Facts of the Case

  • Assessee & Business Transaction: The petitioner, M/s. GR Tech Services Pvt Ltd., entered into commercial transactions with M/s. Larsen and Toubro Limited during the tax period 2019-20. M/s. Larsen and Toubro Limited maintained active units in both Bengaluru (Karnataka) and Chennai (Tamil Nadu).
  • Initial Tax Treatment & Mistake: For the initial months of the financial year, the petitioner mistakenly raised tax invoices on the vendor’s Chennai unit and subsequently declared and remitted Integrated Goods and Services Tax (IGST).
  • Rectification in Returns: Upon realizing that the invoices should have been directed to the vendor's unit located in Bengaluru, the petitioner rectified its tax reporting behavior in subsequent returns by offering and declaring Central Goods and Services Tax (CGST) and Karnataka Goods and Services Tax (KGST) liabilities.
  • Audit and Lower Authority Action: The discrepancies became the subject of an official audit observation. The audit authorities determined that while the petitioner had paid tax under the incorrect head, it had no option but to pay the tax under the corrected CGST/SGST head first, and then separately file a claim for the refund of the IGST paid under the wrong head in terms of Section 77(1) of the CGST/KGST Act.
  • Dismissal on Technicalities: Based on these observations, an Adjudication Order was passed under Section 73(9) on July 30, 2024. The petitioner’s statutory appeal against this order was summarily dismissed on June 24, 2025, strictly on the grounds of limitation (delay). Furthermore, the petitioner’s application seeking a refund of the IGST was rejected by the CGST/KGST authorities on the premise that the IGST was remitted on invoices meant for interstate transactions, leaving the petitioner facing a consequential demand notice in Form GST DRC-13 dated May 6, 2026.

Issues Involved

  1. Whether the GST authorities are legally mandated to adjust Integrated Goods and Services Tax (IGST) paid inadvertently under an incorrect head directly against the corresponding Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST/KGST) liabilities when there is absolutely no loss of revenue to the Government exchequer.
  2. Whether a conjoint reading of Section 77(2) of the CGST/KGST Act and Rule 92 of the GST Rules permits the systematic adjustment of tax through Form GST DRC-07 Part A as an alternative to enforcing a strict, burdensome "first-pay-then-seek-refund" mechanism.
  3. Whether the recovery and demand actions taken under Form GST DRC-13 and Section 73(9) without extending a proper personal hearing violate the principles of natural justice.

Petitioner’s Arguments

  • Conjoint Legal Interpretation: The learned counsel for the petitioner heavily placed reliance on the provisions of Section 77(2) of the CGST/KGST Act read alongside Rule 92 of the Goods and Services Tax Rules. It was argued that when an interstate supply is subsequently found to be an intrastate supply, the tax offered under the IGST head must be seamlessly adjusted against the CGST/SGST demands.
  • No Tax or Interest Liability: It was emphasized that under Section 77(2), an assessee who mistakenly pays integrated tax cannot be fastened with an additional liability to pay interest or penalty on the amount of State tax subsequently found payable. Therefore, creating a secondary demand with interest and penalty is completely illegal.
  • Reliance on Precedent: The petitioner placed reliance on the landmark judgment of the High Court of Kerala in Saji S., Proprietor, Adithya and Ambadi Traders & Another v. The Commissioner, State GST Department, Thiruvanthapuram & Ors. (2018-VIL-508-KER), where the court approved the process of complete tax adjustment across heads using Part A of Form GST RFD-07.
  • Violation of Natural Justice: The petitioner maintained that the impugned orders and subsequent demands were passed arbitrarily, bypassing the foundational principles of natural justice since no adequate opportunity for a personal hearing was provided before enforcing recovery.

Respondent’s Arguments

  • Statutory Procedure Enforced: The learned High Court Government Pleader representing Respondents No. 1 and 2 defended the actions of the department by highlighting that tax administration operates under strict statutory blocks.
  • Separate Adjustment and Refund Channels: The department contended that under the audit protocols, once a tax is paid under the wrong head, the law expects the taxpayer to first clear the liability under the correct head (CGST/SGST) and then move an independent application for a refund of the wrong IGST component under Section 77(1).
  • Maintainability and Delay: It was pointed out that the original appellate authority had rejected the appeal purely due to delay (limitation grounds), and the refund application was technically non-viable before the specific regional authorities because the initial tax was remitted under the IGST head.

Court Order / Findings

  • Interference with Technical Dismissal: The Hon'ble High Court, presided over by Mr. Justice B.M. Shyam Prasad, observed that the statutory authorities failed to read Section 77(2) of the CGST/KGST Act in total harmony with Rule 92 of the GST Rules.
  • Endorsement of the Adjustment Mechanism: The Court upheld that Rule 92 explicitly contemplates the "adjustment" of an amount to which an assessee is entitled against any outstanding tax demand under the Act, and such details must be formally issued in Part A of Form GST DRC-07 (or Form GST RFD-07).
  • Protection against Interest and Penalty: The High Court categorically held that since the petitioner mistakenly offered IGST, they cannot be heavily penalized or fastened with double tax, interest, or penalty liabilities when the entire issue is a revenue-neutral head mismatch.
  • Final Judgment: The Writ Petition was allowed-in-part. The High Court quashed the Adjudication Order dated July 30, 2024, the Order-in-Original dated June 24, 2025, and the consequential Demand Notice in Form GST DRC-13 dated May 6, 2026. The matter was remanded back to the Assistant Commissioner of Commercial Taxes (Audit), Madikeri, with instructions to re-evaluate the case and pass fresh, just orders allowing adjustments in line with the principles established by the Kerala High Court.

Important Clarification

Key Legal Takeaway: A registered taxpayer who accidentally remits IGST on a transaction that is later identified as an intra-state supply (requiring CGST/SGST) is legally insulated from paying interest or penalty on the intra-state tax due. Revenue authorities cannot force an assessee into an active financial crunch by demanding double payment; instead, they are legally obligated to evaluate the mechanism of adjusting the wrong tax pool directly against the correct tax demand under the provisions of Section 77(2) read with Rule 92.

Sections Involved

  • Section 77(1) & Section 77(2) of the Central Goods and Services Tax (CGST) Act, 2017 / Karnataka Goods and Services Tax (KGST) Act, 2017.
  • Rule 92 of the Goods and Services Tax Rules (concerning tax adjustment via prescribed forms).
  • Section 73(9) of the CGST/KGST Act, 2017 (Adjudication and demand determinations).
  • Articles 226 and 227 of the Constitution of India (Writ Jurisdiction for violation of Natural Justice).

Link to download the order - https://mytaxexpert.co.in/uploads/1783062297_339compressed.pdf

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