Impact of ITC and relevance of refund due to merger, Demerger, Spin-off and Split within India as well as Outside India.

Nowadays corporate restructuring has become a need for change in the organizational structure, or business model of a company. It is done majorly to expand the business, revive a declining business, increase a company’s value or to gain a competitive advantage, attain the benefit of synergy etc. Post this Covid-19 pandemic as well, we may notice major corporate restructuring because of the covid-19 effect. One of the forms of corporate restructuring is the transfer of existing business/part of the business to a different entity.

Understanding of terms merger, Demerger, Spin-off and Split

Merger: A merger is a corporate strategy of combining different companies into a single company in order to enhance the financial and operational strengths of both organizations. It can be made either through slump sale or itemised sale. The process requires the approval of National Company Law Tribunal (NCLT) in case of merger by companies.

Demerger: A demerger is a form of corporate restructuring in which the entity’s business operations are segregated into one or more components. It is the converse of a merger or acquisition. The process requires the approval of NCLT in case of de-merger by company.

Spin-off: A spinoff is the creation of an independent company through the sale or distribution of new shares of an existing business or division of a parent company.

Split: A split is a way of restructuring the capital structure of a company. Shareholders of a split must relinquish their shares of stock in the parent company in order to receive shares of the subsidiary company.

Being the aforementioned process subsume or create a separate person, it is very diligent evaluate the GST implications on such transfer before taking any decision in this regard. Through this article, we have made an attempt to discuss on the impact of input tax credits, pending refund proceedings and other refund options available to the transferor.

Relevance of GST laws in the intervening period of the aforementioned processes i.e. merger, demerger, amalgamation etc.

The merger, demerger or amalgamation of companies can be done only with the approval of the NCLT. The date of the NCLT order is typically subsequent to the date from which the merger, demerger, etc. is effective. The companies undergoing a change in the constitution would be treated as distinct entities till the date of order of the Court or Tribunal. The companies would have to obtain, cancel, and/or amend their registrations with the tax authorities and meet the procedural compliance requirements.

In case of any pending proceedings with the department, the tax authorities should be informed of the proposed slump sale or merger or demerger or amalgamation of companies, as well as the details of the new undertaking and the new communication address to ensure that the notices reaches the new company.

When it comes to liability, the GST law provides for transitional provisions (i.e. section 86, 86 of CGST Act, 2017). Whereas, in relation to input tax credit, it provides the mechanism to transfer the input tax credit, however it does not touch upon the intervening period proceedings of refund claims, availment of ITC on invoice bearing the name of previous entity etc.

Recently, in relation to IBC proceedings, CBIC had notified vide notification no. 11/2020 CT dated 21st March 2020, special procedures under section 148 of CGST Act enabling the Interim Resolution Professionals / Resolution Professionals to avail the input tax credit though the same is addressed in the name of the company entered into insolvency code provisions. Without touching the legal validity of such notification, it provides the intention of the lawmakers towards enabling the availment of credit.

Wherever, refund applications (i.e. in case of inverted duty structure / Zero rated supplies) were not made by the transferor, such application can’t be made by the transferee on behalf of transferor, rather either of the following can be planned –

1. Transferor file all the pending refund applications prior to corporate re-structuring (This has to be mandatorily followed where the zero rated supply of services has been made with payment of integrated tax) (or)

2. Transfer the accumulated credit to the transferor through filing ITC-02 as explained below and let the transferee to utilise the same or enabling him to file a refund application wherever applicable.

Impact on unutilized input tax credits

Input Tax Credit being a blood in the system of value additive taxation, the law GST has also considered the factor of transferring the asset – input tax credit, accrued in GST during the restructuring of the business. Article 300A of constitution of India also provides the relevance for such provision.

Hence, section 18(3) of CGST Act read with rule 41 and 41A of CGST Rules, 2017 provides an option to transfer input tax credit in consequent to merger, demerger, spin-off, or split within India. By going through the provisions provided in the law, one may infer that the transfer of the ITC under GST would be a secondary level action in the cases of corporate restructuring, since, prior to transfer of input tax credit, it is necessary that the transferee has to get himself/itself registered under GST Act.

Rule 41 of CGST Rules, 2017 reads as “A registered person shall, in the event of sale, merger, de-merger, amalgamation, lease or transfer or change in the ownership of business for any reason, furnish the details of sale, merger, de-merger, amalgamation, lease or transfer of business, in FORM GST ITC-02, electronically on the common portal along with a request for transfer of unutilized input tax credit lying in his electronic credit ledger to the transferee:

Provided that in the case of demerger, the input tax credit shall be apportioned in the ratio of the value of assets of the new units as specified in the demerger scheme.

Explanation: – For the purpose of this sub-rule, it is hereby clarified that the “value of assets” means the value of the entire assets of the business, whether or not input tax credit has been availed thereon.

The transferor shall also submit a copy of a certificate issued by a practicing-chartered accountant or cost accountant certifying that the sale, merger, de-merger, amalgamation, lease or transfer of business has been done with a specific provision for the transfer of liabilities.

The transferee shall, on the common portal, accept the details so furnished by the transferor and, upon such acceptance, the un-utilized credit specified in FORM GST ITC-02 shall be credited to his electronic credit ledger.

The inputs and capital goods so transferred shall be duly accounted for by the transferee in his books of account.

Recently, CBIC has issued a Circular No. 133/03/2020-GST dated 23rd March 2020 clarifying various issues in apportionment of ITC in case of business reorganization. Few of such issues are discussed below:

Issue Clarification given
At the time of calculation of ITC to be transferred, whether the value of the assets shall be taken at state level or at all India level? The value of the assets shall be taken at state level and accordingly ITC available at each state shall be apportioned based on the assets transferred at each state.
Is the transferor required to file ITC-02 in each state where it is registered? The transferor is required to file ITC-02 only in those states where transferor and transferee are registered.
Whether the ITC to be apportioned shall be calculated independently for CGST, SGST and IGST? No. The ITC to be apportioned shall be calculated on overall basis i.e.., total of CGST, SGST and IGST and not independently.
How to determine the amount of ITC that is to be transferred to the transferee under each tax head (IGST/CGST/SGST) while filing of FORM GST ITC – 02 by the transferor? The total ITC to be transferred shall not exceed the ITC amount to be transferred in accordance with Rule 41 of CGST Rules, 2017. However, the transferor is at his liberty to decide the amount to be transferred under each head subject to the ITC balance available with the transferor under the respective tax head –

For instance, as per our earlier example, the ITC to be transferred is Rs. 4 cr.

Following is the amount of ITC balance under each head and the ITC that can be transferred –

Tax head Balance available Amount that can be transferred Amount that can be transferred Amount that can be transferred
CGST 2 cr 2 cr NIL 1 cr
SGST 2 cr 2 cr NIL 1 cr
IGST 6 cr NIL 4 cr 2 cr
Total 10 cr 4 cr 4 cr 4 cr

Care must be taken that the total ITC to be transferred shall not exceed 4 cr.

ITC balance as on which date shall be taken for apportionment? ITC balance as on the date of filing ITC-02 shall be considered for the purpose of apportionment of the same to the transferee.
Which date shall be relevant to calculate the ratio of value of assets? The date to be taken is the appointed date of demerger/any business reorganization.

Relevance of GST refund

Even though there are no restrictions under the GST law for merger, demerger, split and spin off, to restrict only within a State, the GST portal doesn’t allow one to file ITC 02 between parties of different States.

The above reason triggers a person to claim refund under GST.

The above restriction by portal also triggers Article 19(1)(g) of Constitution of India. If there are any GST portal glitches to transfer input tax credit, it would cause the taxpayers to approach to courts through writs. Input tax being the most important and would play a vital role management of working capital of an organization, it is ensured to be transferred appropriately otherwise refund options via courts are suggested though there are no enabling refund provisions in GST law. It was decided in case of Slovak India Trading Private Limited vs. Commissioner of Central Excise (Bengaluru) [2006 (205) ELT 956 that refund on un-utilized CENVAT in their account as on the date of the closure of their factory and that, “refund claimed is eligible to the assessee and refund has to be made in cash when the assessee goes out of the erstwhile MODVAT Scheme or their unit is closed” this view was maintained by apex court of India. Thereafter, the following questions were aroused: –

(a) Whether cash refund is permissible in terms of clause (c) to the proviso to section 11B (2) of the Central Excise Act, 1944 where an assessee is unable to utilize credit on inputs?

(b) Whether by exercising power under Section 11B of the said Act of 1944, a refund of un-utilised amount of Cenvat Credit on account of the closure of manufacturing activities can be granted?

(c) Whether what is observed in the order dated 25th January 2007 passed by the Apex Court in Petition for Special Leave to Appeal (Civil) No. CC 467 of 2007 (Union of India vs Slovak India Trading Company Pvt Ltd.) can be read as a declaration of law under Article 141 of the Constitution of India?”

In the referring order, the court has found that the attempt is to claim something which the law does not permit to be claimed at all. If the law does not permit something, no provision therein should construed to hold that it is also not prohibited. It not being prohibited, the provision has been erroneously construed as permitting the refund. This would amount to rewriting the provisions or reading into them something which they themselves do not provide. In these circumstances, the court should hold that a refund of unutilised amount of Cenvat Credit on account of closure of manufacturing activities or inability to utilise input credit is not permitted. The order passed by the Hon’ble Supreme Court in Slovak India (supra) cannot be a declaration of law. It appears that the Revenue has brought to the notice of the Division Bench, the view of the larger Bench of the CESTAT in the case of Steel Strips Ltd. vs. Commissioner of Central Excise, Ludhiana5. 2011-TIOL-656-CESTAT-DEL-LB = 2011 (269) E.L.T. 257 (Tri.-LB) The Revenue relied upon this judgment while urging that the claim of refund is not a matter of right unless vested by law. The plea of injustice or hardship cannot be raised to claim refund in the absence of statutory mandate. No equity or good conscience influence fiscal courts without the same being embedded to statutory provisions. Thus, strict compliance with law in matters of refund is a pre-requisite. This larger Bench judgment in the case of Steel Strips (supra), according to the Revenue, expressly refers to all prior views of the tribunal and answers the questions, accordingly. It also decides the issue of merger, which was pressed into service. Hence, the attention of this court is invited to the view taken in this matter and though it is claimed that an appeal has been admitted against this larger Bench order by the High Court of Punjab and Haryana, still, now there is at least a certainty. Now the tribunal’s view is that refund of un-utilised Cenvat Credit on closure of unit was not admissible in the absence of express statutory mandate or provision of law.

It is well settled law that Courts in India have no authority to direct the legislature to frame a law as held by Hon’ble Supreme Court in the case of Gainda Ram & Ors v. MCD and Ors. Hence, GST Law does not provide for refund of unutilized credit in such a case, such credit would lapse.

Relevant date in case of Merge, Demerge, Spin-off or Split-off

It was held in case of CST Vs. ITC Hotels Ltd. Supreme Court holding that, in cases of Merge, Demerge, Spin-off or Split-off the date of high court order to be taken as relevant date for applying refund and not the date on which entire formalities were completed and the service provided.

GST implication on slump sale and an itemised sale

GST should not apply to the sale of a business as a whole on a going concern basis with all its assets and liabilities comprising movable and immovable property, including stock-in-trade and other goods, for a lump-sum consideration (i.e. a separate price is not assigned to each asset or liability).  Unlike a slump-sale, in an itemized sale, individual assets are transferred at a specified price for each asset transferred. Since the intention is clearly to sell goods as goods, a GST liability may apply to the consideration paid for the goods.

Transfer of Cenvat credit – judicial prouncements to understand the courts view

  • Unutilised Cenvat credit on inputs and capital goods of a company which was merged with the appellant company is available to the appellant and no prior permission from the Deputy Commissioner was required under rule 10 of the Cenvat Credit Rules, 2004. [Kiran Pondy Chems Ltd. vs. CCE (2011) 22 STR 119 (Tri. – Che.)
  • In this case the Tribunal held that where the appellant firm was converted into a Private Limited company no formal permission from the Central Excise Officers was required by the company to avail the unutilized balance of Cenvat credit lying with the firm. [Flex Art Foil Pvt. Ltd. vs. CCE(2011) 22 STR 591 (Tri-Ahmd.)
  • Where there had been only a change in the name of the assessee company without any change in the Constitution, the Tribunal held that the unutilized Cenvat credit standing in the old name of the company can be transferred in the new name of the company [ CCE vs. Sri Varahiamman Steels (P) Ltd.(2011) 23 STR 91 (Tri-Chennai)
  • CENVAT Credit cannot be denied merely based on the facts that the input service invoices were received in an earlier name of the company which had since got changed. [Showa India (P) Ltd. v. CCE(2012) 25 STR 152 (Tri- Del.)]
  • Where only the people controlling the affairs of the assessee company had changed but the assessee company continued to be the owner of factory, the Tribunal held that provisions of Rule 8 of Cenvat Credit Rules, 2002, (Corresponding to Rule 10 of the 2004 Rules) which mainly deals with transfer of cenvat credit on account of shifting of factory to another site or change in the ownership in certain specified circumstances, would not apply [Auora Foam Pvt. Ltd. v. CCE (2012) 26 STR 603(Tri – Del.)

Liability in case of amalgamation or merger of companies

When two or more companies are amalgamated or merged in pursuance of an order of court or of Tribunal or otherwise and the order is to take effect from a date earlier to the date of the order and any two or more of such companies have supplied or received any goods or services or both to or from each other during the period commencing on the date from which the order takes effect till the date of the order, then such transactions of supply and receipt shall be included in the turnover of supply or receipt of the respective companies and they shall be liable to pay tax accordingly. Notwithstanding anything contained in the said order, for the purposes of this Act, the said two or more companies shall be treated as distinct companies for the period up to the date of the said order and the registration certificates of the said companies shall be cancelled with effect from the date of the said order.

Liability in case of company in liquidation

When any company is being wound up whether under the orders of a court or Tribunal or otherwise, every person appointed as receiver of any assets of a company (hereafter in this section referred to as the “liquidator”), shall, within thirty days after his appointment, give intimation of his appointment to the Commissioner.

The Commissioner shall, after making such inquiry or calling for such information as he may deem fit, notify the liquidator within three months from the date on which he receives intimation of the appointment of the liquidator, the amount which in the opinion of the Commissioner would be sufficient to provide for any tax, interest or penalty which is then, or is likely thereafter to become, payable by the company.

When any private company is wound up and any tax, interest or penalty determined under this Act on the company for any period, whether before or in the course of or after its liquidation, cannot be recovered, then every person who was a director of such company at any time during the period for which the tax was due shall, jointly and severally, be liable for the payment of such tax, interest or penalty, unless he proves to the satisfaction of the Commissioner that such non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

Merge, Spin-off or Split – off with entity outside India

If the Merge, Spin-off or Split off involved with the company outside India, and the consideration is received in convertible foreign currency one may can claim refund of the input tax credit by considering the transaction as export of service due to the following:

  • In terms of SL No 2 of Notification No. 12/2017 CTR dated 28th June, 2017 transfer of business as going concern has been considered as a supply of services and same has been exempted from the levy of GST.[1]
  • In terms of section 13 (2) of IGST Act, 2017 “Place of supply of services where location of supplier or location of recipient is outside India” – “The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services:…”
  • In terms of section 16(2) of IGST Act, 2017 “Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.”

By above provision one may infer that, the subjected transaction can qualify as export of service thereby getting eligibility to claim refund of un-utilized input tax credit/integrated tax paid based on the option availed by the registered person under section 16 (3) of IGST Act, 2017. The time limit would be two years from the date of receipt of consideration.

In erstwhile law, a similar question came up before the High court of Karnataka in the case of CCE v ANZ international (2009) 233 ELT 40 (Kar), wherein the assessee was an EOU engaged in the manufacture of agricultural equipment which were chargeable to NIL rate of duty. They claimed refund of input credit under rule 5 which was denied on the ground that no credit could be availed in manufacture of exempted goods. The High Court held that even though the goods are exempt they are exported under bond and hence in terms of Rule 5 and 6 of CENVAT credit Rules, 2004 credit is admissible and refund is allowable.

Other Points

If the main intention of the corporate restructuring via merger, Demerger, Spin-off and Split within India is to encash the accumulated input tax credit to aid the working capital requirement of the business entity, the following factors may be considered:

  • Merge, Spin-off or Spilt of with an entity having core business of Zero-rated supplies be it may an EOU unit, SEZ unit or Advance authorization holder.
  • Instead of transferring the entire business under GST, one may also choose for individual transfer of asset in order to transfer the credit which can be used by transferee.
  • When corporate restricting made through split-off or spin off, one should look into provisions of the related parties under explanation to the section 15(5) of CGST Act, 2017 to comply with the schedule I taxability resulting in transfer of input tax credit.


Even though, the prima facie requirement of the law is to transfer of input tax credit for which there are special provisions prescribed under the law when the restructuring happening within India. The lacuna in the implementing such provisions would trigger the requirement of filing the refund applications by the registered person to protect his freedom of practising/ continuing his business and to preserve his asset (Input tax credit).

However, when that restructuring is between an entity outside India, subject to the satisfaction of the conditions of the export of service, the transferor can claim the refund of un-utilized tax credit/integrated tax paid, under the category of Zero-rated supplies.

[1] Alternate view in the industry entry in the exemption notification, doesn`t hold up the view that the levy section attracts. Schedule II SL No 4 (c ) of CGST Act, 2017 can also be referred.

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May 2021