Indirect Tax Quarterly Milestones (July-September 2025)

In a significant judgment, the Bombay High Court has ruled that the transfer of unutilised Input Tax Credit (ITC) between amalgamating companies registered in different states is permissible under Section 18(3) of the Central Goods and Services Tax Act, 2017 (CGST Act) and Rule 41 of the Central Goods and Services Tax Rules, 2017 (CGST Rules).¹ The Court noted that a combined reading of these provisions establishes the legal framework for transferring ITC during business restructuring due to mergers, amalgamations, demergers, and similar transactions.

The Court emphasised that the primary objective of GST was to allow seamless credit across the supply chain and avoid the cascading effect of tax. It noted that neither Section 18(3) nor Rule 41 imposed any restriction on the transfer of ITC based solely on the geographical location of the transferor and transferee. The Court criticised the GSTN portal’s design for imposing limitations not supported by law and held that technical constraints cannot override statutory entitlements.

While the Court upheld the legality of transferring Central Goods and Services Tax (CGST) and Integrated Goods and Services Tax (IGST) credits across states post-amalgamation, it refrained from directing the transfer of State Goods and Services Tax (SGST) credits. This was due to concerns raised by revenue authorities regarding potential revenue loss to the originating state (Goa, in this case). The petitioner volunteered to forego the SGST credit, enabling the Court to safeguard taxpayer rights without triggering a conflict over inter-state SGST adjustments, which remain unresolved.

The Court reaffirmed the principle of legislative intent – that conditions not expressly stated in law cannot be read into it. This provides a favourable precedent for the legal position on inter-state ITC transfer post-amalgamation and also underscores the need for technical upgrades to the GSTN portal to ensure seamless credit flow in line with statutory provisions. It remains to be seen whether courts will adopt a similar approach when dealing with SGST credit transfers in the future.

The Karnataka High Court has ruled that if a genuine employer-employee relationship exists, salaries paid by an Indian company to expatriate employees seconded from an overseas group company are not liable to IGST.²

This decision diverges from the Supreme Court’s earlier ruling in the Northern Operating Systems (NOS) case,³ where secondment was deemed a taxable supply of manpower services. The High Court emphasised the following key factual distinctions in the present case:

Crucially, no mark-up was charged by the foreign entity to the Indian entity for the secondment, which, in the High Court’s view, reinforced the conclusion that the arrangement was not in the nature of a service transaction liable to tax, as outlined in the NOS case. Instead, the Court held that these factors collectively indicated an employer-employee relationship, falling outside the scope of supply defined under Schedule III of the CGST Act.

As an alternative argument, the Court relied on the Central Board of Indirect Taxes and Customs (CBIC) Circular No. 210/4/2024-GST, which clarifies that for related parties, where the Indian recipient is eligible to full ITC, and the Indian recipient has not raised an invoice for such arrangement (this is required under GST laws for services imported into India), the value of such services may be deemed to be ‘nil’. Accordingly, no GST was payable on the receipt of such services by the Indian host entity. The High Court concurred with a similar view taken by the Delhi High Court and held that this binding CBIC circular further neutralises any potential tax liability, even if the secondment was considered a taxable supply.

This judgment provides a notable precedent for Indian entities who have seconded employees. Businesses must carefully assess whether their secondment structures demonstrate a genuine employer-employee relationship. Where such a relationship is evident, and especially where no mark-up is charged by the foreign supplier, this ruling, supported by the CBIC circular, offers a robust defence against IGST demands.

The Delhi High Court has ruled that additional IGST cannot be imposed under the Customs Tariff Act, 1975 (CTA) on goods re-imported into India after undergoing repairs abroad.⁴

The Court held that such a transaction constitutes an “import of service” which is taxable exclusively under Section 5(1) of the Integrated Goods and Services Tax Act, 2017 (IGST Act). Consequently, the Court declared Notification No. 36/2021-Customs and Circular No. 16/2021-Customs to be unconstitutional and ultra vires the IGST Act to the extent they sought to impose an additional IGST levy on the value of repairs.

The Court held that once a transaction has been classified and taxed as a “supply of service” under the IGST Act, the authorities cannot re-characterise it as a supply of “goods” to impose an additional tax under a different statute (the CTA). The essential nature of the transaction was the provision of repair services, not the sale of goods.

The Court also held that levying IGST first on the import of service under Section 5(1) of the IGST Act and again on the value of the same service under Section 3(7) of the CTA upon re-import amounted to taxing the same transaction twice. This constituted impermissible double taxation on a single transaction, which is unconstitutional.

The Court clarified that Section 3(7) of the CTA was merely a part of the composite machinery for tax collection. It designates the customs frontier as the point of tax discharge for IGST on imported goods and does not contain the legislative power to impose a fresh tax on a service already subjected to IGST under its parent statute.

This judgment provides significant and much-needed relief to key sectors, notably aviation, shipping, oil and gas, and heavy engineering, which regularly send critical and high-value equipment abroad for repairs and maintenance.

The elimination of the double taxation burden directly reduces operational costs and improves cash flow. It provides certainty and clarity on tax positions, allowing businesses to plan their Maintenance, Repair, and Operations (MRO) activities without the risk of incurring substantial, duplicated tax liabilities. Further, the ruling opens a clear pathway for affected taxpayers to claim refunds of additional IGST that may have been paid under protest or erroneously since the 2021 notification was issued.

By firmly demarcating the boundaries between GST and Customs law and upholding the principles laid down by the Supreme Court in Mohit Minerals,⁵ the Delhi High Court has reinforced the constitutional scheme of taxation. The customs department has challenged the decision before the Supreme Court. 

The recommendations from the 56th GST Council meeting represent a significant step towards a more mature and business-friendly GST regime. For the services export sector, the proposed omission of Section 13(8)(b) is a watershed moment that will resolve years of litigation, unlock working capital, and enhance the global competitiveness of Indian firms. The introduction of an automated, risk-based provisional refund system for both zero-rated and IDS claims is a major liquidity-boosting measure that will directly benefit exporters and manufacturers by expediting cash flows. Finally, the simplification of rules for post-sale discounts will align the law with common trade practices, reduce compliance burdens, and provide much-needed legal certainty. Collectively, these reforms are expected to reduce litigation, improve the ease of doing business, and foster a more transparent and efficient indirect tax environment.