The Madras High Court ruled that the transferor’s unfulfilled obligations under an advance license, including liabilities related to customs duty, persist post-merger and are not extinguished, further holding that these obligations are transferred to and must be discharged by the transferee in cases of merger or amalgamation.
In a case concerning the challenge of a show cause notice dated August 28, 2019, the petitioner sought relief from customs duty recovery tied to imports made under an advance license issued on November 30, 2005.
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The petitioner, Mr. Prakash Sha, representing the appellant, argued that the notice was erroneously addressed to M/s Fabritex Exports Pvt. Ltd., a company that had ceased to exist due to a merger, and further contended that the notice should be quashed as it was issued to a non-existent entity.
However, the counsel for the second respondent Mr.T.L.Thirumalaisamy countered that the Import Export Code (IEC) for M/s Fabritex Exports Pvt. Ltd. remained active and uncanceled, validating the issuance of the notice.
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The respondent further referenced communications from 2007 and 2008, where M/s Fabritex Exports Pvt. Ltd. acknowledged its difficulty in paying customs duties and agreed to settle the outstanding amounts. The petitioner had failed to fulfill export obligations tied to the license and had not produced the required Export Obligation Discharge Certificates (EODC), which prompted the demand for customs duty and interest.
The petitioner’s counsel also contended that due to the mergers first with M/s Integra Apparels and Textiles Ltd., and later with M/s Morarjee Textiles Ltd. the liabilities of Fabritex should not transfer to the petitioner. However, the respondents maintained that, under the Foreign Trade Policy, it was the company’s responsibility to update its details with the Director General of Foreign Trade (DGFT).
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After hearing both sides, the single bench of Justice C. Saravanan ruled that the merger of companies does not extinguish their liabilities. Citing provisions of the Companies Act, 1956, the court held that the transferee company inherits both assets and liabilities of the transferor company. Therefore, the petitioner, as the successor to Fabritex, remains responsible for the customs duties owed.
Further noted 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 Notice. If the liabilities of the notice Company stood undischarged, the petitioner, as the successor of the business of the notice company and as the transferee company not only acquires the liabilities of the transferor company but also its assets, unless, the liability was retained by the promoters of the transferor company. The petitioner has not filed a Scheme of Amalgamation before the Court. Therefore, Show Cause Notice proceeding cannot be scuttled.
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The court dismissed the writ petition and directed the petitioner to respond to the show cause notice within 30 days. A corrigendum to the notice would be issued, addressing the petitioner as the successor company. The respondents were instructed to adjudicate the matter within three months and complete the process within six months. Should the petitioner fail to cooperate, the respondents may confirm the demand and proceed with recovery. The petition was dismissed without costs, and all related miscellaneous petitions were closed.
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