The Delhi High Court has quashed the show cause notice issued to HCL Infosystems and held that amalgamating company and transactions undertaken cannot be subject to GST.
The bench of Justice Yashwant Varma and Justice Dharmesh Sharma has observed that Section 87 essentially seeks to preserve and identify the transactions which may have occurred between two or more companies which ultimately amalgamate and merge.
The bench ruled that in order to fix the liabilities that would accrue under the CGST Act and to avoid a contention being raised that the Amalgamating Company and transactions undertaken with it would no longer be subject to tax, the Legislature, ex abundanti cautela, has come to place Section 87 on the statute book and which bids to bear in mind that notwithstanding an order of amalgamation or a scheme of merger coming to be approved, for the purposes of the CGST Ac. The two entities would be treated as distinct companies for the period up to the date of the order of the competent court or tribunal approving the scheme and the registration certificate of the companies being cancelled.
The petitioner has challenged the Show Cause Notice as also a final order purporting to be under Section 73 of the Central Goods and Services Tax Act, 2017 and raising a demand in the name of “Digilife Distribution and Marketing Services Limited”.
A Scheme of Arrangement3 was formulated between Digilife Distribution and Marketing Services Limited and the petitioner/HCL Infosystems Limited.
The Scheme ultimately came to be approved by the National Company Law Tribunal4 in term of its order of 10 August 2022. The appointed date specified in that Scheme was 01 April 2022. Pursuant to the aforesaid Scheme coming to be approved, both the Amalgamating Company as well as the petitioner informed and apprised the Registrar of Companies of the factum of the Scheme having come to be duly approved.
The proceedings for FY 2017-2018 were dropped on the merits of the case. However, and notwithstanding those disclosures having been duly made, the second respondent proceeded to issue yet another SCN in the interregnum, for FY 2018-2019 on 03 December 2023. This notice too was in the name of the Amalgamating Company.
Despite the petitioner, thus, having clearly and in unequivocal terms informed and having apprised the respondents that Digilife Distribution and Marketing Services Limited could no longer be viewed as existing in law, the respondents proceeded to frame a final order on 27 April 2024 in the name of the Amalgamating Company.
The court was unable to read Section 87 as enabling the respondents to either continue to place a non-existent entity on notice or for that matter to pass an order of assessment referable to Section 73 against such an entity. In fact, in terms of Section 87, the liabilities of the non-existent company would in any case stand transposed to be borne by the amalgamated entity. This is, therefore, not a case where the department would stand to lose or be deprived of their right to subject transactions to tax.
The court allowed the writ petition and quashed the SCN.
Case Details
Case Title: HCL Infosystems Ltd. Versus Commissioner Of State Tax & Anr
Case No.: W.P.(C) 7391/2024 & CM APPL. 30899/2024
Date: 21.11.2024
Counsel For Petitioner: Puneet Agrawal
Counsel For Respondent: Rajeev Aggarwal
