Bombay HC removes interstate restriction on Input Tax Credit transfer after merger under Section 18(3) CGST Act

The Bombay HC allowed a petition challenging restriction on transfer of unutilized Input Tax Credit following merger/amalgamation under Section 18(3) of CGST Act, 2017. The tax department had denied ITC transfer displaying message that transferee and transferor must be from same state/union territory. The petitioner entity emerged after amalgamation and sought ITC transfer from transferee company but was refused due to interstate restriction. The HC held that careful reading of Section 18(3) with Rule 41 does not impose any interstate restriction for ITC transfer to new entity following merger/amalgamation. The court emphasized legislative intention must be gathered from actual language used, noting what has been said and not said. Construction requiring addition/substitution of words should be avoided, and courts cannot reframe legislation or read words into Act without clear statutory basis. Finding no grounds to deny statutory benefit to petitioner if entitled under the scheme, the petition was disposed of favorably.

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1. ISSUES:

1. Whether Section 18(3) of the CGST Act, 2017 and Rule 41 of the CGST Rules, 2017 impose a restriction on the transfer of un-utilized Input Tax Credit (ITC) in cases of merger or amalgamation involving entities registered in different States or Union Territories.

2. Whether the transfer of un-utilized ITC from a Transferor Company registered in one State to a Transferee Company registered in another State pursuant to a scheme of amalgamation sanctioned by the National Company Law Tribunal is permissible under the GST law.

3. The scope and interpretation of the term "Registered Person" under the CGST Act, 2017 in the context of ITC transfer between entities across different States.

4. The legal effect of technical restrictions imposed by the GST Network (GSTN) portal on the transfer of ITC between entities registered in different States.

5. The applicability and distinction of precedent relating to ITC transfer, specifically the decision of the Madras High Court in MMD Heavy Machinery (India) Pvt. Ltd. regarding inter-State ITC transfer.

2. RULINGS / HOLDINGS:

1. The Court held that neither Section 18(3) of the CGST Act, 2017 nor Rule 41 of the CGST Rules, 2017 "impose any such restriction" that the transfer of un-utilized ITC on account of merger or amalgamation is prohibited merely because the Transferor and Transferee are registered in different States or Union Territories.

2. The transfer of un-utilized ITC from the Transferor Company registered in Goa to the Transferee Company registered in Maharashtra pursuant to a scheme of amalgamation sanctioned by the National Company Law Tribunal is permissible under the statutory provisions, as the Transferee has undertaken all liabilities of the Transferor.

3. The term "Registered Person" under Section 2(94) and Section 25 of the CGST Act contemplates that entities registered in different States or Union Territories are distinct persons; however, sub-section (3) of Section 18 permits transfer of ITC upon change in constitution of a registered person without imposing State-based restrictions.

4. Technical limitations of the GSTN portal, including the error message that "Transferee and Transferor should be of the same State/UT," cannot override the statutory entitlement to transfer ITC under Section 18(3) and Rule 41; such technical issues must be addressed by the GST Council and GST Network.

5. The decision of the Madras High Court in MMD Heavy Machinery (India) Pvt. Ltd. is distinguishable on facts and law, as it dealt with ITC accumulated under the erstwhile Cenvat Credit Rules on a shut-down unit prior to GST implementation, and did not involve transfer pursuant to a scheme of amalgamation under GST.

6. The un-utilized IGST and CGST credit in the electronic credit ledger of the Transferor Company shall be transferred to the Transferee Company; however, the claim for transfer of SGST credit was relinquished by the Petitioner and thus not allowed.

7. In the interim, pending necessary modifications to the GSTN portal, the transfer of ITC across States shall be effected by physical mode subject to future adjustments.

3. RATIONALE:

1. The Court applied the statutory framework under the CGST Act, 2017, particularly Chapter V (Input Tax Credit) and Rule 41 of the CGST Rules, 2017, which govern the availability and transfer of ITC on change in constitution of a registered person due to sale, merger, demerger, amalgamation, lease or transfer of business.

2. The constitutional provisions under Articles 269-A and 289, introduced by the 101st Amendment, empower the Parliament and States to levy GST and provide for apportionment of inter-State tax, forming the basis of the dual GST regime (CGST and SGST) and IGST for inter-State supplies.

3. The Court emphasized that the legislative intent is to provide a seamless chain of set-off of ITC to eliminate cascading and reduce compliance costs, and that the statutory language of Section 18(3) does not contain any explicit restriction on transfer of ITC across States in cases of amalgamation.

4. The principle of statutory interpretation was invoked to avoid reading in restrictions or conditions not expressly provided by the legislature, relying on established canons that courts cannot legislate or supply omissions (casus omissus) absent clear legislative direction.

5. The Court distinguished the MMD Heavy Machinery decision on the basis that it concerned transition of pre-GST Cenvat Credit on a non-operational unit and did not involve transfer pursuant to a merger or amalgamation under the GST regime.

6. The Court acknowledged the technical difficulties posed by the GSTN portal design, which currently facilitates only intra-State ITC transfers, and directed the GST Council and GST Network to develop mechanisms to accommodate inter-State ITC transfers arising from amalgamation or similar business reorganizations.

7. The Court's decision reflects a doctrinal affirmation of the statutory scheme permitting transfer of ITC on change in constitution of a registered person without State-wise limitation, while recognizing practical implementation challenges to be resolved administratively.

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