Namaste DOST.

Sometimes GST disputes are not about tax rates or invoices, but about how we read the law.

This case is one such story—where the meaning of “supply”, “business”, and “change in constitution” came under sharp judicial focus.

Summary

This case deals with the transfer of an entire Research & Development (R&D) unit of a pharmaceutical company from Andhra Pradesh to Karnataka as a going concern. The tax department treated this transfer as a taxable supply of goods and denied the transfer of accumulated Input Tax Credit (ITC). The Authority for Advance Ruling initially ruled in favour of the taxpayer, but the Appellate Authority reversed that decision. The dispute finally reached the Andhra Pradesh High Court. The High Court held that sale of a business as a whole is not a supply made in the course or furtherance of business, and therefore not taxable under GST. It also clarified that ITC is an asset of the business and can be transferred under Section 18(3) of the CGST Act when the business itself is transferred.

Facts of the Case

M/s Shilpa Medicare Limited is engaged in pharmaceutical research and development.

It had two R&D units:

• One at Vizianagaram, Andhra Pradesh, registered under the APGST Act

• Another at Bengaluru, Karnataka, registered under the KGST Act

Both units were registered separately under GST, though they shared the same PAN.

In 2019, the company decided to transfer its Vizianagaram R&D unit to the Bengaluru unit. A Business Transfer Agreement dated 26.06.2019 was executed. Under this agreement:

• The entire R&D undertaking was transferred

• All assets, liabilities, employees, records, and intangibles moved together

• The transfer was as a going concern

• The transfer was made for zero consideration

After the transfer, the company approached the Authority for Advance Ruling (AAR) seeking clarity on three points:

1. Whether the transaction was a supply of goods, services, or both

2. Whether it was covered under Sl. No. 2 of Notification No. 12/2017

3. Whether unutilised ITC could be transferred through Form GST ITC-02

Legal Issue

At the heart of the dispute were two clear legal questions:

1. Is transfer of an entire business as a going concern a “supply” under Section 7 of the CGST Act?

2. If the business is transferred, can the accumulated ITC of the transferor unit also be transferred under Section 18(3)?

These questions sound simple. But the answers divided authorities at every level.

Arguments

Before the AAR

The applicant argued that:

• Transfer of a going concern is not made in the course or furtherance of business

• Even if treated as supply, it is exempt under Notification No. 12/2017

• Section 18(3) allows transfer of ITC when business is transferred

The AAR accepted these arguments and ruled that:

• The transaction was a supply of services

• It was exempt from GST

• ITC transfer through ITC-02 was permissible 

Before the AAAR

The Department appealed.

The Appellate Authority took a very different view. It held that:

• Since both units had the same PAN, the business was not transferred to “another person”

• Therefore, the going concern exception did not apply

• The transaction amounted to supply of goods between distinct persons

• Section 18(3) did not apply as there was no “change in constitution”

The AAAR set aside the AAR ruling and denied ITC transfer entirely.

That reversal is the moment many professionals will recognise—the moment when a client calls and says, “Order aa gaya hai… ab kya?”

Court’s Decision

The Andhra Pradesh High Court examined the entire chain—AAR, AAAR, and the statutory framework.

On GST Liability

The Court focused on Section 7 of the CGST Act, which defines “supply”.

It emphasised one critical phrase:

“in the course or furtherance of business.”

The Court held that:

• Sale of a business as a whole is not a transaction carried out in business

• It is a transaction by which the business itself is transferred

• Once the business is sold, there is no business left to be carried on

Relying on earlier VAT-era principles (as discussed within the judgment itself), the Court concluded that only sales in business are taxable, not sale of the business itself.

Therefore, transfer of the R&D unit as a going concern was not a taxable supply under GST.

On Exemption under Notification 12/2017

The Court noted that Notification No. 12/2017 treats transfer of a going concern as a supply of services and exempts it from tax.

Interestingly, the Court observed that there is even a doubt whether such transfer could be treated as a supply at all under GST. Still, it left that issue open because the exemption clearly applied.

Result: No GST payable.

Legal Reasoning on ITC Transfer

This is where the judgment becomes truly instructive.

The department argued that:

• Section 18(3) requires a “change in constitution”

• Change in constitution means conversion from proprietorship to company, partnership to LLP, etc.

• Since both units belonged to the same company, ITC transfer was not allowed

The Court rejected this narrow reading.

It held that:

• Section 18(3) expressly covers sale, merger, demerger, lease, or transfer of business

• In a sale, there is no internal change in the seller’s constitution

• Yet, the law still allows ITC transfer

The phrase “change in constitution” cannot be read so narrowly that it defeats the very situations listed in the section.

The Court made an important observation:

ITC represents tax already paid. It is an asset of the business.

When the business itself is transferred, it is only logical that this asset also moves with it.

Distinct Persons – A Double-Edged Sword

The department had relied heavily on the concept of distinct persons under Section 25.

The Court turned that logic around.

It held that:

• If the law treats registrations in different States as distinct persons

• Authorities cannot later argue that they are the same person to deny ITC transfer

In simple words—you cannot have it both ways.

यहाँ कानून ने साफ कहा: एक ही हाथ से ताली नहीं बजती.

Important Takeaways for Business Owners

• Going concern transfer is not business supply
  Sale of a running business is different from sale during business.

• Exemption under Notification 12/2017 is real and enforceable
  It is not just a technical entry.

• ITC is a business asset
  When the business moves, ITC can move.

• Section 18(3) must be read purposefully
  Not narrowly, not mechanically.

• AAAR is not the final word
  Judicial review still matters. And it works.

Why This Judgment Matters

This ruling restores balance in GST interpretation.

It reminds tax authorities that GST is a tax on transactions, not on restructuring decisions.

For businesses planning mergers, internal reorganisations, or unit transfers, this judgment provides long-awaited clarity.

Conclusion

This case began as a technical GST ruling request.

It ended as a lesson in statutory interpretation.

The High Court did not create new law.

It simply read the law as it is, not as it is sometimes applied.

For businesses, the message is reassuring.

For professionals, it is grounding.

And for the GST ecosystem, it is a reminder that substance still matters over form.

📞 Need help with a business transfer or ITC dispute? GST DOST is here to help you navigate it—calmly, clearly, and correctly.

FAQ

Q: What was the core dispute in this case?

A: Whether transfer of an entire R&D unit as a going concern was taxable under GST and whether accumulated ITC could be transferred.

Q: What did the Andhra Pradesh High Court decide?

A: The Court held that sale of a business as a going concern is not taxable under GST and ITC transfer is permissible under Section 18(3).

Q: Did the Court allow ITC transfer across States?

A: The Court held the principle in favour of ITC transfer and directed that the procedural aspect be examined by State authorities.

Q: Is transfer of business always exempt from GST?

A: As per this judgment, transfer of a business as a going concern is not taxable and is also covered by Notification 12/2017.

References

• M/s Shilpa Medicare Limited v. Union of India & Ors.
  Andhra Pradesh High Court, W.P. No. 15955 of 2021,
  Judgment dated 31.01.2026 

• Authority for Advance Ruling, Andhra Pradesh
  AAR No. 05/AP/GST/2020 dated 24.02.2020

• Appellate Authority for Advance Ruling, Andhra Pradesh
  AAAR/AP/07/GST/2020 dated 10.11.2020 

Written by CA Vikash Dhanania | Reviewed by GST DOST Legal Research Team | Updated on 03/02/2026

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