The Bombay High Court has held that payment of GST under Central GST (CGST) and State GST (SGST), instead of Integrated GST (IGST), did not justify invoking Section 74 of the Central Goods and Services Tax Act, 2017 where the payment was undisputed and there was no deliberate attempt to evade tax.
A Division Bench of Justice M. S. Karnik and Justice Sandesh D. Patil directed the authorities to transfer ₹7,65,03,407 paid under CGST and SGST to IGST, upon an application supported by proof of payment.
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The Court expressly clarified that it had decided only the adjustment of tax paid under the wrong heads. It did not determine the quantum of IGST payable and preserved the department’s right to recover any additional amount lawfully due.
The petitioner facilitated the sale of medical equipment by overseas suppliers to buyers in India. It also provided marketing, distribution and support services to group companies located outside India.
The dispute concerned amounts received from foreign group companies towards replacement of parts from inventory under warranty support services supplied under a sale commission agreement. The company had paid GST of ₹7,65,03,407 on these amounts under CGST and SGST.
However, the department issued a show-cause notice on July 16, 2024 under Section 74, seeking recovery under IGST for the same transactions and period. The Joint Commissioner subsequently confirmed the demand through an Order-in-Original dated December 31, 2024.
Aggrieved, the company approached the High Court.
The petitioner contended that the demand suffered from a jurisdictional defect because the entire tax had already been paid under CGST and SGST.
Its counsel submitted that a supply could either be an intra-State supply attracting CGST and SGST or an inter-State supply attracting IGST. According to the petitioner, the applicable rate and taxable value remained the same, leaving the amount of tax unchanged.
The company further argued that there were no revenue implications and referred to the apportionment mechanism under Section 17 of the IGST Act.
Relying on the Kerala High Court’s decision in Saji S. v. Commissioner, State GST, it submitted that the authorities could internally transfer the amount to the correct tax head instead of initiating recovery proceedings.
It also challenged the invocation of Section 74 on the ground that fraud or suppression was absent.
The Revenue argued that payment of CGST and SGST did not discharge an IGST liability because the taxes were credited to distinct sovereign accounts.
It maintained that the department had no legal obligation to adjust CGST and SGST payments against an IGST demand. According to the Revenue, the company should have applied for a refund of the tax paid under the wrong heads and separately discharged IGST.
The department also alleged that the company had systematically classified inter-State supplies as intra-State supplies and improperly claimed zero rating on non-export transactions in its GSTR-1 and GSTR-3B returns.
It contended that this amounted to suppression under Explanation 2 to Section 74. The Revenue additionally relied on the availability of an alternative remedy.
The Bench noted that the department had not denied receipt of ₹7,65,03,407 under CGST and SGST, including in its affidavit.
The principal question was whether payment under the wrong tax heads was, by itself, sufficient to invoke Section 74 to recover tax under IGST and impose a penalty.
The Court examined Section 77 of the CGST Act and Section 19 of the IGST Act, which address tax paid on transactions initially treated as intra-State supplies but subsequently held to be inter-State supplies, and the reverse situation.
Section 77(1), as reproduced in the judgment, provides for refund of CGST and SGST paid on a transaction initially considered intra-State but subsequently held to be inter-State. Section 19(2) provides that interest is not payable on the IGST amount in that situation.
The Bench also considered the refund-sanctioning provision reproduced in the judgment, including its mechanism for adjustment against outstanding demands.
Reading these provisions together, the Court concluded that the authorities could have transferred the tax paid under CGST and SGST to IGST.
The Bench drew support from Saji S., in which the Kerala High Court had held that officials should have permitted transfer from SGST to IGST when payment had been made under the wrong head.
On the invocation of Section 74, the High Court relied on the Supreme Court’s decision in Tata Steel Limited v. Union of India, cited in the judgment as 2026 SCC OnLine SC 1702.
The Supreme Court passages reproduced by the Bench emphasised that the assessing officer must be satisfied that fraud, wilful misrepresentation or suppression caused the alleged mismatch or short payment.
The foundational facts supporting that inference must be evident from the notice itself. Merely using statutory expressions does not demonstrate the application of mind required to invoke the provision.
Applying that reasoning, the High Court found that the present case did not involve a deliberate attempt to evade tax. Consequently, invoking Section 74 was uncalled for.
The Bench therefore quashed the impugned Order-in-Original.
The Court directed the company to submit an application within three weeks from the judgment, enclosing proof of payment of ₹7,65,03,407, for transfer of the amount from CGST and SGST to IGST.
Upon receipt of the application, the authorities were directed to transfer the amount forthwith.
The Court left it open to the company to appeal before the competent forum. The operative directions do not explain the nature of that amount.
The Bench expressly limited the scope of its decision to adjustment of the tax already paid under the wrong heads.
It clarified that the department remained free to initiate appropriate proceedings in accordance with law to recover any amount exceeding ₹7,65,03,407, if due and payable.
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