Case Law Details
GR Tech Services Pvt. Ltd. Vs Assistant Commissioner of Commercial Taxes (Audit) (Karnataka High Court)
When the Tax Has Already Reached the Government, Can It Be Demanded Again Merely Because It Was Paid Under the Wrong Head?
The Karnataka High Court, in GR Tech Services Pvt. Ltd. v. Assistant Commissioner, dealt with a recurring issue under the GST regime. The taxpayer had initially discharged IGST, treating the transaction as an inter-State supply. It was subsequently found that the supply was, in fact, intra-State, warranting payment of CGST and SGST. Instead of recognising that the tax had already reached the Government, the Department proceeded under Section 73, demanding CGST and SGST afresh, together with interest and penalty, while directing the taxpayer to separately pursue a refund of the IGST already paid. The High Court set aside the adjudication order and remanded the matter, holding that the authorities had failed to examine the matter in the light of Section 77(2) of the CGST Act read with Rule 92 of the CGST Rules, before fastening such liability.
While the relief granted by the Court is both equitable and commercially sensible, the legal reasoning merits closer reflection.
Section 77(2) is a limited statutory protection it merely declares that where IGST has been paid on a transaction subsequently held to be intra-State, the registered person shall not be liable to pay interest.
Section 77(2) of the KGST Act,2017 read as follows
(2) A registered person who has paid integrated tax on a transaction considered by him to be an inter-State supply, but which is subsequently held to be an intra-State supply, shall not be required to pay any interest on the amount of State tax payable.
The provision is conspicuously silent on adjustment of the tax already discharged. Equally, Rule 92 is a procedural provision governing the sanction and adjustment of refunds, it is not a source of adjudicatory power under Section 73. Whether a refund mechanism can be relied upon to justify adjustment during assessment is, therefore, a question that remains jurisprudentially open.
In my respectful view, the decision could have rested on a more enduring legal foundation as follows:
- Once the State has already received the tax, the controversy is no longer one of non-payment, but merely of payment under an incorrect statutory head. The distinction is fundamental. The dispute concerns the distribution of revenue between the Union and the State a matter of governmental accounting not the existence of tax liability itself.
- To insist that the taxpayer first discharge the tax a second time and thereafter embark upon a separate refund proceeding is to elevate procedure over substance and to impose an avoidable financial burden for no corresponding benefit to the Revenue.
Interest is compensatory it presupposes that the Revenue has been deprived of money lawfully due. Where the Government has, throughout, remained in possession of the tax, the very rationale for interest disappears a position that Section 77(2) itself recognises.
Equally, the constitutional command under Article 265 is not merely that tax must be authorised by law, but that the State cannot retain or recover amounts beyond what the law legitimately permits. A system that requires duplicate payment merely because the tax travelled through the wrong statutory channel risks sacrificing substantive justice at the altar of procedural formality.
The Karnataka High Court has undoubtedly reached a result that advances fairness. Whether the reasoning adopted provides a complete jurisprudential answer, however, is a question that may yet await authoritative consideration by the Supreme Court. Until then, the larger issue persists when the Government has already received the tax, should the law concern itself with the source of the payment or merely with ensuring that the correct sovereign ultimately receives it?
The Legislative Disconnect: A Tale of Two Mirror-Image Provisions
A closer examination of the statutory framework reveals an interesting legislative asymmetry between Section 19 of the IGST Act and Section 77 of the CGST Act.
19. (1) A registered person who has paid integrated tax on a supply considered by him to be an inter-State supply, but which is subsequently held to be an intra-State supply, shall be granted refund of the amount of integrated tax so paid in such manner and subject to such conditions as may be prescribed.
Both provisions deal with an identical legal mischief an erroneous determination of the place of supply resulting in tax being discharged under the wrong head. The only distinction lies in the direction of the error.
Where a registered person pays IGST treating a transaction as an inter-State supply, which is subsequently held to be an intra-State supply, Section 19(1) of the IGST Act expressly provides that the registered person shall be granted refunded the CGST and SGST so paid.
However, in the converse situation, where a registered person has paid IGST treating the transaction as an inter-State supply, which is subsequently held to be an intra-State supply, Section 77(2) of the CGST Act merely provides that no interest shall be payable on the CGST and SGST payable. The provision is conspicuously silent on the fate of the IGST already discharged. It neither provides for a refund, nor authorises adjustment, nor prescribes any statutory mechanism for transfer of the tax already lying with the Government.
This distinction assumes considerable significance because both provisions seek to remedy the same underlying mistake. In both situations:
- the tax has already been paid to the Government;
- there is no suppression or tax evasion;
- the dispute is confined to the head under which tax has been paid; and
- the Revenue has suffered no loss whatsoever.
Yet, while one provision expressly grants a statutory refund, the other leaves the taxpayer to navigate the general refund machinery under Section 54, procedural rules, or constitutional remedies before the High Courts.
The question that naturally arises is whether Parliament intended to create two different statutory consequences for the very same legal error. Nothing in the Statement of Objects and Reasons, the Finance Act amendments, or the scheme of the GST legislation suggests such an intention. On the contrary, both provisions are complementary in nature and were enacted to mitigate the hardship arising from incorrect determination of the place of supply.
In my respectful view, the absence of a corresponding refund provision in Section 77 is less a matter of legislative policy and more a legislative omission. It is this statutory disconnect that has compelled constitutional courts to invoke equitable principles, read Section 77 harmoniously with the refund provisions, and ultimately devise judicial solutions to a problem that ought to have been resolved by the statute itself.
Way Forward:
The Law Already Recognised the Problem it is right time for the GST System to Solve It
Perhaps the most striking aspect of this controversy is that the issue is not legislative but technological. The GST law has, through Section 77, acknowledged the consequences of payment under the wrong tax head. The difficulty arises because the GST portal still lacks a statutory workflow enabling seamless transfer of tax once the liability has already been discharged under an incorrect head.
Considering the practical hardship GSTN may examine the feasibility of developing a system functionality enabling adjustment of tax paid under the wrong head upon payment under the correct head, thereby eliminating the need for a separate refund application. The recommendation is rooted in a simple premise where the Revenue has already received the tax, the issue is merely one of accounting allocation and should not become a source of avoidable litigation.
Unfortunately, despite the legislative amendments no corresponding system functionality has yet been implemented. The only available mechanism is Form GST PMT-09 which permits transfer of unutilised balances in the Electronic Cash Ledger. It does not permit reallocation of tax that has already been utilised towards discharge of a tax liability. Consequently, taxpayers continue to be compelled to pay tax again under the correct head, pursue separate refund proceedings for the tax already paid, and often litigate for years over what is, in essence, a revenue-neutral accounting adjustment.
It is, therefore, imperative that the GST Council revisit this issue. A dedicated functionality should be introduced on the GST portal enabling a registered person to electronically apply for reallocation of tax paid under the wrong head. The application may be verified by the jurisdictional Proper Officer within a prescribed statutory timeline, following which the GSTN system should automatically transfer the amount between the respective tax heads without requiring the taxpayer to undergo refund proceedings. Such a mechanism would preserve the integrity of Government accounting while simultaneously protecting taxpayers from unnecessary blockage of working capital.
This reform would not create any additional fiscal burden upon the exchequer. On the contrary, it would reinforce the principle of revenue neutrality, substantially reduce litigation under Section 77, minimise administrative costs for both taxpayers and the Department, and further the Government’s stated commitment to Ease of Doing Business.
After nearly a decade of GST, disputes relating to payment under the wrong tax head should no longer be resolved in courtrooms. They should be resolved by the GST portal itself.
“Technology was intended to simplify compliance not to institutionalise litigation”.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The petitioner is aggrieved by the Adjudication Order dated 30.07.2024 [Annexure C] under Section 73 (9) of the Central Goods and Services Tax/Karnataka Goods and Services Tax, 2017 [for short, ‘the CGST/KGST Act’] read with the relevant Rules and the other enactments and the dismissal of the appeal against such order on the ground of limitation culminating in a demand in Form GST DRC-13. The order-in-appeal is dated 24.06.2025 which is produced as Annexure-A, and the consequential Demand in Form GST DRC-13 is dated 06.05.2026 [Annexure-B].
2. The petitioner in presenting these proceedings proposes to contend that the authorities should have either refunded the IGST wrongfully paid or adjusted the same towards the CGST/KGST liability. This contention is in the light of the following facts and circumstances:
[a] The petitioner’s transactions are with M/s. Larsen and Turbo Limited which has its units both in Bengaluru and Chennai;
[b] The transactions are relevant to the tax period 2019-20;
[c] The petitioner for the initial months has raised invoice on its vendors’ unit at Chennai and offered IGST, but upon realizing that the invoice had to be raised on the vendors’ unit at Bengaluru, it has filed returns accordingly offering CGST/KGST liability.
3. The dispute relates to the IGST offered instead of CGST/KGST, and this is the subject matter of an audit observation. The audit observation is that the petitioner has wrongly remitted ITC but it has no choice except to first paying the tax under the corrected head and then claim the refund on payment of tax made under the wrong head which could be considered under Section 77(1) of the CGST/KGST Act. The proceedings with the Show Cause Notice are closed based on the audit observation and the appeal is dismissed on the ground of delay. This Court must also observe that the petitioner’s application for refund of the IGST is rejected supposedly because the request for refund is with the CGST/KGST authorities when the IGST is offered based on invoices for interstate transaction.
4. Sri Prashanth Sabarish Shivadass, the learned counsel for the petitioner emphasizes these facts and circumstances and relies upon the provisions of Section 77(2) of the CGST/KGST Act and Rule 92 of the Goods and Services Tax Rules, 2019 [for short, ‘GST Rules’] to contend that the IGST offered should have been adjusted towards the CGST/KGST and only in the event of a shortfall, a claim could be made with interest and not otherwise. In support of this canvass, the learned counsel relies upon the decision of High Court of Kerala in Saji S., Proprietor, Adithya and Ambadi Traders & Another v. The Commissioner, State GST Department, Thiruvanthapuram & Ors1. Sri Shamanth Naik, the learned High Court Government Pleader, is heard in the facts and circumstances as recorded above and the decision of the High Court of Kerala in the light of Sections 77 (2) of the CGST/KGST Act and Rule 92 of the GST Rules.
5. This Court at the first instance must observe that Section 77(2)2of the CGST/KGST Act stipulates that a registered person, who has paid integrated tax on a transaction considered by him to be an interstate supply but which is subsequently held to be an intra-state supply, shall not be required to pay either the interest or tax. This Rule is read by the Kerala High Court in conjunction with Rule 92 of GST Rules which contemplates adjustment of an amount to which an assessee is entitled and the order that must be in Part A of Form GST DRC -07 giving the details of the adjustment as against a refund. It is in the light of these provisions the High Court of Kerala has observed thus:
As seen, Section 77 provides for the refund of the tax paid mistakenly under one head instead of another. But Rule 4 speaks of adjustment. Where the amount of refund is completely adjusted against any outstanding demand under the Act, an order giving details of the adjustment is to be issued in Part A of FORM GST RFD-07. The petitioner’s counsel lays stress on this process of adjustment and asserts that the amount remitted under one head can be adjusted under another head, for the demand can be any amount under the Act.
6. There can be no dispute that the original authority has not read the provisions of Section 77(2) of the CGST/KGST Act in conjunction with Rule 92 of the GST Rules in raising a demand on the petitioner along with interest and penalty. If the petitioner, in terms of the conjoint reading by the High Court of Kerala, cannot be fastened with the liability to pay either tax or interest or penalty because it has wrongly offered IGST, this Court is of the opinion that for just orders the original authority must consider these aspects and issue an order in the prescribed form in the light of the undisputed facts and circumstances. As such, there must be interference to remand the matter to the original authority instead of closing the proceedings at this stage. In the light of the afore, the following:
ORDER
The petition is allowed-in-part quashing the Adjudication Order dated 30.07.2024 [Annexure-C], the Order-in-Original dated 24.06.2025 [Annexure-A] and Demand in form GST DRC-13 dated 06.05.2026 [Annexure-B] restoring the proceedings to the first respondent to consider and pass orders in the light of this Court’s affirmation of the proposition exposited by the High Court of Kerala [supra].
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Disclaimer: The views expressed herein are solely those of the author and are intended to facilitate academic and professional discussion on the evolving jurisprudence under the GST laws. This post does not constitute legal advice, a legal opinion, or a definitive interpretation of the law. Readers are advised to examine the relevant statutory provisions, judicial precedents and seek professional advice before acting upon any of the views expressed herein.
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