Question

This works for me

MERGE Table1 AS tgt
USING
(
    SELECT
        TOP 1
        *
    FROM
        Table2,
        (
            SELECT
                itmid
            FROM
                Table3
            WHERE
                id = @id
        ) as a
    WHERE
        id = @id
) AS src
ON ( tgt.id = src.id )
WHEN MATCHED THEN
    UPDATE SET qty = qty + @qty
WHEN NOT MATCHED THEN
    INSERT itmid
    VALUES itmid;

But when i change like this, its not working, showing error near last select

MERGE Table1 AS tgt
USING
(
    SELECT
        TOP 1
        *
    FROM
        Table2
    WHERE
        id = @id
) AS src
ON ( tgt.id = src.id )
WHEN MATCHED THEN
    UPDATE SET qty = qty + @qty
WHEN NOT MATCHED THEN
    INSERT itmid
    SELECT itmid FROM Table3 WHERE id = @id;

Answer 1

According to MSDN docs

<merge_not_matched>::=
{
    INSERT [ ( column_list ) ] 
        { VALUES ( values_list )
        | DEFAULT VALUES }
}

The syntax with INSERT from SELECT like:

  WHEN NOT MATCHED THEN
            INSERT itmid SELECT itmid FROM Table3 WHERE id=@id;

Is not allowed!

I would try to solve your problem doing another merge with Table3.