HC holds unutilised CGST and IGST credit can be transferred on business transfer between distinct persons

 This Tax Alert summarizes a recent ruling of the Andhra Pradesh High Court (HC) ^[1] on the Goods and Services Tax (GST) implications on business transfer between distinct persons.

The assessee transferred its Research and Development unit in Andhra Pradesh (AP) to its Karnataka unit. The Appellate Authority for Advance Ruling (AAAR^[2] held such transfer as taxable supply of goods and disallowed transfer of unutilized ITC. Aggrieved the assessee filed a writ petition before the HC.

The key observations of the HC are:

• Various judgments under the erstwhile regime have made it clear that only supplies made in the course or furtherance of business are taxable and not the sale of the business itself.
• While a question arises as to whether such services could have been brought within the purview of GST regime, the Court is leaving this issue open, as the assessee would, in any event, be entitled to exemption under the notification.
• The phrase “change in the constitution of the registered person” under section 18(3) of the Central Goods and Services Tax Act,2017(CGST Act) cannot be narrowly interpreted to mean only an internal change in the transferor, as such an interpretation would exclude transfers like sale, merger, or lease of business.
• Although the AP and Karnataka units form part of the same legal entity, the GST law deem such units as “distinct persons” for GST purposes. The authorities cannot contend that they are part of the same legal entity and hence, there is no transfer of business.
• There is no issue in transferring ITC of central tax or integrated tax as these are administered by the Central Government. However, transferring ITC of state tax from AP to Karnataka involves both the States and the matter should be referred to the respective State authorities for a decision.

Basis above, HC set aside the ruling of AAAR and allowed the writ petition.

Comments:

• This ruling is important for taxpayers planning to shift business operations from one State to another.
• Goa Bench of the Bombay High Court (Writ Petition No. 463 of 2024) had earlier permitted inter State transfer of CGST and IGST credits in the context of amalgamation between separate legal entities.
• The judgment may be cited in disputes where authorities have refused ITC transfers based on State specific registrations. It strengthens the principle that ITC can move seamlessly across State boundaries in cases involving transfer of business.
• It is relevant to note that the position on SGST credit transfer remains unsettled.
• The Government may need to issue a Circular to clarify the process and mechanism for transferring credits in case of inter-state business transfers. Also, the GST portal might need to be aligned to enable the transfer of credits in such cases.