Merger or Amalgamation Not Legitimate Tools for Tax Evasion, Cooperate with Customs Department: Madras HC [Read Order]

In a recent ruling, the Madras High Court, while dismissing the writ petition directed the petitioner to cooperate with the customs department. Failure to do so would result in the authorities confirming the demand stated in the contested show cause notice and recovering the amount from the petitioner based on available material. A Single bench of Justice Senthilkumar Ramamoorthy observed that “Merger or amalgamation of companies is not a tool under law to either facilitate avoidance and evasion of tax liability already incurred by a transferor company like the Noticee.”

The petition challenged a show cause notice issued by the third respondent seeking to recover customs duty on imports made by the petitioner. The petitioner argued that the notice was issued in the name of a company that had ceased to exist due to mergers and demergers. Representing the petitioner, Senior Counsel contended that the show cause notice was issued to a company, M/s. Fabritex Exports Pvt Ltd, which no longer existed due to corporate restructurings. The petitioner’s Counsel stated that M/s. Fabritex Exports Pvt. Ltd. obtained an Advance Authorization from ADGFT, Bangalore.

This authorization required fulfilling export obligations as per specified conditions, backed by a bond of Rs.1,25,00,000/- to repay customs duties if obligations weren’t met, along with applicable interest. In addition, following a High Court order on 11.12.2009, Fabritex Exports Pvt. Ltd. merged with M/s. Integra Apparels and Textiles Ltd. Subsequently, as per a Karnataka High Court order dated 27.08.2010, Integra Apparels and Textiles Ltd. merged with M/s. Morarjee Textiles Ltd.

Under Fabritex Export Pvt. Ltd., an Advance Authorization was utilised in December 2005 for importing four consignments, leading to the issuance of a Show Cause Notice dated 29.08.2019 by the third respondent. However, the learned Standing Counsel for the second respondent argued that the Import Export (IE) code of M/s. Fabritex Exports Pvt Ltd had not been cancelled, and communications had been sent to the company on various occasions. Further, it was highlighted that the petitioner had failed to fulfill export obligations, leading to violations of import regulations. Despite this, the petitioner was called upon to respond to the show cause notice. Considering the submissions, the bench observed that “Merely because, the noticee company has been merged with the petitioner company ipso-facto would not mean the liability of the noticee company would stand extinguished on account of its merger with the petitioner company.” The court noted that in amalgamation schemes under the Companies Act, 1956 and 2013, the transferee company assumes both assets and liabilities of the transferor. However, the liability of the noticee company, merged with the petitioner, doesn’t dissolve.

The merger aims to leverage strengths to enhance efficiency, inspire investor confidence, and increase profits for promoters and shareholders. Furthermore, if the liabilities of the Noticee Company remain unresolved, the petitioner, as its successor and transferee, inherits both assets and liabilities. Unless the liability was retained by the promoters, the petitioner is responsible. As no Scheme of Amalgamation was filed, the Show Cause Notice proceedings cannot be halted. Therefore, the petitioner is directed to file a reply with the impugned Show Cause Notice within a period of 30 days from the date of receipt of a copy of this order.

For the sake of clarity, a corrigendum may be issued to the impugned Show Cause Notice to the petitioner as a transferee company/successor of Noticee company namely M/s.Fabritex Exports Pvt.Ltd. The court clarified that if the petitioner, as the successor of the Notice company, fails to cooperate with the customs department, the department is authorized to confirm the demand specified in the contested show cause notice and recover the amount from the petitioner company using available material.

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