Facts of the Case

M/s BSH Household Appliances Manufacturing Pvt. Ltd., which manufactures home appliances across units in Karnataka, Maharashtra and Tamil Nadu, had expatriate employees of its German parent company deputed to each unit under a Delegation Agreement dated 1 July 2011, for the period July 2017 to June 2022. On 19 May 2022, the Supreme Court in Commissioner of Customs, Central Excise and Service Tax, Bangalore v. Northern Operating Systems Pvt. Ltd. held that such secondment of foreign group employees constitutes a taxable 'Manpower Supply Service', attracting tax on reverse charge. Within about two months of that ruling, on 20 July 2022, the petitioner voluntarily paid IGST for all three units for the entire five-year period and filed Form GST DRC-03. Despite this voluntary compliance, show cause notices were issued separately to each unit demanding interest and penalty under Section 74 of the CGST Act, 2017 for the period preceding payment, culminating in Order-in-Original No. 88/2024-25 (GST-JC) dated 2 February 2025 against the Karnataka unit.

Issues Involved

  1. Whether penalty under Section 74 of the CGST Act — which requires fraud, wilful misstatement or suppression of facts — can be levied where the tax liability itself was uncertain and turned on a legal interpretation ultimately settled only by the Supreme Court.
  2. Whether an assessee who fully disclosed the secondment arrangement in its books, contested the taxability of the transaction on bona fide legal grounds, and paid tax promptly once the Supreme Court ruled against it, can be treated as having 'evaded' tax so as to attract Section 74.
  3. Whether interest on the delayed payment is nonetheless payable even if penalty is not leviable.

Petitioner's Arguments

  • Prior to the Supreme Court's judgment in Northern Operating Systems on 19 May 2022, there was no settled liability on an Indian company to pay service tax/GST on secondment of expatriate employees from a foreign group company.
  • The petitioner made the IGST payment within about two months of the judgment being pronounced, on 20 July 2022, and filed Form GSTR-3B and Form GST DRC-03 promptly thereafter — well within the time reasonably required once the legal position was settled.
  • Since there was no delay attributable to the petitioner from the date the liability crystallised, no interest or penalty ought to be levied, and Section 74's requirement of wilful misstatement or suppression was never satisfied given full disclosure throughout.

Respondent's Arguments

  • The secondment of employees squarely fell within 'Manpower Supply Service' as conclusively held by the Supreme Court in Northern Operating Systems, and various tribunals had earlier ruled in the assessee's favour before the Supreme Court settled the question against such assessees.
  • Since the liability to pay tax was known to the petitioner from the date the services were availed (irrespective of when litigation concluded), and payment was made only after the Supreme Court's ruling rather than at the time of availing the services, Section 74 was rightly invoked and both interest and penalty were correctly levied by the adjudicating authority.

Court Order / Findings

  • The Court framed the short question as whether an assessee who challenges the taxability of a transaction, succeeds before the Tribunal, but is ultimately reversed by the Supreme Court, is liable to pay interest and penalty under Section 74.
  • It found that the secondment arrangement was fully disclosed in the petitioner's books of accounts and known to the department throughout, and that the dispute was purely one of legal interpretation — first decided in the assessee's favour by Tribunals and only later reversed by the Supreme Court.
  • On this basis it held that the basic requirement of Section 74 — evasion of tax by fraud, wilful misstatement or suppression of facts — was not attracted, since the issue was interpretational and not a case of concealment, and therefore no penalty could be levied.
  • However, it held that the petitioner would remain liable to pay interest on the belated payment of tax, computed from the date of availment of the service, factually to be determined by the adjudicating authority; the impugned order was set aside and the matter remitted for fresh consideration in these terms, with the petitioner also held eligible to avail any amnesty scheme under Section 128A of the CGST Act.

Important Clarification

  • Penalty under Section 74 of the CGST Act cannot be levied merely because a tax dispute is ultimately resolved against the assessee — the provision requires actual fraud, wilful misstatement or suppression of facts, which is absent where the transaction was fully disclosed and the dispute was genuinely interpretational, including where Tribunals initially ruled in the assessee's favour.
  • Even where penalty is knocked out on this basis, interest on the belated payment remains payable from the date the service was actually availed, since interest is compensatory and not penal in character.
  • A taxpayer who promptly pays tax once a binding Supreme Court ruling settles a previously contested legal question (here, within about two months) strengthens the case that there was no wilful default, and such a taxpayer may also remain eligible for statutory amnesty relief under Section 128A.

Sections Involved

  • Section 74, CGST Act, 2017 – demand and recovery of tax in cases involving fraud, wilful misstatement or suppression of facts, carrying higher interest and penalty exposure than Section 73.
  • Section 128A, CGST Act, 2017 – amnesty scheme providing conditional waiver of interest/penalty for specified past periods, which the Court held the petitioner remained eligible to invoke.
  • Reverse Charge Mechanism under IGST – the framework under which GST/service tax on 'Manpower Supply Service' from an overseas group entity is payable by the Indian recipient, as settled in Northern Operating Systems.

Decision – In Favour of

The decision is disposed of with directions, in favour of the assessee in part — the Section 74 penalty is set aside as legally untenable, but liability to pay interest on the belated tax payment survives and the matter is remitted for that limited determination.

Case Details

Court: High Court of Karnataka at Bengaluru. Case No.: Writ Petition No. 11574 of 2025 (T-RES). Coram: Hon'ble Mr. Justice Suraj Govindaraj. Date of Order: 16 July 2025.

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