ITC Transfer After Amalgamation Allowed Despite Different State Registrations: Gujarat HC
Input Tax Credit (ITC) is the lifeblood of GST, and any break in its seamless flow can turn a tax‑neutral transaction into a real cash cost. One recurring controversy is whether unutilised ITC can be transferred when companies amalgamate and the transferor and transferee have registrations (GSTINs) in different States. Recent High Court and advance ruling decisions, including rulings relied upon by the Gujarat High Court, have now clarified that the GST law itself does not prohibit such inter‑State ITC transfers in genuine amalgamations, and any portal‑based or departmental restriction cannot override the statute.
Statutory Framework: Section 18(3) and Rule 41
The starting point is Section 18(3) of the CGST Act, 2017, which provides that where there is a change in the constitution of a registered person on account of sale, merger, demerger, amalgamation, lease or transfer of business, the unutilised ITC may be transferred to the transferee. The manner of such transfer is prescribed in Rule 41 of the CGST Rules, 2017, which requires filing of Form GST ITC‑02 along with a certificate from a practising CA/CMA and prescribes apportionment in case of demerger based on asset values.
Notably, neither Section 18(3) nor Rule 41 contain any express condition that both the transferor and the transferee must be registered in the same State for the ITC transfer to be valid. At the same time, Section 25 of the CGST Act treats each registration (even of the same legal entity in different States) as a separate “distinct person”, which has been used by the administration to argue that ITC cannot be moved across State GSTINs on the basis of an internal amalgamation or corporate reorganisation.
The conflict has therefore been between a facilitative substantive provision (Section 18(3) read with Rule 41) and rigid portal / administrative logic based on State‑wise GSTINs.
Key Judicial Developments on Inter‑State ITC Transfer
Bombay HC (Goa Bench): Inter‑State ITC Transfer Permitted in Amalgamation
In a significant writ petition before the Goa Bench of the Bombay High Court, the transferee company sought transfer of unutilised ITC of the transferor pursuant to a court‑sanctioned amalgamation, where the transferor and transferee were registered in different States. The GSTN portal rejected Form ITC‑02 due to State‑wise registration restrictions, and the authorities refused to allow manual transfer by contending that ITC was “State specific” and not portable across GSTINs.
The High Court held as follows:
- Section 18(3) read with Rule 41 allows transfer of unutilised ITC on merger/amalgamation without any geographical limitation regarding the States in which the entities are registered.
- Rule 41 is purely procedural and cannot be read to introduce a same‑State condition which the parent statute does not impose.
- GSTN portal constraints are merely technical and cannot curtail substantive statutory rights; to the extent the system prevented inter‑State ITC transfer in amalgamation cases, it was ultra vires the Act.
- Authorities were directed to permit transfer of eligible CGST and IGST credit through a manual mechanism and the GST Council / GSTN were advised to enable such transfers via the portal in future.
This ruling is often summarised in commentaries as confirming that unutilised ITC can be transferred from a company registered in one State to another company registered in a different State following a court‑approved amalgamation, at least to the extent of CGST and IGST components.
Case Note: Cross‑State Amalgamation and GSTN Error
A detailed case analysis widely circulated in professional media describes how a petitioner attempted to transfer ₹3.57 crore of ITC (CGST, SGST and IGST) of the transferor company to the transferee under Section 18(3), but the GSTN system generated an error due to the different State GSTINs involved. The petitioner argued that there was no statutory bar to inter‑State transfer in amalgamation, and that Section 18(3) is an enabling provision which must be given full effect.
The High Court accepted that:
- Neither Section 18(3) nor Rule 41 impose any same‑State restriction.
- Reading an implied same‑State condition into Section 18(3) would be judicial legislation.
- Denial of transfer based solely on a portal error message, in spite of a court‑sanctioned amalgamation and full compliance with Rule 41, was unsustainable in law.
While the Court did not allow SGST transfer on the specific facts due to the petitioner’s concession, it nevertheless affirmed the principle that the law does not restrict cross‑State transfer of ITC in amalgamation, especially in relation to CGST and IGST.
AAR Ruling: No Bar on Cross‑State ITC Transfer Post‑Merger
The Authority for Advance Rulings (AAR) has also addressed a similar issue where a company registered in one State had merged with another entity registered in a different State, and the question was whether the closing balance of CGST and IGST in the electronic credit ledger could be shifted to the resulting entity’s GSTIN.
- Section 18 of the CGST Act explicitly permits transfer of unutilised ITC in case of a change in constitution, including mergers approved by the National Company Law Tribunal.
- There is no statutory prohibition on transfer of such ITC merely because the merger involves taxpayers registered in different States.
- Accordingly, the applicant was entitled to transfer the closing balance of CGST and IGST credit from the transferee company’s GSTIN in one State to its GSTIN in another State, and the portal’s refusal to allow such transfer could not prevail over the substantive right.
This ruling aligns with the High Court view that the GST law facilitates continuity of ITC in genuine reorganisations and does not confine such transfers to intra‑State situations.
Gujarat High Court: ITC Transfer Versus Refund After Amalgamation
While the Gujarat High Court’s most recent decisions have largely focused on refundability of unutilised ITC in amalgamation scenarios, their reasoning strongly reinforces that ITC should flow through the statutory transfer mechanism rather than being claimed as a cash refund.
Gujarat HC on Bar Against Refund Where Transfer Route Exists
In a recent case involving Alstom or a similar large corporate amalgamation, the Gujarat High Court examined a fact pattern where unutilised ITC remained in the electronic credit ledger of the transferor company after amalgamation, and the transferor sought refund under Section 54 rather than transferring the ITC under Section 18(3) read with Rule 41.
Key takeaways from the judgment include:
- Form ITC‑02 is the only lawful route for transfer of unutilised ITC in amalgamation; in this context, the provision is to be treated as mandatory.
- Once an amalgamation scheme is sanctioned and becomes effective, the transferor company ceases to exist as a taxable person and cannot claim refund of unutilised ITC, as the credit should have been moved to the transferee’s ledger via ITC‑02.
- Section 18(3) is a specific provision governing ITC in business reorganisations, and it prevails over the general refund mechanism under Section 54 for such situations.
Thus, the Gujarat HC has essentially closed the door on post‑amalgamation refund claims of unutilised ITC by the transferor, thereby nudging taxpayers to use the transfer mechanism to preserve ITC continuity.
A recent EY Tax Alert summarising the decision notes that the Court disallowed refund of ITC in amalgamation where the scheme had been implemented and emphasised that the unutilised ITC “may be transferred” to the transferee under Section 18(3), reinforcing the primacy of transfer over refund.
Legal Position on Different State Registrations: Synthesis
Putting the above rulings together, the current legal position can be distilled as follows:
- No statutory bar on cross‑State ITC transfer in amalgamation
- Section 18(3) and Rule 41 do not contain any requirement that the transferor and transferee must hold registrations in the same State.
- High Courts (notably the Bombay HC Goa Bench) and the AAR have expressly recognised that unutilised ITC, at least in respect of CGST and IGST, can be transferred between entities registered in different States pursuant to a court‑sanctioned merger or amalgamation.
- Portal/administrative restrictions cannot override the Act
- Courts have held that GSTN’s technical design or error messages cannot curtail the substantive statutory right to transfer ITC.
- Where the portal does not support such transfers, authorities can and should facilitate manual ITC transfers to give effect to Section 18(3).
- Mandatory use of Form ITC‑02 and bar on refund by transferor
- Gujarat HC has clarified that, in amalgamation, Form ITC‑02 is not optional; it is the mandated mode of moving unutilised ITC to the transferee.
- Post‑amalgamation, the transferor cannot seek refund of unutilised ITC; the only proper course is transfer of the credit to the transferee entity in accordance with Section 18(3) and Rule 41.
- Treatment of SGST component
- Some courts have, on specific facts or concessions, limited relief in respect of State tax components, particularly where the transferee does not have a corresponding registration in that State.
- However, the broader principle accepted is that there is no inherent statutory bar on transfer of ITC solely because registrations are located in different States; the exact treatment of SGST may still be influenced by the specific scheme, registrations and the reliefs claimed in the writ.
Practical Takeaways for Taxpayers and Practitioners
In light of the above jurisprudence, taxpayers planning or implementing amalgamations involving different State GST registrations should consider the following practical steps:
For ongoing or future amalgamations, structure the scheme and timelines so that there is minimal gap between effectiveness of amalgamation and filing/approval of ITC‑02, to avoid disputes around eligibility, limitation and identity of the taxable person.
Ensure that the amalgamation / merger scheme is duly sanctioned by the High Court or NCLT and that the effective date is clearly identified, as Section 22(4) and related provisions also require the transferee to obtain registration from that date.
Map the unutilised ITC (CGST, SGST, IGST) in the electronic credit ledger of the transferor as on the effective date and plan timely filing of Form ITC‑02, supported by a CA/CMA certificate as per Rule 41.
If the GSTN portal does not permit ITC‑02 filing due to cross‑State registrations, document the errors and representations, and seek manual transfer orders from jurisdictional officers relying on the Bombay HC Goa Bench ruling and related case law.
Avoid pursuing refund of unutilised ITC in the hands of the transferor post‑amalgamation, in view of the Gujarat HC’s clear stance that such refund is barred where the statute provides a specific transfer mechanism.
FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)
Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.