The Karnataka High Court has held that the activity of holding of shares of subsidiary companies by the holding company cannot be treated as a supply and cannot be taxed under Goods and Service Tax (GST).
The bench of Justice S.R.Krishna Kumar has observed that securities are considered neither goods nor services in terms of definition of ‘goods’ under section 2(52) of CGST Act and the definition of ‘services’ under section 2(102). The term ‘securities’ include ‘shares’ as per definition of securities under clause (h) of section 2 of Securities Contracts (Regulation) Act, 1956. It implies that the securities held by the holding company in the subsidiary company are neither goods nor services.
The petitioner/assessee submitted that the Audit report was issued by the department under Section 65(6) of the CGST Act, pursuant to which, intimation under Section 73(5) of the CGST and KGST Acts, 2017, was issued by Deputy Commissioner Of Commercial Taxes to which the petitioner submitted a detailed response pointing out that the demands were not sustainable in law and placing reliance upon several documents including the notifications bearing No.9/2017 dated 28.06.2017 in which at Sl.No.28, department have themselves stated that extending deposits, loans or advances insofar as the consideration is represented by way of interest or discount (other than interest involved in credit card services) and interse sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers were exempt from payment of GST where consideration were in the form of interest payable.
The assessee contended that despite the detailed objections submitted by the assessee, the department proceeded to issue the Show Cause Notice, which is illegal, arbitrary and without jurisdiction or authority of law and the same deserves to be quashed.
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During pendency of the petition, the Central Board of Indirect Taxes and Customs has issued a Circular dated 26.06.2024 bearing No.218/12/2014 – GST, in which they have stated at Sl.No.1 that they have clarified regarding the exemptions available to the petitioner in the earlier Notification No.12/2017 – Central Tax (Rate). The Show Cause Notice insofar as it relates to the proposal to levy tax in respect of the Table No.IX deserves to be quashed. It is also submitted that insofar as the proposal in Show Cause Notice proposing to levy taxes in relation to Table No.VII of the Show Cause Notice is concerned, the petitioner is not liable to pay the amount in the light of the judgments of Karnataka High Court in M/s. Yonex India Private Limited Vs. Union of India and others and M/s. Metro Cash and Carry Pvt. Ltd., Vs. State of Karnataka and others.
The department contended that there is no merit in the petition and the same is liable to be dismissed.
The issue was raised in respect of taxability of share capital held in subsidiary company by the parent company.
The court noted that securities held by the holding company in the subsidiary company are neither goods nor services. Further, purchase or sale of shares or securities, in itself is neither a supply of goods nor a supply of services. For a transaction/activity to be treated as supply of services, there must be a supply as defined under section 7 of CGST Act. It cannot be said that a service is being provided by the holding company to the subsidiary company, solely on the basis that there is a 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 CGST Act.
The court while quashing the GST demand held that mere holding of shares by the holding company in the subsidiary company cannot be classified, treated or construed as “supply of service” as clearly clarified and confirmed by the Circulars by both the Central Government and the State Government.
The court stated that the proposal to demand/levy GST at Table No.VII in the Show Cause Notice, is illegal, arbitrary and without jurisdiction or authority of law and the same deserves to be quashed.
Case Details
Case Title: M/S A O Smith India Water Products Pvt. Ltd Versus State Of Karnataka
Citation: Writ Petition No.7227 Of 2023 (T-Res)
Decision date: 20/08/2024
