The Karnataka High Court has held that authorities cannot mechanically demand CGST and SGST along with interest and penalty where a taxpayer had already discharged IGST on the same transaction.
The bench of Justice B.M. Shyam Prasad directed the adjudicating authority to reconsider the matter in light of Section 77(2) of the CGST/KGST Act and Rule 92 of the GST Rules, recognizing the statutory mechanism for adjustment of tax paid under the incorrect head.
The dispute arose from GST returns relating to the financial year 2019-20. The taxpayer had initially treated its supplies as inter-State transactions and discharged Integrated GST (IGST). Subsequently, upon realizing that the invoices ought to have been issued to the Karnataka unit of its customer instead of its Tamil Nadu unit, it corrected the transactions by reporting them as intra-State supplies liable to CGST and KGST.
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During the audit, the department concluded that the taxpayer had wrongly paid IGST instead of CGST/KGST. The authorities insisted that the taxpayer first pay tax under the correct heads and thereafter separately seek refund of the IGST under Section 77(1) of the CGST/KGST Act. Based on this approach, proceedings culminated in an adjudication order under Section 73(9), which was later followed by recovery proceedings after the appeal was dismissed as time-barred.
The taxpayer argued that once IGST had already been paid on the transaction, the authorities ought either to have adjusted the amount towards the CGST/KGST liability or refunded the tax instead of raising a fresh demand with interest and penalty.
It relied upon Section 77(2) of the CGST/KGST Act and Rule 92 of the GST Rules, contending that adjustment of tax paid under the wrong head is permissible where there is no revenue loss to the Government. The petitioner also placed reliance on the Kerala High Court’s judgment in Saji S. v. Commissioner, State GST Department, which recognized such adjustment instead of compelling a fresh payment followed by refund.
The Karnataka High Court observed that Section 77(2) specifically provides protection to a registered person who has paid IGST on a transaction that is subsequently held to be an intra-State supply.
The Court noted that the provision stipulates that such a taxpayer shall not be liable to pay interest on the State tax payable merely because the transaction was initially classified under the wrong GST head.
Justice Shyam Prasad further observed that Rule 92 of the GST Rules contemplates adjustment of refundable amounts against outstanding demands. Referring extensively to the Kerala High Court’s decision, the Court held that the statutory framework recognizes adjustment rather than compelling a taxpayer to first make another payment and thereafter seek refund.
The Court found that the original adjudicating authority had failed to consider the conjoint operation of Section 77(2) and Rule 92 while raising demand along with interest and penalty.
According to the Court, if the taxpayer had already discharged IGST on the transaction, the authority was required to examine whether adjustment could be granted before fastening liability for tax, interest or penalty.
Allowing the writ petition in part, the Karnataka High Court quashed the adjudication order dated July 30, 2024; the appellate order dated June 24, 2025; and the consequential GST DRC-13 demand dated May 6, 2026.
The Court restored the matter to the original adjudicating authority with directions to reconsider the case afresh in accordance with Section 77(2), Rule 92 of the GST Rules, and the legal principles laid down by the Kerala High Court regarding adjustment of tax paid under the wrong GST head.
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