Inter-State Transfer of Input Tax Credit under Amalgamation: A Judicial Reaffirmation of Statutory Supremacy

Abstract

The Gujarat High Court in Emerson Process Management (India) Pvt Ltd Versus Union of India & Ors., State Of Gujarat, Deputy Commissioner Of State Tax, Assistant Commissioner of State Tax, Goods And Services Tax Network. - 2026 (3) TMI 826 - GUJARAT HIGH COURT has addressed a significant lacuna under the GST regime concerning the transfer of unutilised Input Tax Credit (ITC) across State registrations pursuant to an NCLT-approved amalgamation. The Court held that neither Section 18(3) of the CGST Act, 2017 nor Rule 41 of the CGST Rules, 2017 imposes any restriction on inter-State transfer of ITC, and that portal-based limitations are ultra vires the statute. This decision reinforces the doctrine of statutory supremacy and advances the objective of seamless credit flow under GST.

1. Introduction

The Goods and Services Tax regime is premised upon the seamless flow of credit across the supply chain, thereby eliminating cascading of taxes. However, practical implementation through the GSTN portal has, at times, introduced constraints not envisaged under the statute. One such issue pertains to the transfer of ITC under business reorganisations where the transferor and transferee entities are registered in different States.

The Gujarat High Court, in Emerson Process Management (India) Pvt Ltd Versus Union of India & Ors., State Of Gujarat, Deputy Commissioner Of State Tax, Assistant Commissioner of State Tax, Goods And Services Tax Network. - 2026 (3) TMI 826 - GUJARAT HIGH COURT, has examined whether such technological limitations can override substantive statutory rights.

2. Factual Matrix

The petitioner, a multi-State registered entity, underwent amalgamation pursuant to an order of the National Company Law Tribunal. Consequent to the scheme, the entire business of the transferor entity, including its unutilised ITC, stood vested in the petitioner.

The petitioner attempted to transfer such ITC through Form GST ITC-02 under Rule 41 of the CGST Rules, 2017. However, the GST portal rejected the request on the ground that the transferor and transferee were not registered within the same State/Union Territory.

Aggrieved by such restriction, the petitioner approached the High Court under Article 226 of the Constitution.

3. Statutory Framework

3.1 Section 18(3), CGST Act, 2017

Section 18(3) provides that in case of sale, merger, demerger, amalgamation, lease or transfer of business, the registered person shall be allowed to transfer unutilised ITC to the transferee in the prescribed manner.

3.2 Rule 41, CGST Rules, 2017

Rule 41 prescribes the procedural mechanism for such transfer through Form GST ITC-02, subject to certification by a Chartered Accountant or Cost Accountant.

3.3 Absence of Territorial Restriction

Notably, neither the parent provision nor the delegated legislation imposes any restriction that such transfer must occur only between registrations within the same State.

4. Issues for Determination

1. Whether Section 18(3) read with Rule 41 permits transfer of ITC across different States pursuant to amalgamation.
2. Whether a restriction embedded in the GST portal can override statutory provisions.
3. Whether administrative or technological limitations can defeat substantive rights.

5. Judicial Analysis

5.1 Portal Restriction: A Non-Statutory Imposition

The Court observed that the restriction requiring transferor and transferee to be located in the same State was embedded in the GST portal and reflected as an endorsement in Form ITC-02. However, such restriction finds no mention in the statutory framework.

The Court held that incorporation of such a condition in a statutory form, without legislative backing, is impermissible in law.

5.2 Interpretation of Section 18(3)

The Court adopted a purposive interpretation of Section 18(3), emphasising that:

• The provision enables transfer of ITC as part of business reorganisation;
• There is no express or implied restriction on inter-State transfer;
• The objective of GST is to ensure uninterrupted credit flow.

Accordingly, the absence of prohibition cannot be construed as a restriction.

5.3 Reliance on Precedent

The Court placed reliance on the decision of the Bombay High Court in Umicore Autocat India Private Limited, (after amalgamation of M/s Umicore Anandeya India Private Limited) Versus Union of India, Goods and Services Tax Network, New Delhi, Central Board of Indirect Taxes and Customs, The Goods and Services Tax Council (GST Council), New Delhi, The State Tax Officer, Panaji, Goa, The Commissioner, CGST, Patto. - 2025 (7) TMI 1188 - BOMBAY HIGH COURT, which had addressed an identical issue and permitted inter-State transfer of ITC.

The Gujarat High Court concurred with the reasoning that technical limitations of the GSTN portal cannot override statutory entitlements.

5.4 Technological Constraints vs Legal Rights

A significant aspect of the judgment is the clear distinction drawn between procedural infrastructure and substantive law. The Court held that:

• GSTN is merely a facilitative mechanism;
• Any deficiency in the system cannot curtail vested rights;
• Authorities are obligated to provide alternative mechanisms.

5.5 Directions Issued

Recognising the absence of an enabling portal mechanism, the Court directed:

• Acceptance of manually filed Form ITC-02;
• Processing of such claims within six weeks.

6. Ratio Decidendi

The Court authoritatively held that:

In the absence of any statutory prohibition, Input Tax Credit can be transferred across States under Section 18(3) of the CGST Act pursuant to an NCLT-approved amalgamation, and such transfer cannot be denied on the basis of portal-based or administrative restrictions.

7. Critical Analysis

7.1 Reinforcement of Statutory Supremacy

The ruling reiterates the settled principle that delegated or administrative mechanisms cannot override primary legislation. The GST portal, being an executive tool, must operate within statutory confines.

7.2 Advancement of GST Objectives

By permitting inter-State transfer of ITC, the judgment aligns with the foundational GST principle of seamless credit flow, thereby preventing artificial credit blockages.

7.3 Revenue Considerations

While the Court acknowledged potential concerns regarding State revenue, particularly in relation to SGST, it confined its ruling to CGST credit. This leaves scope for future litigation on State tax components.

7.4 Judicial Consistency

The decision strengthens judicial consistency by affirming the Bombay High Court ruling in Umicore Autocat India Pvt. Ltd., thereby creating persuasive precedent across jurisdictions.

8. Unresolved Issues

• Treatment of SGST credit in inter-State transfers;
• Finality pending adjudication before the Supreme Court in Umicore;
• Absence of uniform procedural guidelines.

9. Conclusion

The Gujarat High Court's ruling marks a significant development in GST jurisprudence by clarifying that technological limitations cannot defeat statutory rights. The decision not only facilitates business reorganisations but also reinforces the integrity of the GST framework by aligning implementation with legislative intent.

Until legislative or technological corrections are introduced, this judgment will serve as a critical reference point for taxpayers and practitioners dealing with ITC transfer in multi-State structures.

By: CA. Chitresh Gupta

Mobile: 99103 67918

https://www.linkedin.com/in/ca-chitresh-gupta-22795920/