Karnataka High Court Sets Aside GST Interest & Penalty Waiver: Works Contract Tax Liability Cannot Override Statutory Scheme
Case Overview
Commissioner of Central Tax Vs Sadguru Infratech Pvt Ltd (Karnataka High Court)
The Karnataka High Court, in a significant ruling, allowed the appeal preferred by the Commissioner of Central Tax against the order of a Single Judge in W.P. No. 10163/2020. The impugned Single Judge order had issued wide-ranging directions concerning GST liability arising from works contracts executed both before and after the introduction of the GST regime. This Division Bench ruling has important implications for the mandatory nature of interest under Section 50 of the Central Goods and Services Tax Act, 2017 and the limits of judicial discretion in fiscal matters.
Background and Factual Matrix
The Contracting Structure
Sadguru Infratech Pvt Ltd (the respondent-assessee) held GST registration bearing No. 29AANCS9649H1ZG and was previously registered under the Karnataka Value Added Tax Act, 2003 (KVAT). The respondent functioned as a sub-contractor in a major infrastructure project — specifically, the survey, investigation, design, supply, installation, testing, and commissioning of a lift irrigation system, along with construction of the canal distribution system including aqueducts, for the Basaveshwar (Kempwad) Lift Irrigation Scheme in Athani Taluk, Belagavi District.
The project was originally floated by Karnataka Neeravari Nigam Limited (KNNL) and awarded to M/s Gayatri-RNS-SIPL JV (the main contractor), a joint venture of which the respondent is a constituent. The principal agreement between KNNL and the main contractor was dated 06.03.2017, entered into prior to the rollout of the GST regime.
The respondent, in turn, executed the works as a sub-contractor pursuant to a works contract dated 24.06.2017 with the main contractor, at Schedule of Rates (SR) prevailing under the VAT regime at the time.
The GST Transition Problem
Since the contract rates had been quoted on the basis of pre-GST Schedule of Rates, the element of GST — Central GST, SGST, and IGST — was not factored into the pricing. Upon the GST regime coming into force on 01.07.2017, works contracts became taxable at 18% (from 01.07.2017 to 21.08.2017) and at 12% thereafter, creating a significant incremental tax burden on the respondent.
Additionally, the respondent filed its GST returns for financial years 2017-18, 2018-19, and 2019-20 belatedly. The GST authorities placed on record that delays in payment of self-assessed tax had occurred on as many as twenty-six occasions, ranging from one day to as many as 338 days.
Notices Issued by GST Authorities
Following the belated filing of returns, the GST authorities issued:
- A notice dated 13.02.2020 in Form GST ASMT-10 demanding interest on delayed payment of tax under
Section 50of the Central Goods and Services Tax Act, 2017 - A subsequent notice dated 19.02.2020
- A recovery notice dated 18.03.2020 in Form GST DRC-13 under
Section 79(1)(c)of the said Act, addressed to the respondent's banker
The respondent challenged these notices by way of writ petition, contending that the larger question of taxability of works contracts entered into prior to 01.07.2017 was already pending consideration before the Court.
The Single Judge's Order — Key Directions
The writ petition was allowed by the Single Judge through a common order in the batch matter of Chandrashekaraiah and others v. The State of Karnataka (W.P. No. 9721/2019 and connected matters, including W.P. No. 10163/2020), decided on 11.04.2023.
The operative portion of the impugned order issued the following directions: