Bombay High Court Quashes GST Recovery Order Where Tax Was Paid Under the Wrong Head

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 06.11.2026

Bombay High Court Quashes GST Recovery Order Where Tax Was Paid Under the Wrong Head

The Bombay High Court has ruled that a taxpayer cannot be subjected to a fresh GST recovery and penalty under Section 74 merely because the full tax was paid under CGST and SGST instead of IGST for the same transaction.

Case overview

In DHR Holding India Private Limited v. Union of India & Ors., the Bombay High Court considered a dispute arising from the classification of GST paid on warranty-support services. DHR Holding India Private Limited facilitates sales of medical equipment by overseas suppliers to Indian buyers and provides marketing, distribution and support services to group companies outside India.

The company had paid Rs. 7,65,03,407 as CGST and SGST on amounts received from foreign group companies for replacing inventory parts under warranty-support services. The tax authorities later treated the same supplies as inter-State supplies liable to IGST and issued a show-cause notice under Section 74 of the Central Goods and Services Tax Act, 2017.

An Order-in-Original dated 31 December 2024 confirmed the IGST demand and imposed consequences under Section 74. The company challenged that order before the High Court.

The central issue: Wrong tax head, but no unpaid tax

The dispute did not turn on whether the company had paid GST at all. The revenue authorities accepted that the company had already deposited Rs. 7.65 crore. Their position was that the payment should have been made as IGST rather than split between CGST and SGST.

The company argued that:

• A supply may be classified as intra-State, attracting CGST and SGST, or inter-State, attracting IGST.
• The applicable GST rate and taxable value were the same in either scenario.
• There was no loss of revenue because IGST is ultimately apportioned between the Centre and the State.
• The issue was one of correcting the accounting head, not collecting the same tax amount again.

The department contended that CGST, SGST and IGST are credited to distinct government accounts. It argued that the taxpayer should first seek a refund of CGST and SGST and then separately pay IGST, and that the department was not required to make an adjustment.

Court’s reasoning

The High Court focused on the statutory mechanism for supplies initially treated under the wrong GST classification. It considered Section 77 of the CGST Act and Section 19 of the IGST Act, which address situations where a transaction treated as intra-State is subsequently held to be inter-State, or vice versa.

The Court held that these provisions support correction of the tax treatment without treating an already-paid tax amount as unpaid. It also referred to the GST refund rules, which permit a refund amount to be adjusted against an outstanding demand.

The Court concluded that the authorities could transfer the amount already deposited under CGST and SGST to the IGST head. A recovery proceeding under Section 74 was therefore not justified merely because the payment had been made under an incorrect tax head.

Why Section 74 could not be invoked

Section 74 is intended for cases involving tax short-payment, erroneous refund or wrongful input-tax-credit claims caused by fraud, wilful misstatement or suppression of facts. The Court found no deliberate attempt by DHR Holding India to evade tax.

Relying on the Supreme Court’s decision in Tata Steel Limited v. Union of India, the High Court emphasized that a Section 74 notice must disclose the foundational facts supporting an allegation of fraud, wilful misrepresentation or suppression. Simply using those expressions in a notice is insufficient.

Here, the company had paid the entire disputed tax amount, and the dispute concerned the head under which it was credited. On those facts, the Court found that invoking the extended and penal recovery framework of Section 74 was unwarranted.

The ruling

The Bombay High Court quashed and set aside the impugned Order-in-Original. It directed the company to apply within three weeks, with proof of payment, for transfer of Rs. 7,65,03,407 from the CGST and SGST heads to the IGST head.

Once such an application is filed, the authorities must transfer the amount forthwith.

The Court clarified that it had not determined the total IGST liability. The department remains free to initiate proceedings in accordance with law if any amount above Rs. 7,65,03,407 is legally due. Separately, for an amount of Rs. 11,36,447, the company may pursue an appeal before the competent forum.

Key takeaway for GST taxpayers

This decision draws an important distinction between non-payment of tax and payment under an incorrect GST head. Where the taxpayer has paid the full tax amount for the same transaction and period, the appropriate response may be adjustment or transfer between tax heads rather than a duplicate demand with penalty under Section 74.

The ruling also reinforces that allegations of fraud, suppression or wilful misstatement require specific supporting facts. Tax authorities cannot invoke Section 74 mechanically where the record instead shows a bona fide classification error and no apparent intent to evade tax.

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Source: Bombay High Court

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