1999 (3) TMI 615 - AT - VAT and Sales Tax

Issues Involved:
1. Validity of the transfer of fixed assets to a subsidiary company under the sales tax deferral scheme.
2. Interpretation of the Government Order G.O. Ms. No. 500 dated May 14, 1990.
3. Compliance with the terms of the agreement dated August 6, 1992, and September 28, 1995.
4. Lifting the corporate veil to determine the true nature of the transaction.
5. Impact of the transfer on the interest of the revenue.
6. Validity of notices dated January 2, 1997, and January 22, 1997.
7. Rejection of the petitioner's request by the Commercial Tax Officer on January 25, 1999.

Detailed Analysis:

1. Validity of the transfer of fixed assets to a subsidiary company under the sales tax deferral scheme:
The petitioner-company, Sri Jayajothi and Company Ltd., transferred the assets and liabilities of its "B" unit to its subsidiary, Sri Jayajothi Textile Mills (P) Ltd. This transfer was contested by the Commercial Taxes Department, arguing it violated the terms of the sales tax deferral agreement, which prohibited the alienation of fixed assets until the government loan was fully repaid.

2. Interpretation of the Government Order G.O. Ms. No. 500 dated May 14, 1990:
The petitioner argued that the primary objective of the Government Order was to encourage new industries and the expansion of existing ones in backward areas. Therefore, the creation of a subsidiary and the transfer of assets should not be seen as alienation to a third party but as part of the same business entity under the control of the holding company.

3. Compliance with the terms of the agreement dated August 6, 1992, and September 28, 1995:
The agreements explicitly prohibited the alienation of fixed assets without prior permission. The Tribunal found that the petitioner did not comply with these terms, as no approval was obtained from SIPCOT for the transfer to the subsidiary company.

4. Lifting the corporate veil to determine the true nature of the transaction:
The petitioner cited the Supreme Court judgment in State of U.P. v. Renusagar Power Co. to argue that the court should lift the corporate veil and view the subsidiary as an extension of the holding company. However, the Tribunal held that lifting the corporate veil is only justified in extreme cases, such as fraud or evasion of legal obligations, which was not applicable here.

5. Impact of the transfer on the interest of the revenue:
The Tribunal emphasized that the transfer of fixed assets to a different legal entity could potentially affect the revenue, depending on the conduct of the transferee company. Therefore, strict adherence to the terms of the agreement was necessary to safeguard the revenue's interest.

6. Validity of notices dated January 2, 1997, and January 22, 1997:
The notices were issued due to the perceived violation of the agreement terms, demanding immediate payment of the deferred sales tax and attaching the petitioner's bank accounts. The Tribunal upheld these notices, stating that the petitioner had indeed violated the agreement by transferring the assets without proper authorization.

7. Rejection of the petitioner's request by the Commercial Tax Officer on January 25, 1999:
The Commercial Tax Officer rejected the petitioner's request to amend the eligibility certificate and enter into a new agreement with the subsidiary company, citing the difference in the legal status of the companies and the lack of SIPCOT's approval. The Tribunal upheld this rejection, noting that the terms of the original agreement must be strictly enforced.

Conclusion:
The Tribunal dismissed all the original petitions, emphasizing the need for strict adherence to the terms of the agreement to protect the revenue's interest. However, it left the door open for fresh negotiations, suggesting that the respondents could consider entering into a new agreement with the subsidiary company if a fresh eligibility certificate from SIPCOT was obtained.

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