The Hon'ble High Court of Karnataka [Writ Petition No. 25142 Of 2022 (T-It) dated March 14, 2024] held that the mere holding of shares by a parent company in its subsidiary cannot be classified, treated, or construed as a 'supply of service' under the Goods and Services Tax (GST) laws. The court quashed the show cause notices issued by the tax authorities, proposing to demand and recover IGST on the holding of shares by the parent company in the subsidiary. The court relied on circulars issued by the Central and State Governments, which clarified that the activity of holding shares of a subsidiary company by the holding company, per se, cannot be taxed under GST.
Facts of the Case:
The Petitioner, Metro Cash and Carry (P.) Ltd., was a subsidiary company of Metro Cash and Carry International GmbH, which held shares in the Petitioner. The Respondent, State of Karnataka, issued four show cause notices (SCNs) dated November 15, 2022, proposing to demand and recover total IGST amounting to Rs. 48,44,27,296/- along with interest and penalty for the periods 2017-2018, 2018-2019, 2019-2020, and 2020-2021. The Petitioner filed the instant petition assailing the SCNs and seeking to hold that the levy of GST on the activity of holding equity capital by the parent company was illegal and without jurisdiction.
Issue:
Whether the activity of holding shares by a holding company in a subsidiary company can be treated as a 'supply of service' under GST and taxed accordingly.
Held by the Court:
The Hon'ble High Court of Karnataka, in the Writ Petition No. 25142 Of 2022 (T-It),
Held that securities, including shares, are neither goods nor services as per the definitions under Section 2(52) and Section 2(102) of the CGST Act and the definition of securities under Section 2(h) of the Securities Contracts (Regulation) Act, 1956.
Observed that the securities held by the holding company in the subsidiary company are neither goods nor services. The court further observed that the purchase or sale of shares or securities, in itself, is neither a supply of goods nor a supply of services.
Held that for a transaction or activity to be treated as a supply of services, there must be a supply as defined under Section 7 of the CGST Act.
Opined that it cannot be said that a service is being provided by the holding company to the subsidiary company solely based on the Service Accounting Code (SAC) entry '997171' in the scheme of classification of services mentioning "the services provided by holding companies, i.e., holding securities of (or other equity interests in) companies and enterprises for the purpose of owning a controlling interest," unless there is a supply of services by the holding company to the subsidiary company in accordance with Section 7 of the CGST Act.
The court relied on the Circulars dated July 17, 2023, and July 21, 2023, issued by the Central Government and the State Government, respectively, clarifying that the activity of holding shares of a subsidiary company by the holding company, per se, cannot be treated as a supply of services by the holding company to the subsidiary company and cannot be taxed under GST.
Based on the above observations and relying on the judgment in Yonex India (P.) Ltd. v. Union of India [2024] (Karnataka), the court held that in the instant case, where (the Petitioner) was a subsidiary company and merely because the parent company held shares in (the Petitioner), the said circumstance could not be classified, treated, or construed as a supply of service for the purpose of IGST. Consequently, the court quashed the impugned SCNs as being without jurisdiction or authority of law.
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