Isabella Mariam

The High Court of Karnataka Single Bench of Justice S.R. Krishna Kumar partly allowed a writ petition by an automobile manufacturer against tax authorities over a show-cause notice that proposed Central and State GST on dealer supplies even though IGST had been discharged. The Court held that, for determining the place of supply under Section 10(1)(a) of the IGST Act, the controlling factor is the location where the movement of goods ends for delivery to the recipient, and not the point where goods are handed over to a common carrier for transport. Consequently, it quashed the notice to the extent it raised the place-of-supply demand under the relevant audit objection, while directing the petitioner to respond to the remaining issues within eight weeks, with documents, hearing, and further action to follow in accordance with law.

The writ petition was instituted by M/s. Toyota Kirloskar Motor Pvt. Ltd., a company incorporated under the Companies Act, 1956, engaged in the manufacture and supply of motor vehicles from its manufacturing facility at Bidadi Industrial Area, Karnataka. The petition challenged a show cause notice dated 30.12.2023 and the corresponding summary in Form GST DRC-01 dated 03.01.2024, issued pursuant to audit observations covering the period April 2018 to March 2021. The notice proposed demands of CGST, KGST, IGST, and Compensation Cess, along with interest and penalty, aggregating to ₹4,507.44 crore, under multiple audit objections.

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One of the audit observations alleged incorrect determination of place of supply for inter-State supplies, contending that CGST and KGST were payable instead of IGST, based on clauses in dealership agreements and invoices indicating transfer of title upon handing over goods to a common carrier at Bidadi. The petitioner contended that IGST had already been correctly discharged under Section 10(1)(a) of the IGST Act, 2017, as the movement of goods terminated at destinations outside Karnataka. For the remaining audit objections, the petitioner sought liberty to submit replies before the adjudicating authority. The statutory provisions examined included Section 10(1)(a) of the IGST Act, 2017, and provisions of the Sale of Goods Act, 1930.

The Court examined Section 10(1)(a) of the IGST Act and recorded that “where the supply of goods involves movement of goods… the place of supply of such goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient.” The Court observed that the statutory focus is on the termination of movement for delivery, and “not when the goods are handed over to the ‘common carrier’ but only when the goods reach the destination for the purpose of enabling the recipient to obtain / take delivery.”

While noting the department’s reliance on clauses in the dealership agreement and the Sale of Goods Act, the Court recorded that the audit concluded that “delivery as per Sale of Goods Act should be deemed to have happened at the factory premises” and, on that basis, demanded CGST and KGST despite payment of IGST. The Court stated that such reasoning could not be sustained because “the place of supply of goods would have to be determined by reckoning / considering the place where the movement of goods terminates for delivery to the recipient and not at the place where the movement of goods originates.”

The Court further recorded that the supplies were undisputedly inter-State in nature and that “the liability to pay IGST under Section 10(1)(a) would arise only upon the movement of the goods terminating for delivery to the recipient at various places outside Karnataka.” It observed that the impugned demand would result in “double taxation” since IGST had already been paid on both goods and freight. The Court also recorded that non-payment of CGST or KGST in such circumstances would lead to a “revenue neutral situation,” causing no prejudice to the revenue.

Addressing the argument relating to passing of title under the Sale of Goods Act, the Court stated that “there is no nexus or connection whatsoever between passing of title of goods… and the liability to pay IGST in terms of Section 10(1)(a) of the IGST Act.” Accordingly, the Court recorded that the show cause notice, to the extent it demanded CGST and KGST on the said inter-State supplies, was “clearly erroneous, arbitrary and contrary to Section 10(1)(a) of the IGST Act.”

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The Court ordered that “the petition is hereby allowed-in-part. The impugned Show Cause Notice insofar as it relates to the demand made in paragraph 3.3 i.e., OBS 1090810 is hereby quashed. The petitioner is relegated to the stage of filing reply to the remaining issues in the impugned Show Cause Notice except issue No.1 relating to OBS 1090810, which stands quashed by this order.”

“Immediately upon petitioner filing its reply / documents, etc., to the impugned Show Cause Notice in relation to all issues other than OBS 1090810, the respondents shall consider the same and provide sufficient and reasonable opportunity to the petitioner and grant opportunity of personal hearing and thereafter proceed further in accordance with law. To enable the petitioner to effectively participate in the proceedings, Respondents are directed to furnish all relevant documents to the petitioner during the course of the proceedings.”

“Petitioner is granted eight weeks time to file reply to the aforesaid issues excluding issue No.1 pertaining to OBS 1090810, which stands answered in favour of the petitioner under this order.”

Advocates Representing the Parties

For the Petitioners: Sri. Ravi Raghavan, Advocate; Sri. Rohan Karia, Advocate; Sri. Nischal K.M., Advocate

For the Respondents: Sri. Gowthamdev C. Ullal, Central Government Counsel for Union of India; Sri. Jeevan J. Neeralgi, Advocate for Respondent Nos. 2 and 3

Case Title: M/s. Toyota Kirloskar Motor Pvt. Ltd. v. Union of India & Ors.
Neutral Citation: NC: 2025: KHC:49789
Case Number: WP No. 6126 of 2024 (T-RES)
Bench: Justice S.R. Krishna Kumar