Chapter 1 – Introduction
The State apparatus of India as regards to Goods and Service Tax law has envisioned a destination-based tax which was implemented to negate cascading taxes and to facilitate a seamless credit flow. However, there remains friction between the tax department and taxpayers. The subsequent article is intended to highlight the persistence of the department to incorporate narrow interpretation of beneficial legislation in matters relating to cross state transfers of unutilised credits in cases mentioned u/s 18(3) of the CGST Act, 2017. The following article is an analysis of the decision rendered by the Hon’ble Andhra Pradesh.
Chapter 2 – The Holy Trinity: Section 18(3), Rule 41 and Section 25(4) of CGST Act, 2017[1].
The dispute in concern revolves around the below mentioned provisions:
a. Section 18(3) –
“(3) Where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities, the said registered person shall be allowed to transfer the input tax credit which remains unutilised in his electronic credit ledger to such sold, merged, demerged, amalgamated, leased or transferred business in such manner as may be prescribed.”
b. Rule 41 of the CGST Rules, 2017 – facilitates the enforcement of Section 18(3), prescribes the transfer of the utilised ITC vide FORM ITC-02.
c. Section 25(4) of the CGST Act, 2017 –
“(4) A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.”
Chapter 3 –let’s infiltrate the core of issue
It is imperative that we practically understand the issue with an example,
Let’s suppose – “Company A and Company B, situated in two different states, are two distinct persons registered as per Section 25(4) of the CGST Act, 2017, continuing operations under the same PAN. Now Company A transfers its unit located in one state to Company B located in another state. The above transfer was a going concern, whereby the transfer took place for zero consideration.”
From the above, the issue arises because the GST departments take a very narrow view of law. The revenue argues that “Change in Constitution” mentioned in Section 18(3), is understood as mere “internal change” i.e. change in the structure of the same registered person (change in legal entity type or PAN).
Whereas the taxpayers argue that as per Section 18(3) change in constitution includes “sale, merger, demerger, amalgamation, lease or transfer of the business with the specific provisions for transfer of liabilities”. Herein, the legislative intent renders that ITC is an asset ascribed to the business, therefore, when business is transferred as a going concern, the credit should travel with it so that the transferee can smoothly continue the operations of business.
However, the department assumes that “change in Constitution” as mere “internal change” i.e. changes in the structure of the same registered person (change in legal entity type or PAN). It concludes that since there is no change in PAN, there is no “change in constitution” hence ITC transfer as prescribed under rule 41 of the CGST Rules, 2017 is not allowed.
Chapter 4 – Judiciary (Knight in shining armour)
In the present matter, the relevant Hon’ble High Court has permitted inter-state transfer of tax credits in context of transfers and amalgamation between separate legal entities. In regard to cases where the departments have denied ITC transfers, the Judiciary has relied on legal principle established by law, whereby it has given importance to the basis that credits should move seamlessly across states in matters regarding transfer of business.
In furtherance to the above, it is pertinent to note that, the Andhra Pradesh High Court has given a favourable decision[2], whereby the Assessee being a Pharmaceutical Company transferred its R&D unit located in the state of Andhra Pradesh, to its own unit in Karnataka. Both units are under the same PAN but have separate GST registration considering subsistence of Section 25(4) of the CGST Act, 2017. The above-mentioned transfer had taken place as a going concern through an agreement for no consideration.
When the assessee in this instance approached AAAR, it concluded that credits could only be transferred in situations when the business is transferred for consideration. Furthermore, Karnataka cannot receive SGST credits that have been accrued for the State of AP. Thereafter, since the transfer occurs between two individuals of the same entity with the same PAN, it cannot be regarded as a business sale. Finally, Section 18(3) and the pertinent regulations do not apply because the constitution has not changed[3].
On the contrary, the Hon’ble Andhra Pradesh High Court, herein, concluded that, as per Entry 2 of Notification No. 12/2017-Central Tax(Rate) dated 28.06.2017, the transaction relevant to this case is considered as transfer of business as a going concern and accordingly such sale/transfer is not a supply in course or furtherance of business. Thereafter, it also emphasised that the phrase “change in the constitution of the registered person” should not carry a narrow construction as the language in the law intends to cover business transfer such as sale, merger, lease or transfer of a unit as a going concern. If the interpretation as per department is incorporated then such an interpretation would lead to an exclusion of other transactions mentioned in Section 18(3) of the CGST Act, 2017[4].
In the same matter, the Hon’ble High Court, while allowing for a transfer of ITC under CGST head or IGST head, as these are centrally administered, recommended that in case of ITC under SGST head, the issue should be placed before authorities under both states to issue a decision regarding acceptability of such a transfer[5].
In the same matter, the ruling rendered by the GOA bench of Bombay HC in case of Umicore Autocat India Pvt. Ltd. (after amalgamation of M/s Umicore Anandeya India Pvt. Ltd.) v. Union of India & Ors[6]., was referred to emphasise that the unutilised credit transfer across states is allowed.
Chapter 5 – Conclusion
The current case provides a breather to the taxpayers who are looking forward to sale, transfer or closure of their business due to amalgamation. It is important to keep above mentioned judgements in mind, as they serve as a reformist step towards enabling a harmonious system where the GST mechanism is able to meet with tough realities of economics and commerce where interstate transactions are taking place.
Furthermore, to stay true to the legislative intent of ensuring a seamless credit flow system, the author recommends that a circular be issued to explain the procedure for transferring the credits in matters relating to interstate transfer of business. Furthermore, although theoretically it may seem like an easy task to transfer the credit in case of interstate business transfers as per orders of the Hon’ble High court. But such steps will be counted as a success only if the GST portal is in proper alignment feasible for such transfer of credits. Hence, the technological arrangements such as the GST common portal should align well with the legislative intent and finally it should also be noted that tech-based limitations should not hinder the substantive rights of the assessee.
Notes:
[1] The Central Goods and Services Act, 2017
[2] Shilpa Medicare Limited Vs Union of India (Andhra Pradesh High Court)
[3] In re Deputy Commissioner of Central Tax in case of M/s. Shilpa Medicare Limited (GST AAAR Andhra Pradesh)
[4]https://www.ey.com/content/dam/ey-unified-site/ey-com/en-in/technical/alerts-hub/documents/2026/02/hc-holds-unutilised-cgst-and-igst-credit-can-be-transferred-on-business.pdf.
[5] Supra Id, 2.
[6] Umicore Autocat India Private Limited Vs Union of India (Bombay High Court)
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