A GST notice alleging an incorrect place of supply typically arises where the taxpayer charged CGST and SGST on a transaction that was inter-state, or IGST on a transaction that was intra-state. The substantive tax may have been paid, but under the wrong head. The notice can demand the correct head of tax, interest and penalty unless the taxpayer invokes the adjustment mechanism under Section 77 of the CGST Act and Section 19 of the IGST Act.
The Place-of-Supply Framework
For goods, Sections 10 and 11 of the IGST Act govern; for services, Sections 12 and 13 govern depending on whether the supplier and recipient are in India or across borders. Where both are in India, Section 12 applies: the place of supply is generally the location of the registered recipient, and for unregistered recipients it is the location of the supplier, subject to the specific rules for immovable property, events, transport, restaurant and other categories. For cross-border transactions, Section 13 applies, and the place of supply is generally the location of the recipient.
The specific rules matter. Immovable property-related services use the property location; event-related services use the event location; intermediary services have their own rule; and the default rule yields to the specific rule where applicable. A taxpayer that applies the general rule without checking the specific rule can misstate the place of supply and the head of tax.
Section 77 and the Wrong-Head Adjustment
Section 77 provides relief where a taxpayer paid IGST on a transaction considered inter-state but later held to be intra-state, or paid CGST and SGST on a transaction considered intra-state but later held to be inter-state. The taxpayer must pay the correct tax and can then claim a refund of the tax wrongly paid. The Karnataka High Court has held that where GST was paid under the wrong head, the department ought to directly adjust the tax already paid instead of requiring the taxpayer to first pay under the correct head and thereafter seek a refund.
The adjustment route is the taxpayer’s primary defence against a wrong-head demand. The reply should demonstrate that the substantive tax was paid, identify the correct head, and request adjustment under Section 77 rather than a fresh demand with interest and penalty.
The Documents
The reply should include the invoice-wise place-of-supply analysis, the GSTIN and location of the recipient, the nature of the service or goods, the specific rule applied, the returns showing the tax paid under the wrong head, and the computation of the adjustment. Where the transaction is immovable-property-related, the property location evidence is essential. Where the recipient is registered, the recipient’s GSTIN and state code should be verified.
The Penalty Position
A bona fide wrong-head payment supported by the Section 77 adjustment should not attract a penalty, because the substantive tax has been paid and the error is procedural. The Karnataka High Court’s ruling supports the adjustment-first approach and discourages fresh tax and penalty. The taxpayer should frame the reply as a correction rather than a dispute, while reserving the argument that no fresh liability arises.
What the Taxpayer Should Control
The place-of-supply outcome depends on three variables: whether the specific rule was correctly applied; whether the tax was paid under the wrong head but for the correct amount; and whether the reply invokes Section 77 and requests adjustment rather than conceding a fresh demand. The taxpayer that controls these variables avoids a duplicate tax liability on a procedural error.
Call to Action: We advise taxpayers on place-of-supply notices, Section 77 wrong-head adjustments and the documentation that avoids a fresh demand. For a place-of-supply review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.