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Subsidiary Shares Held by the Parent Company Are Not Taxable as 'Supply of Service' Under the GST Regime

Introduction

The Karnataka High Court (‘HC’), in Metro Cash and Carry (P.) Ltd v. State of Karnataka[i], reaffirmed its decision passed in Yonex India (P.) Ltd. v. Union of India[ii] case, wherein the HC had observed and held that the mere act of the parent company holding the shares of the subsidiary company would not qualify or be treated as a ‘supply of service’ to be taxed under the Integrated Goods and Services Act, 2017 (‘Act’).

Facts

  • M/s Metro Cash and Carry P. Ltd. (‘Petitioner)’, a subsidiary of M/s Metro Cash and Carry International GmnH, approached the HC to quash the show cause notices (‘SCN’) issued by the Directorate General of GST Intelligence, DGGI, (‘Respondent’), against the Petitioner, for demand and recovery of the unpaid Integrated Goods and Services Tax (‘IGST’), along with the applicable interest and penalty thereon.

  • The Petitioner also further prayed before the HC to hold that the levy of GST on the activity of the parent company holding shares of the subsidiary company is illegal and bad in law.

Issue  

The issue before the HC was whether a parent company holding shares in a subsidiary constitutes a ‘supply of service’ under s. 7 of the Act.

Held

  • The HC quashed the SCN and allowed the writ petition applying the principles established in Yonex India’s case (supra) directly to the Petitioner’s circumstances.

  • In Yonex India’s case, the issue under consideration was exactly the same as in the present case, i.e., whether the holding of shares of a subsidiary company, by its parent company, would qualify as a ‘supply of service’ under the GST regime.

  • Yonex India had challenged Notification No. 11/2017- Central Tax (Rate), dt. 29.06.2017 and Notification No. 08/2017 – Integrated tax (Rate) (‘Notifications’), issued by the Ministry of Finance, Department of Revenue. As per the said Notifications, equity of a subsidiary company, held by its parent company, was taxable as ‘supply of service’ under the GST. However, during the pendency of Yonex India’s Petition, a clarificatory circular was issued by the Central and State Governments on 17.07.2023 and 21.07.2023, respectively. The observation made in the said clarificatory circular is as follows:

    • Securities are neither goods nor services: neither does security fall within the definition of goods under s. 2(52), nor does it qualify as a service under s. 2(102) of the Act, which means that the securities held by the parent company in a subsidiary company, neither qualify as goods nor services. Additionally, the sale and purchase of securities is neither a supply of goods nor a supply of services in itself, and for a transaction to be treated as a ‘supply of service’, it must fulfil the criterion provided under s. 7 of the Act.

Thus, in light of the aforementioned clarification, the HC, while allowing the Petition filed by Yonex India, quashed the order passed against it by the DGGI.

Our Analysis 

The clarificatory notification issued by the Central Government, and its subsequent validation and recognition by the HC, resolves the much-conflicted issue regarding corporate shareholding and its taxability under the GST regime. The HC’s order, guided by the Central Government's clarifications, ensures that corporate interests are not unjustly compromised under the guise of taxation.




End Notes

[i] [2024] 161 taxmann.com 67 (Karnataka)

[ii] [2024] 159 taxmann.com 71 (Karnataka)




Authored by Anshi Bhatia, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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