Karnataka High Court Clarifies Section 77(2) CGST/KGST Act Bars Interest and Penalty When Tax Paid Under Wrong Head Must Be Adjusted

Karnataka High Court has delivered a significant ruling on the interpretation of Section 77(2) of the Central Goods and Services Tax/Karnataka Goods and Services Tax Act, 2017 (CGST/KGST Act) in the context of tax paid under the wrong head. The petitioner, aggrieved by an adjudication order and subsequent demand, challenged the authorities’ refusal to adjust or refund IGST wrongly paid instead of CGST/KGST, as well as the dismissal of their appeal on limitation grounds.

The dispute arose from transactions during the 2019-20 tax period, where the petitioner initially raised invoices to a vendor’s Chennai unit and paid IGST, but later realized the invoices should have been addressed to the Bengaluru unit, requiring payment of CGST/KGST. The authorities, following an audit, observed that the petitioner had wrongly remitted tax under the IGST head and insisted that the petitioner first pay the correct tax under CGST/KGST and then seek a refund for the IGST paid. The petitioner’s application for refund was rejected, as the request was made to the CGST/KGST authorities despite the IGST being paid on interstate transactions.

The petitioner’s counsel argued that Section 77(2) of the CGST/KGST Act, read with Rule 92 of the GST Rules, mandates adjustment of tax paid under the wrong head and precludes the imposition of interest or penalty. Reliance was placed on the Kerala High Court’s decision in Saji S., Proprietor, Adithya and Ambadi Traders & Another v. The Commissioner, State GST Department, Thiruvanthapuram & Ors, which held that such mistaken payments should be adjusted and not penalized.

Justice B. M. Shyam Prasad, delivering the oral order, observed that Section 77(2) expressly provides that a registered person who has paid integrated tax on a transaction considered to be an interstate supply, but which is subsequently held to be an intra-state supply, shall not be required to pay interest or tax again. The Court noted that the original authority failed to read Section 77(2) in conjunction with Rule 92, which contemplates adjustment of amounts and issuance of an order in the prescribed form.

The Court affirmed the legal proposition set out by the Kerala High Court, emphasizing that the petitioner cannot be saddled with liability for interest or penalty in such circumstances. Accordingly, the Karnataka High Court quashed the adjudication order, the order-in-original, and the demand in Form GST DRC-13, remanding the matter to the original authority for fresh consideration in light of the correct legal position.

This decision clarifies that tax authorities must adjust tax paid under the wrong head without imposing interest or penalty, and must issue appropriate orders as per the statutory framework. The ruling reinforces the principle that procedural errors in tax head selection, when rectified, should not attract punitive consequences under the CGST/KGST regime.