The Goods and Services Tax Appellate Tribunal (GSTAT), Chennai Bench, has held that a dispute concerning the transfer and availment of Input Tax Credit (ITC) following a merger involves questions of law when its resolution requires interpretation of Sections 16 and 18 of the Central Goods and Services Tax Act, 2017, read with Rule 41 of the CGST Rules.
The Tribunal held that such an appeal must be heard by a Division Bench comprising one Judicial Member and one Technical Member and cannot be assigned to a Single Member merely because the disputed tax amount is below Rs. 50 lakh.
The Division Bench of Judicial Member Praveen Kumar Jain and Technical Member Shaik Khader Rahman passed the miscellaneous order in an appeal filed by the Assistant Commissioner of GST and Central Excise, Villupuram Division, against Rockman Industries Limited.
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The departmental appeal concerns ITC amounting to Rs. 30,23,370 allegedly availed by Rockman Industries Limited after a merger or amalgamation. At this stage, the Tribunal was not deciding whether the company was ultimately entitled to the disputed credit. The limited question before it was whether the appeal involved a “question of law” within the meaning of Section 109(8) of the CGST Act and, consequently, whether it should be heard by a Single Member or a Division Bench.
Department Claims Dispute Is Factual
The Department initially submitted that the appeal did not involve any question of law. According to it, the dispute was confined to the factual issue of whether the respondent had validly availed ITC of Rs. 30.23 lakh.
Rockman Industries, however, contended that the two conditions prescribed under Section 109(8) for an appeal to be heard by a Single Member must be satisfied cumulatively.
It argued that a Single Member could hear an appeal only when the amount of tax, ITC, fine, fee or penalty involved did not exceed Rs. 50 lakh and the appeal did not involve any question of law.
Although the amount involved in the present dispute was below the statutory monetary threshold, the company maintained that the appeal raised substantial questions regarding the interpretation and application of the CGST Act. It therefore sought adjudication by a Division Bench.
Questions Raised Over ITC Following Merger
The respondent identified several legal questions arising from the departmental appeal. These included whether the substantive benefit of ITC could be denied because of a procedural lapse and whether credit could be rejected solely because the inward supply details were not reflected in Form GSTR-2A during a period preceding the introduction of Section 16(2)(aa) of the CGST Act.
The company also raised the question of whether proceedings for reversal of ITC could be initiated directly against a recipient where the relevant invoices were not reflected in the recipient’s GSTR-2A.
Another significant issue was whether the disputed credit could have been availed only through the transfer mechanism prescribed under Section 18(3) of the CGST Act read with Rule 41 of the CGST Rules.
Section 18(3) deals with the transfer of unutilised ITC in cases involving a change in the constitution of a registered person, including sale, merger, demerger, amalgamation, lease or transfer of business with specific provisions for the transfer of liabilities. Rule 41 prescribes the procedural mechanism, including the filing of Form GST ITC-02, for transferring such credit.
Statutory Interpretation Required
The Tribunal examined the Department’s own paragraph-wise response to the company’s submissions and found that the Department had itself raised issues requiring statutory interpretation.
The Department’s case was that invoices relating to Rockman Industries Chennai Private Limited were reflected in that entity’s GSTR-2A, whereas the corresponding credit was availed in the GSTR-3B return of Rockman Industries Limited.
It further pointed out that Form GST ITC-02 had separately been filed for the transfer of unutilised ITC following the merger. On that basis, the Department contended that the relevant issue was whether credit reflected against one GSTIN could be directly availed by the transferee without following the procedure prescribed under Section 18(3) and Rule 41.
According to the Tribunal, these contentions demonstrated that the matter could not be decided merely through an appreciation of facts. Its determination required an examination of the scope and interplay of Section 16(2), Section 18(3) and Rule 41, particularly in the context of a merger or amalgamation.
The questions of whether credit reflected against one GSTIN could be directly availed by a transferee and whether failure to follow the prescribed transfer mechanism constituted a procedural or substantive lapse were questions of law, the Bench observed.
Department’s Position Found Contradictory
The Tribunal also noted that the Department had specifically contended in its memorandum of appeal that the framework under Section 18(3) read with Rule 41 was mandatory and not merely directory.
The grounds of appeal asserted that compliance with the statutory mechanism was a necessary condition for a valid transfer and availment of ITC in merger cases.
In these circumstances, the Tribunal found the Department’s subsequent submission that the appeal did not involve any question of law to be inconsistent with the grounds contained in its own appeal.
The Bench observed that the CGST Act does not define the expression “question of law.” It therefore relied on the Karnataka High Court’s decision in Atria Convergence Technologies Ltd. v. Deputy Commissioner of Commercial Tax, which explained that a question would ordinarily be one of law when its answer must be found by referring to or interpreting a statutory provision.
The Tribunal held that a question of law encompasses an issue requiring the interpretation of a legal principle, statutory provision or precedent.
The Tribunal concluded that the appeal involved questions of law within the meaning of Section 109(8) of the CGST Act.
It consequently directed that the departmental appeal be heard by a Division Bench comprising one Judicial Member and one Technical Member.
The Bench clarified through the nature of its order that it had only determined the appropriate composition of the Bench. The merits of the underlying ITC dispute, including the company’s eligibility for the disputed credit and the legal effect of non-compliance with the ITC transfer mechanism, remain to be adjudicated.
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