Foreign holding company's shareholding in Indian subsidiary treated as taxable "supply of service" (SAC 997171) overturned

The dominant issue was whether mere holding of shares by a foreign holding company in its Indian subsidiary constitutes a "supply of service" taxable under SAC 997171 and whether the impugned order could be sustained. Relying on Central and State Government circulars issued during the writ, which clarified that holding of shares in a subsidiary cannot be treated or classified as a supply of service, the HC held that the authority's contrary view lacked jurisdiction and legal basis, rendering the order illegal and arbitrary. Consequently, the impugned order was quashed and the writ petition was allowed.

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Issues Involved:
The issues involved in the judgment are the validity of notifications related to taxation of holding equity of subsidiary companies under various Goods and Services Acts and the legality of an order issued by a respondent regarding the same.

Validity of Notifications:
The petitioner sought to strike down notifications issued by Respondent Nos. 1 and 2, which provided for the taxation of holding equity of subsidiary companies. The petitioner argued that such provisions were ultra vires the Central Goods and Services Act, Karnataka Goods and Services Tax Act, and Integrated Goods and Services Tax Act. The petitioner also requested to quash the Explanatory Notes to the Scheme of Classification of Services related to the same issue.

Legal Argument:
The petitioner's senior counsel highlighted Circulars issued by the Central and State Governments clarifying that holding shares of a subsidiary company by a holding company does not constitute a supply of services under GST. The counsel argued that the impugned order was without jurisdiction in light of these Circulars, and therefore, Prayer Nos. A and B of the petition were not pressed.

Validity of Impugned Order:
The impugned order dated 02.11.2022, issued by Respondent No. 4, was challenged by the petitioner as being illegal, arbitrary, and without jurisdiction or authority of law. The order proceeded on the basis that holding shares by the holding company amounted to a supply of service, which was contested by the petitioner in light of the Circulars issued by the Central and State Governments.

Court's Decision:
The Court acknowledged the Circulars clarifying that holding shares by a holding company in a subsidiary does not constitute a supply of service under GST. Consequently, the Court found the impugned order to be illegal and arbitrary, leading to its quashing. The Court allowed the petition and recorded that Prayer Nos. A and B were not pressed by the petitioner.

This summary outlines the key issues addressed in the judgment, including the challenge to notifications related to taxation and the legality of the impugned order in light of Circulars clarifying the treatment of holding equity of subsidiary companies under GST laws.

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