Karnataka High Court Allows Adjustment of IGST Wrongly Paid Against CGST/SGST Liability

The Karnataka High Court in M/s. GR Tech Services Pvt. Ltd. v. Assistant Commissioner of Commercial Taxes (Audit) & Ors. has reaffirmed a crucial principle under the GST regime: where an assessee has incorrectly paid IGST treating a supply as inter-State but the supply is later found to be intra-State, the amount already paid under the wrong head can be adjusted against the correct CGST/SGST liability. This must be done before initiating any coercive recovery of tax, interest, or penalty.

By applying Section 77(2) of the Central Goods and Services Tax Act, 2017 read with Rule 92 of the CGST Rules, and relying on the ratio in Saji S., Proprietor, Adithya and Ambadi Traders v. The Commissioner, State GST Department, Thiruvananthapuram & Ors., the Court set aside the existing demand and directed the original authority to freshly examine the assessee’s entitlement to such adjustment.

Background of the Dispute

Transaction Pattern and Initial Tax Treatment

M/s. GR Tech Services Pvt. Ltd. entered into supply transactions with M/s. Larsen and Toubro Limited, which operates units at both Bengaluru and Chennai, during the tax period 2019-20. Initially:

• The assessee issued invoices to the Chennai unit of Larsen and Toubro.
• These supplies were considered as inter-State.
• Accordingly, the assessee discharged tax under the IGST head on such invoices.

Subsequently, the assessee realized that, correctly viewed, the supplies were intra-State with reference to the Bengaluru unit of the same recipient. Acting on this understanding, it:

• Started raising invoices on the Bengaluru unit of Larsen and Toubro.
• Offered the tax liability under CGST and SGST in the GST returns for the relevant period.

Thus, there existed a scenario where tax had already been paid under the IGST head for transactions that were later treated as intra-State, for which CGST/SGST were also offered.

Audit Objection and Department’s Stand

During an audit, the Revenue authorities observed that the assessee had:

• Paid tax as IGST treating the supplies as inter-State, and
• Subsequently disclosed the same supplies as intra-State and offered CGST/SGST liability.

The Department took the view that:

• The assessee was obligated to first pay tax under the correct head, i.e., CGST/SGST.
• Only after such payment, a separate refund claim could be made for the amount already paid as IGST under Section 77(1) of the CGST Act.
• Until then, the tax earlier paid as IGST could not be treated as an automatic adjustment against CGST/SGST liability.

Proceedings culminated in an Adjudication Order and a subsequent recovery process, fastening the assessee with tax, interest, and penalty demands.

Adjudication, Appeal and Refund Proceedings

1. Adjudication Order

   • The Show Cause Notice issued based on audit findings resulted in an Adjudication Order dated July 30, 2024 under Section 73(9) of the CGST Act (“Impugned Order”).
   • This order effectively directed payment of CGST/SGST afresh, along with interest and penalty, ignoring the IGST already paid.

2. Appeal Dismissed on Limitation

   • The assessee’s appeal came to be dismissed vide Order-in-Appeal dated June 24, 2025.
   • The dismissal was solely on the ground of limitation, without entering into the substantive merits of the adjustment issue.

3. Recovery Proceedings

   • Based on the Adjudication Order and dismissal of appeal, a demand in Form GST DRC-13 dated May 06, 2026 was issued, initiating recovery from the bank account.