”
The Learned Appeal Judge observed that section 21(1) applies to two categories of contracts, namely: (1) a contract or agreement for the sale of any equitable estate or equitable interest in any property; and (2) a contract or agreement for the sale of any legal estate or legal interest in any property.
Justice Azizul further observed that the exceptions, i.e. “lands, tenements, hereditaments, or heritages, or property locally situate out of Malaysia, or goods, wares or merchandise, or stock, or marketable securities, or any ship or vessel, or part interest, share or property of or in any vessel” only apply to the second category of contracts and agreements, that is for the sale of any legal estate or legal interest in any property.
The classes of assets stated in the exceptions are exempt from the operation of section 59(1) and section 54 of the English Stamp Act 1891 (corresponding with section 21(1) and definition of “conveyance on sale” in the Act. Thus, a contract for sale of goods would only be dutiable ad valorem if it operated as a conveyance on sale.
The meaning of "goods”
The Appellant had contended that the expressions “goods, wares or merchandise” in section 21(1) of the Act was only intended to cover stock-in-trade or assets held as inventory, and that capital assets, such as tables, chairs and computer equipment, came within the scope of section 21(1) and the instrument documenting their sale was dutiable as though it were a conveyance on sale regardless of whether such assets were transferred by the instrument in question.
According to His Lordship, “goods” refers to tangible property. According to Black’s Law Dictionary, “goods” is defined as “tangible or moveable property other than money.” As the Appellant was unable to provide any authority to support its contention, the Court of Appeal was of the view there was no legal basis for the expression “goods” to be read down to include only goods that are current assets or inventory. The Court of Appeal said it was clear from Drages v Commissioner of Inland Revenue (1927) 46 TC 389 that the UK Tax Commissioners in implementing their equivalent of section 21(1) of the Act did not discriminate between goods held as inventory or stock, and goods that were capital in nature.
Fortified by the decision in Drages, the Court of Appeal held that the fixed assets sold under the APA came within the meaning of “goods” in section 21(1) of the Act and the consideration paid for the fixed assets would not be dutiable on an ad valorem basis by reason solely of section 21(1). Nevertheless, the APA constituted a “conveyance on sale” by reason that the property in those assets passed to the Respondent under the APA without the need of any further act to be taken by the parties to the agreement.
Summary of the applicable principles
In closing, the Court of Appeal summarised the principles applicable to the operation of section 21(1) as follows:
- The first step in assessing the duty payable in respect of an agreement for the sale of property is to determine whether the sale relates to an equitable estate or equitable interest in property. If it is, then the duty payable would be at the ad valorem rate specified under item 32 of the First Schedule;
- if, on the other hand, the agreement relates to a sale of a legal estate or legal interest in property, then it must be ascertained if any of the exceptions in section 21(1) apply. If they do not, then duty would be payable ad valorem pursuant to item 32 of the First Schedule;
- if the sale relates to legal estate or legal interest in property, and the property in question comes within one of the exceptions in section 21(1), the next question to be asked is whether the agreement or contract in question is a conveyance on sale. Does property in assets pass to the purchaser by virtue of the agreement or contract in question? If so, then duty would be payable ad valorem pursuant to item 32 of the First Schedule;
- if, on the other hand, one of the exceptions applies and the agreement is on its proper construction not a conveyance on sale, then the agreement or contract ought to be stamped as an “agreement” pursuant to item 4 of the First Schedule.
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The Court of Appeal’s decision in Havi Logistics
is noteworthy in several respects.
First, it establishes that an agreement involving the sale of goods where title passes under a deemed delivery clause without any requirement for further action by the parties is a “conveyance on sale” and is dutiable on an ad valorem
basis under item 32(a) of the First Schedule to the Act. This would be the legal position even if the agreement is conditional or completion is to occur after the date of signing of the agreement.
Second, Havi Logistics
also clarifies that the expression “goods” in section 21(1) of the Act includes all forms of tangible and moveable property (except cash) and includes items that are capital in nature.
Third, the Court of Appeal has provided helpful guidance as to how the provisions contained in section 21(1) of the Act operate.
This decision highlights the importance of the precise language used in drafting legal documents. While a deeming provision like the one used in the APA serves as an efficient tool to sidestep inconveniences and complexities associated with the physical transfer of assets, it is now clear that the automatic transfer of title through such a provision would bring the transaction squarely within the ambit of a "conveyance on sale" and render the agreement liable to ad valorem
stamp duty under item 32(a) of the First Schedule to the Act.
: The Respondent has applied for leave to appeal to the Federal Court against the decision of the Court of Appeal.
Case Note by Kok Chee Kheong (Partner) of the Corporate Practice and Victoria Low (Associate) of the Tax Practice of Skrine.