Yonex India Private Limited Vs Union of India
Date: January 17, 2024
Subject Matter
Holding of shares in a subsidiary company by a holding company does not constitute a supply of services
Summary
The petitioner sought relief to strike down the impugned notifications related to the taxation of holding equity of subsidiary companies under the GST acts. The petitioner's senior counsel argued that the holding of shares in a subsidiary company by a holding company does not constitute a supply of services under GST as clarified by circulars issued by the Central and State Governments. The respondent, however, opposed the petition. Ultimately, the court allowed the petition, quashed the impugned order, and noted that the holding of shares by the holding company in its subsidiary cannot be treated or classified as a supply of service under the GST as clarified by the circulars.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
In this petition, the petitioner seeks for the following reliefs:
a) ISSUE an appropriate writ, direction or order to STRIKE DOWN the Impugned Notifications issued by Respondent Nos. 1 and 2 ie. Notification dated 28.06.2017 bearing No. 11/2017-Central Tax (Rate) (Annexure-A) at Entry No. SAC 997171, and Notification dated 28.06.2017 bearing No 08/2017-Integrated Tax (Rate) (Annexure B), at Entry No. SAC 997171, to the extent that they provide for the machinery to tax holding equity of subsidiary companies, as being ultra vires the Central Goods and Services Act, 2017, Karnataka Good and Services Tax Act, 2017 and Integrated Goods and Services Tax Act, 2017;
b) CONSEQUENTLY ISSUE an appropriate writ, direction or order to STRIKE DOWN the Explanatory Notes to the Scheme of Classification of Services (Annexure-C) at Entry No. 997171, to the extent that it provides for the machinery to tax the holding securities of (or other equity interests in) companies and enterprises for the purpose of owning a controlling interest, as being ultra vires the Central Goods and Services Act, 2017, Karnataka Good and Services Tax Act, 2017 and Integrated Goods and Services Tax Act, 2017;
c) ISSUE a Writ in the nature of CERTIORARI or any such / other writ, direction or order to QUASH the Impugned Order issued by Respondent No. 4 dated 02.11.2022 bearing No. ACCT/(A)-2.8/GST/DRC-7/1/T. No. 508/2022-23 (Annexure-D.)”
2. Heard Sri. K. Arun Kumar, the learned Senior counsel for the petitioner, Sri. Narendra A., the learned CGC for the respondent No.1, Sri. Shamanth Naik, the learned HCGP for the respondent Nos.2 to 4 and Sri. Jeevan J. Neeralgi, the learned standing counsel for the respondent Nos.5 and 6. Perused the material on record.
3. In addition to reiterating the various contentions urged in the petition and referring to the material on record, the learned Senior counsel for the petitioner invited my attention to the Circulars dated 17.07.2023 and 21.07.2023 issued by the Central Government and the State Government clarifying that the activity of holding of shares of subsidiary company by holding company per se cannot be treated as a supply of services by a holding company to the said subsidiary company and cannot be taxed under the GST.
4. In this context, it is pointed out that the petitioner is a subsidiary company of M/s. Yonex, Japan [a holding company] and mere holding of shares in a subsidiary company by the holding company cannot be construed or treated as “supply of service” in the light of the Circulars issued by the Central Government and the State Government. It is therefore submitted that in the light of the Circulars referred to supra, the impugned order dated 02.11.2022 is without jurisdiction or authority of law, and the same deserves to be quashed. Under these circumstances, the learned Senior counsel submits that the petitioner would not press Prayer Nos. A and B sought for in the petition.
5. Per contra, the counsels for the respondents, submit that there is no merit in the petition and the same is liable to be dismissed. However, they do not dispute issuance of the Circulars by the Central Government and the State Government.
6. As rightly contended by the learned Senior counsel for the petitioner, the Central Government has issued Circular dated 17.07.2023, which reads as under:
“Representations have been received from the trade and field formations seeking clarification on certain issues whether the holding of shares in a subsidiary company by the holding company will be treated as ‘supply of service’ under GST and will be taxed accordingly or whether such transaction is not a supply.
2. In order to clarify the issue and to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “CGST Act”), hereby clarifies the issues as under:
Taxability of share capital held in subsidiary company by the parent company
| Issue | Clarification |
| 1. Whether the activity of holding shares by a holding company of the subsidiary company will be treated as a supply of service or not and whether the same will attract GST or not | Securities are considered neither goods nor services in terms of definition of goods under clause (52) of section 2 of CGST Act and the definition of services under clause (102) of the said section. Further, securities include ‘shares’ as per definition of securities under clause (h) of section 2 of Securities Contracts (Regulation) Act, 1956.This implies that the 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. Therefore, the activity of holding of shares of subsidiary company by the holding company per se cannot be treated as a supply of services by a holding company to the said subsidiary company and cannot be taxed under GST. |
Therefore, the activity of holding of shares of subsidiary company by the holding company per se cannot be treated as a supply of services by a holding company to the said subsidiary company and cannot be taxed under GST.
3. It is requested that suitable trade notices may be issued to publicize the contents of this Circular.
4. Difficulty, if any, in implementation of this Circular may please be brought to the notice of the Board, Hindi version would follow.
Similarly, the State Government also issued Circular dated 21.07.2023 on the same lines, which reads as under:
Representations have been received from the trade and field formations seeking clarification on certain issues whether the holding of shares in a subsidiary company by the holding company will be treated as ‘supply of service’ under GST and will be taxed accordingly or whether such transaction is not a supply.
2. In order to clarify the issue and to ensure uniformity in the implementation of the provisions of law across the field formations, the Board, in exercise of its powers conferred by section 168 (1) of the Karnataka Goods and Services Tax Act, 2017 (hereinafter referred to as “KGST Act”), hereby clarifies the issues as under.
Taxability of share capital held in subsidiary company by the parent company
| Issue | Clarification |
| 1. Whether the activity of holding shares by a holding company of the subsidiary company will be treated as a supply of service or not and whether the same will attract GST or not | Securities are considered neither goods nor services in terms of definition of goods under clause (52) of section 2 of CGST Act and the definition of services under clause (102) of the said section. Further, securities include ‘shares’ as per definition of securities under clause (h) of section 2 of Securities Contracts (Regulation) Act, 1956.This implies that the 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. Therefore, the activity of holding of shares of subsidiary company by the holding company per se cannot be treated as a supply of services by a holding company to the said subsidiary company and cannot be taxed under GST. |
Therefore, the activity of holding of shares of subsidiary company by the holding company per se cannot be treated as a supply of services by a holding company to the said subsidiary company and cannot be taxed under GST.
3. Difficulties, if any, in implementation of this circular may be brought to the notice of this office.
As it is clear from the aforesaid Circulars issued by the Central Government and the State Government, 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 aforesaid Circulars by both the Central Government and the State Government.
7. Under these circumstances, I am of the view that in the light of the issuance of Circulars by the Central Government and the State Government during the pendency of the present petition, clarifying that holding of shares by M/s. Yonex Co., Japan [the holding company] in its subsidiary, the petitioner herein at Bengaluru cannot be treated or classified as “supply of service”. The impugned order dated 02.11.2022 passed by the respondent No.4 which proceeds on the basis that the said holding of shares amounts to “supply of service” is clearly illegal, arbitrary and without jurisdiction or authority of law, and the same deserves to b e quashed.
8. In the result, the following:
ORDER
(i) The petition is hereby allowed.
(ii) The impugned order dated 02.11.2022 issued by the respondent No.4 is hereby quashed.
(iii) The submission made on behalf of the petitioner that Prayer Nos. a and b are not pressed, is placed on record.