Battle between ITC-02 and Inter-state transfer of ITC

Why do we need Advance Authority Rulings under GST? We need them because only after reaching out to an AAR, we understand that there is an underlying problem that needs our attention. Thanks to the plenteous AAR decisions, now we have great precedents from judicial forums and Interpretations available with the legal fraternity that the baby legislation feels like a toddler needing attention.

This article primarily deals with complications of implementing the Hon’ble AAR decision in the case of M/s Shilpa Medicare Limited, dated 24.02.2020 vide AARNo.05/AP/GST/2020.

The relevant brief facts of the case is that, the applicant in the instant case, a R&D unit, shifts their place of business from the state of Andhra Pradesh (AP) to the state of Karnataka. In the said process, they approached the AAR seeking opinion on whether they can utilize the ITC available in the books under the GSTIN registered with the AP unit to the new GSTIN registered under the State of Karnataka. Surprisingly, the AAR agreed with the contentions of the Applicant and allowed the transfer of credit. However, this very part is where the complication arises. When the AAR has allowed the transfer of credit from one state to another through this Ruling, it has not only made the transfer practically impossible, it also makes the very premise of transfer go against the basis of GST Law.

It is pertinent to understand the circumstances under which, the Input tax credit can be transferred. As per Section 18(3) of the CGST Act, when there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of the business, 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. In the instant case, the AAR ruled that the said transfer from one place to another is an activity covered under Sl.No.2 of chapter 99 of Notification No.12/2017- Central Tax (Rate) dated 28.6.2017, i.e Services by way of transfer of a going concern, as a whole or an independent part thereof and permitted the transfer of ITC. However, the transfer in the instant case was not the transfer envisaged in the CGST Act. In the author’s opinion, the word transfer from one place to another has been misinterpreted and equated to transfer from one person to another.

There is no change in the constitution of the registered person as envisaged in section 18 referred above, when there is a mere shifting of assets from one place to another. Furthermore, the words sale, merger, demerger, amalgamation, lease point to transactions occurring between two different persons. Under such a circumstance, by applying the Rule of Noscitur a Sociis, the word transfer has to read in the light of a transaction occurring between two different persons. In other words, when there is a difficulty in interpreting the words/phrases in a statute, this principle can be applied to interpret the ambiguous word by simply correlating the words associated with it in the statute. It is apposite to refer the case of Maharashtra University Of Health vs Satchikista Prasarak Mandal, Civil Appeal No.2050 of 2010, dated 25.02.2010, wherein reference to this Principle was made and the court observed that

“The Latin maxim Noscitur a sociis contemplates that a statutory term is recognised by its associated words. The Latin word `sociis’ means `society’. Therefore, when general words are juxtaposed with specific words, general words cannot be read in isolation. Their colour and their contents are to be derived from their context [See similar observations of Viscount Simonds in Attorney General v. Prince Ernest Augustus of Hanover, (1957) AC 436 at 461 of the report]”.

In the instant case, even though the two GSTIN are considered as distinct persons under the CGST Act, the GSTIN is obtained using the same PAN and hence do not necessarily create a change in the constitution of the registered person as per Section 18 or change in the ownership of business as per Rule 41 of the CGST Rules.

Also, if the said transfer of ITC from one state to another is permitted vide ITC-02, it means that the credit accumulated from the tax paid to the State Government of Andhra Pradesh can be used/set off against the tax that is liable to paid to the State Government of Karnataka. Such an interpretation would be completely against the premise under the entire GST Law is drafted. The CGST Act and the Rules drafted thereof are implemented in such a way that there is no cross utilization of revenue between the States. It is for this very reason why the form ITC -02 does not permit transfer of Inter-State ITC and allows only if the GSTIN of both the transferor and the transferee belong to the same state.

For instance, a Tamil Nadu registered entity, ABC Pvt Ltd., receives services from a Hotel XYZ Pvt Ltd., registered in the state of Karnataka. ABC Pvt Ltd., would receive only a CGST & SGST Invoice, as the place of supply of services rendered by XYZ Pvt Ltd., would be the place where the immovable property is located. In such a case, ABC Pvt Ltd., would not be eligible to use/utilise the CGST & SGST on the said invoice, even though the said invoice is auto populated in their GSTR-2A and fulfils the conditions under Section 16. This is so because the ITC accruing to the registered person is from a state where he has not obtained any registration. In such a circumstance, credit from a state accrued due to the payment of taxes from that state cannot be used for setting the tax liability arising in another state. Such a cross utilization of ITC was not envisaged under the GST law because the state government’s revenue in such an instance would be affected tremendously. Therefore, transfer of ITC from one state to another via ITC-02 is not a legal/possible transaction envisaged under the CGST Act/CGST Rules.

If the transfer and cross utilization between the ITC of two different states are permitted, then, it’ll also disturb the compensation payable to the State government as per the “Goods & Services Tax (Compensation to States) Act 2017.

Further even Section 20 of the CGST Act, does not enable an ISD to transfer the credit of one state to another. This is clearly to ensure that the revenue accruing to one state in terms of tax has to be in accordance to the ITC that the state has provided to the tax payer.

Therefore, in case of transfer of business or sale, demerger etc between entities located at two different states, the ideal way would be to terminate the registration in one state and get a refund of the unutilized ITC or cross charge the other entity and transfer the ITC. An alternative under ITC-02 is not a viable option for consideration. At the outset, as per the GST provisions, the transfer of ITC between two GSTINs can happen only if the transaction under Section 18 occurs between two entities located in the same state and not otherwise.