GST on Used Motor Vehicles: Margin Scheme, ITC on Repairs, Negative Margins and a Complete Compliance Playbook

By CA Surekha Ahuja 

Kerala AAR in Goexotic Plus91 Motors (P.) Ltd. – The Definitive Law Explained

Executive Summary

The Kerala Authority for Advance Rulings in Goexotic Plus91 Motors (P.) Ltd. (AAR No. KER/42/2025 dated 11 December 2025; reported at 182 taxmann.com 676) has conclusively settled one of the most litigated issues in the used motor vehicle trade under GST.

The ruling authoritatively holds that a dealer paying GST under the margin scheme in terms of Rule 32(5) of the CGST Rules is entitled to full Input Tax Credit on repairs, refurbishment, spare parts, common overheads and capital goods, with only one restriction — no ITC can be claimed on the purchase of the used motor vehicle itself.

Further, negative margins are statutorily ignored, resulting in nil GST liability without triggering ITC reversal, provided the dealer remains compliant with the core statutory conditions.

This ruling is legally sound, textually faithful to the statute, and strategically transformative for organised used-car dealers.

Why a Special Margin Scheme for Used Motor Vehicles Exists

Used motor vehicles have already suffered indirect taxes at the time of their first supply. Taxing the entire resale value would result in double taxation without incremental value addition. To correct this distortion, Rule 32(5) of the CGST Rules introduces a special valuation mechanism whereby GST is levied only on the margin, that is:

Selling price minus purchase price

This concessional valuation is a legislative bargain. In exchange for paying tax only on value addition, the dealer agrees not to avail ITC on the purchase of the used vehicle.

Notification No. 8/2018–Central Tax (Rate) operationalises this scheme by prescribing the applicable rates and explicitly addressing the treatment of negative margins.

Statutory Architecture: How the Provisions Interlock

A correct understanding emerges only when the provisions are read together:

Section 9 establishes levy of GST on taxable supplies. Section 15 governs valuation, subject to prescribed rules. Rule 32(5) provides a special valuation rule for second-hand goods, including used motor vehicles. Notification 8/2018 prescribes the rate and conditions, including treatment of negative margins. Sections 16 and 17 govern eligibility and restrictions on Input Tax Credit.

Crucially, Rule 32(5) restricts ITC only in respect of the purchase of such goods. It does not expand the restriction to any other inward supplies.

In fiscal law, restrictions must be express and narrowly construed. This principle has been repeatedly affirmed by the Supreme Court, including in Dilip Kumar and Company v. Commissioner of Customs.

The Core Issue Before the Kerala AAR

The applicant was engaged in the business of buying and selling used motor vehicles. Before resale, the vehicles underwent:

Minor repairs and refurbishments Replacement of spare parts Denting, painting and mechanical corrections

The applicant also incurred common business expenses such as showroom rent, advertising, professional fees, telephone expenses and purchased capital goods like workshop tools and computers.

The legal question was precise:

Whether Notification 8/2018 or Rule 32(5) bars ITC not only on vehicle purchases but also on repairs, spares, refurbishment services, overheads and capital goods.

Kerala AAR’s Ruling: Clean, Narrow and Statutorily Faithful

The AAR answered the question decisively in favour of the taxpayer.

1. Scope of ITC Restriction Is Limited

The Authority examined Paragraph 2 of Notification 8/2018 and held that the denial of ITC is strictly confined to the inward supply of used motor vehicles meant for resale.

There is no legislative language extending this denial to:

Spare parts Repair or refurbishment services Common business inputs Capital goods

2. Repairs and Refurbishment Are in Furtherance of Business

The AAR recognised that minor refurbishment enhances the marketability of vehicles without altering their essential character. Such activities are integral to the business of trading in used vehicles and squarely fall within the phrase “in the course or furtherance of business” under Section 16.

3. Section 17(5) Does Not Apply

The blocking provision for motor vehicles under Section 17(5) applies to vehicles used as capital assets for transportation. It does not apply to motor vehicles held as trading stock.

Accordingly, ITC on tools, equipment and services used for refurbishing trading stock remains fully admissible.

4. Nil or Negative Margin Supplies Are Taxable Supplies

The Authority clarified that when margin is zero or negative, the supply does not become exempt. It remains a taxable supply with nil taxable value. Therefore, Rules 42 and 43 have no application, and no reversal of common ITC is required.

Treatment of Negative Margin: Statutory Finality

Notification 8/2018 expressly provides that where the margin is negative, it shall be ignored.

The legal consequences are:

No GST payable on that transaction No set-off or carry forward of negative margins Each vehicle treated as an independent supply

Importantly, ignoring negative margin does not convert the supply into an exempt supply under Section 2(47). Absence of exemption notification is fatal to any such argument.

This position aligns with multiple AAR rulings across States and reflects uniform statutory interpretation.

Margin Computation: What Must and Must Not Be Included

Margin computation under Rule 32(5) is rigid and mechanical.

Only the following are relevant:

Selling price Purchase price

The following must never be adjusted against margin:

Repair or refurbishment costs Spare parts Overheads Depreciation or notional adjustments

Valuation and ITC operate in separate statutory compartments. Mixing them is the most common cause of audit disputes.

ITC Eligibility Matrix

Used vehicle purchase – ITC not eligible Spare parts and repairs – ITC eligible Refurbishment services – ITC eligible Rent, advertisement, professional fees – ITC eligible Capital goods such as tools and computers – ITC eligible Negative margin supplies – no ITC reversal

Audit-Proof Compliance Checklist

To remain litigation-safe, dealers should ensure:

No ITC is claimed on used vehicle purchases Vehicle-wise margin working papers are maintained Repair costs are never deducted from margin ITC on repairs and overheads is booked separately Invoices clearly reflect business use Negative margins are ignored and not netted Standard operating procedures document refurbishment activity

Paras 7.4 to 7.10 of the Kerala AAR order should be specifically cited in replies to audit objections.

Strategic Tax Planning Insight

For organised dealers, the margin scheme combined with unrestricted ITC on operational inputs creates a structurally efficient GST model.

The scheme is especially beneficial where gross margins are moderate, operational costs are significant and refurbishment activity is routine.

With the post-2025 expansion of the used vehicle and electric vehicle ecosystem, this ruling provides a decisive compliance advantage to disciplined players.

Final Takeaway

The law is now clear and internally consistent:

The margin scheme restricts ITC only on the purchase of used motor vehicles. It does not, and cannot, block ITC on repairs, refurbishment, spares, overheads or capital goods. Negative margins result in nil GST without triggering reversal.

The Kerala AAR ruling in Goexotic Plus91 Motors stands on strong statutory footing and offers a robust defence framework for dealers nationwide.

For the used motor vehicle trade, this is not merely a ruling — it is a compliance blueprint.

Budget 2026 MAT Overhaul: Accumulated Credit, Carry-Forward, Transition Strategy, and Corporate Impact

 By CA Surekha Ahuja

The Union Budget 2026 introduces a major structural reform of the Minimum Alternate Tax (MAT) regime, fundamentally changing its purpose, usage, and strategic implications for domestic and foreign companies.

The key focus is how accumulated MAT credit is now restricted, the 25% usage cap upon transition, and carry-forward limitations, which require careful planning before moving from the old regime to the new tax regime. The amendments also close the historical “hidden path” that allowed companies to indefinitely defer cash outflow through MAT credits.

MAT – Pre-Budget Overview

Prior to Budget 2026:

• Applicability: Domestic companies under old regime; prescribed foreign companies.

• Rate: 15% (domestic/foreign), 9% for IFSC units (subject to conditions), plus surcharge & cess.

• MAT Credit: Excess MAT paid over normal tax could be carried forward for 15 years and set off against normal tax exceeding MAT.

• Strategic Use: Companies could remain under the old regime to accumulate MAT credit, deferring cash outflows—a major “hidden path” for corporate tax planning.

Observation: MAT acted as a timing-difference levy, allowing deferred monetization of taxes while optimizing cash flow.

Budget 2026 – Key Amendments

Feature	Amendment	Implication
MAT as Final Tax	MAT under old regime from FY 2026–27 is final	No new MAT credit; eliminates deferred recovery
MAT Rate	15% → 14%	Partial relief on cash outflow, especially for foreign companies
Accumulated MAT Credit – Domestic Companies	Can be used only upon transition to the new regime; usage capped at 25% of current year tax liability	Forces strategic planning on when and how much credit to utilize
Carry-Forward Limitation	Carry-forward is allowed for up to 15 years, but only for the portion of MAT credit actually utilized in the transition year	Remaining unused MAT credit beyond 25% cap cannot be carried forward
Foreign Companies	Full accumulated MAT credit till 31 Mar 2026 can be used without cap; carry-forward up to 15 years	Transition timing less critical; easier credit monetization
Scope	Corporate assessees only; AMT for non-corporates unchanged	Non-corporates outside the reform

Clarification: For domestic companies, carry-forward does not apply to the full accumulated MAT credit, but only to the fraction actually used during the year of transition to the new regime. Any portion exceeding the 25% cap cannot be carried forward and is effectively lost.

Government Intent

1. Simplification:

   • Eliminates dual computation (book profits vs taxable income), reducing compliance and litigation risks.

2. Encouraging Migration to New Regime:

   • By restricting MAT credit utilization, companies are incentivized to transition from the old regime.

3. Fiscal Certainty:

   • Limits deferred tax liabilities and improves predictability of government receipts.

4. Closing Loopholes:

   • Companies could previously remain in the old regime indefinitely, accumulating MAT credits while leveraging exemptions.

   • Budget 2026 closes this pathway, ensuring MAT functions as a final, predictable tax.

Impact – Domestic Companies

1. Transition Timing:

   • Early transition (FY 2025–26): MAT credit cannot be used; accumulated credit may be lost.

   • Transition in FY 2026–27: Only 25% of current year’s tax liability can be offset; unused credit beyond 25% is lost.

2. Cash Outflow vs Total Tax Liability:

   • Pre-Budget: MAT credit could minimize cash outflows.

   • Post-Budget: MAT is final, and only partial credit reduces cash outflow, increasing net cash requirement.

3. Carry-Forward Limitation:

   • Carry-forward allowed only for the portion of MAT credit actually used in the transition year.

   • Example: If a company has ₹10 Cr MAT credit and can use only ₹2.5 Cr in transition year (25% cap), carry-forward is allowed for ₹2.5 Cr only. The remaining ₹7.5 Cr cannot be carried forward.

4. Sectoral Considerations:

   • SEZ, IFSC, and other incentivized units often hold high MAT credits; transition planning is critical to avoid substantial cash outflow shocks.

Impact – Foreign Companies

• Full MAT credit utilization allowed; carry-forward up to 15 years.

• Reduced MAT rate (14%) lowers immediate cash outflow.

• Timing of transition is less critical, but credit computation must be precise.

Key Factors for Transition Decision

Factor	Consideration
Accumulated MAT Credit	High credit → delay transition to maximize 25% utilization
Current Year Tax Liability	Model cash outflow vs partial credit offset
Cash Flow Impact	Higher immediate outflow if majority of credit is blocked by cap
Business Model / Sector	SEZ, IFSC units disproportionately impacted
Compliance & Governance	Board approval required; maintain audit trail of calculations
Policy Alignment	Leverage reduced MAT rate and new regime benefits

Illustrative Scenarios

Company	MAT Credit Accumulated	Transition Year	Credit Utilized (25% cap)	Carry Forward	Cash Outflow	Observation
Domestic SEZ	₹10 Cr	FY 2026–27	₹2.5 Cr	15 years for ₹2.5 Cr	₹7.5 Cr unrecoverable	Partial credit utilization; high cash outflow
Domestic Non-SEZ	₹1 Cr	FY 2026–27	₹0.25 Cr	15 years for ₹0.25 Cr	₹0.75 Cr unrecoverable	Low impact; early transition feasible
Domestic – Early Transition FY 2025–26	₹5 Cr	FY 2025–26	0	0	₹5 Cr unrecoverable	Premature transition → forfeited credit
Foreign Company	₹5 Cr	FY 2026–27	100%	15 years	Cash outflow reduced by 14% MAT rate	Full credit set-off allowed; timing less critical

Decision Insight:

• Companies with high accumulated MAT credit should delay transition to maximize partial utilization and carry-forward.

• Companies with low MAT credit can transition early to simplify compliance.

Caution Points

1. MAT Credit Forfeiture Risk: Early transition before FY 2026–27 may result in loss of accumulated credit.

2. 25% Utilization Cap: Only a fraction of credit can be applied in transition year; plan multi-year cash flow.

3. Sectoral Impact: SEZ/IFSC units may face large cash outflows; careful planning required.

4. Governance & Documentation: Maintain audit trail, board approvals, and MAT credit calculations.

5. Policy Monitoring: Follow CBDT FAQs and circulars for precise computation rules.

Conclusion

Budget 2026 transforms MAT into a final levy, fundamentally changing corporate tax strategy:

• Domestic companies: Must strategically plan transition year, partial credit utilization (25% cap), and cash outflows.

• Foreign companies: Full credit utilization remains; reduced MAT rate offers relief.

• Carry-forward now applies only to the portion of credit actually used in transition year—unused accumulated credit beyond 25% is lost.

Key Takeaway: MAT is no longer a deferred tax lever. The timing of regime transition, cash outflow modeling, and partial credit utilization strategy now determine the net corporate tax outcome. Companies must adopt a scenario-driven, analytical approach to optimize tax planning under the new framework.

 

Foreign Entertainers, Hotel Events & Cross-Border Payments

A Complete Compliance Playbook on Section 194E vs 195, Expense Recognition, Advances, GST RCM and FEMA

By CA Surekha Ahuja

Why This Topic Deserves Special Attention 

Hotels, resorts, luxury venues, event companies and corporates increasingly engage foreign magicians, artists, musicians, DJs, sports personalities and performers for India-based events.

What appears to be a simple professional fee payment often turns into:

• wrong section TDS deduction,

• disallowance of expense u/s 40(a)(i),

• payer deemed assessee-in-default u/s 201,

• GST RCM omissions,

• FEMA remittance blocks by banks.

The single biggest error seen in practice:

Blindly applying Section 195 instead of Section 194E

This guidance note resolves that — conclusively and lawfully.

Core Legal Architecture: Why Section 194E Overrides Sec.195

Statutory Position

• Section 194E applies to payments to non-resident sportsmen or entertainers for performance in India.

• Section 195 is a general withholding provision for sums chargeable to tax paid to non-residents.

Interpretative Rule (Settled Law)

Specific provision overrides general provision

Section 194E is:

• a self-contained code

• contains a non-obstante mechanism through Section 115BBA

• designed specifically for entertainers & sportsmen

Result:
Once a person qualifies as an “entertainer”, Section 195 steps out completely.

Who Qualifies as an “Entertainer” (Practical Test)

An entertainer includes:

• Magicians

• Musicians / singers

• DJs / live performers

• Stage artists

• Performers at hotel events, weddings, corporate nights

Key test:
If income arises from performance before an audience in India, Section 194E applies — regardless of:

• whether payment is lump sum,

• whether performance is one-day,

• whether it is called “professional fee”.

Why Section 194E Is Payer-Friendly (and Safer Than 195)

Section 194E – Gross Basis Taxation

• Flat 20% on gross amount

• No deduction for:

  • travel,

  • accommodation,

  • props,

  • agent commission,

  • rehearsals

• No profit estimation

• No Section 195(2) application

• No Rule 37BC debate

Section 195 – Net Basis Risk

• Requires estimation of net taxable income

• Requires expense attribution

• CA assumes risk in Form 15CB

• Under-deduction → payer liability

Professional insight:

From a payer’s risk perspective, 194E is the safest withholding provision in the Act.

Advance Payments: Timing of TDS & Expense Recognition

Income-tax Law Principle

TDS is deductible:

• at the time of credit or payment, whichever is earlier

Illustration

• Feb 2026: USD 2,500 advance paid

• April 2026: USD 2,500 balance paid

✔ TDS under 194E must be deducted on BOTH payments, even though:

• performance occurs later,

• advance is refundable only on cancellation.

Accounting Treatment (Hotel Books)

• At advance stage:

  • Dr. Advance to Performer

  • Cr. Bank

• Expense recognised only post-performance

• TDS deposited immediately — no mismatch risk

Critical caution:
Failure to deduct TDS on advance = permanent disallowance even if deducted later.

Expense Allowability in Hotel Books (40(a)(i) Protection)

A hotel’s expense is allowable if:

• TDS under correct section (194E) is deducted

• Deposited within due dates

• Form 16A issued

• 27Q filed correctly

Common error:

“Since expense relates to next year, TDS can be deducted later”

Incorrect.
TDS obligation is transaction-linked, not expense-linked.

DTAA: When It Helps and When It Doesn’t

Article 17 of Most DTAAs

• Allows source country (India) to tax entertainer income

• Usually no exemption

• Reduced rate (10–15%) only if explicitly provided

Reality check:

• DTAA rarely overrides 194E

• DTAA relief is exceptional, not default

• Burden of proof lies on payer + CA

Form 15CB: Why 194E Certification Is Easier & Safer

Under 194E

CA certifies:

• Nature: Entertainer income

• Section: 194E r/w 115BBA

• Basis: Gross

• Rate: Flat

No estimation, no assumptions.

Under 195

CA must:

• estimate expenses,

• assume profit margin,

• apply DTAA,

• risk under-certification.

Professional verdict:

For events and performances, 194E is the gold-standard compliance path.

GST Reverse Charge (RCM): Parallel but Independent

Why GST Applies

• Import of services

• Artistic / performance service

• Supplier non-resident, no GST registration

Rate

• 18% IGST under RCM

Key Points

• GST payable even on advance

• Paid in cash ledger

• ITC available (if output taxable)

Important distinction:
GST compliance is independent of TDS compliance — both must be done.

FEMA Compliance: Remittance Without Red Flags

Nature

• Current account transaction

• Artistic services

Process

• Form 15CA + 15CB mandatory

• Purpose code (artistic services)

• Contract + passport copy

• No RBI approval needed under limits

Risk area:
Banks reject remittances if section mismatch (195 vs 194E) appears.

Common Mistakes That Trigger Litigation

Mistake	Consequence
Using 195 instead of 194E	Assessee-in-default
Not deducting on advance	Permanent disallowance
DTAA assumed without proof	Short deduction
GST ignored	RCM demand + interest
FEMA docs incomplete	Remittance block

Decision Matrix (Zero-Mistake Tool)

1. Is payee non-resident? → Yes

2. Is activity live performance? → Yes

3. Audience/event in India? → Yes

4. Result → Section 194E applies

5. Deduct on gross

6. GST RCM @18%

7. FEMA via 15CA/CB

No discretion. No ambiguity.

Final Professional Position

Section 194E is not an alternative to Section 195 — it replaces it.
For hotels and event businesses, it is the safest statutory harbour.

Foreign entertainers can always:

• file return,

• claim refund,

• claim DTAA relief themselves.

But the payer must prioritise certainty over optimisation.

Closing Note 

This guidance is based on statutory interpretation, consistent departmental practice, and real assessment experience. It is designed to ensure zero defaults, zero litigation, and full allowability of expenses.

GST Audit Additions Demystified

 By CA Surekha S Ahuja

Why Procedural Lapses, Reconciliation Differences & Mechanical Section 74 Allegations Collapse on Law

GST audit additions today are increasingly driven not by undisclosed supplies, but by process-centric objections, reconciliation variances, and routine invocation of penal provisions.
This note demonstrates—through statutory construction, burden of proof analysis, and settled judicial principles—that such additions do not meet the legal threshold of a valid tax demand.

I. Procedural Lapses: Why Non-Compliance Is Not a Charging Event

Statutory Framework (Foundational Law)

• Tax under GST arises only upon:

  • existence of a taxable supply (Section 7), and

  • levy under Section 9.

No provision under Chapters VIII or IX (returns, payments, procedures) creates tax liability by itself.

Core Legal Fallacy in Audit Additions

Audit objections often adopt the following flawed chain:

“Procedure breached → inference of evasion → tax demand.”

This approach is ultra vires the Act because:

• GST law does not recognise deemed evasion from procedural lapses,

• compliance provisions are facilitative, not determinative.

Judicial Discipline (Settled Principle)

Courts have consistently held that:

• Procedure is a handmaiden of justice, not its master;

• Substance prevails over form, especially in fiscal statutes.

Where tax is otherwise reflected in returns or books, demand collapses for want of jurisdiction.

Assessment-Stage Objection (Must Be Raised)

The proper officer must specifically establish:

1. What taxable supply escaped assessment,

2. How the lapse caused revenue loss,

3. Exact computation of tax short-paid.

➡ In absence of these findings, the addition is void ab initio.

II. Reconciliation Differences: Why Accounting Variance Is Not Evidence of Tax Evasion

Nature of Reconciliations under GST

Reconciliation differences commonly arise due to:

• timing differences,

• accounting vs return architecture,

• credit notes, reversals, adjustments,

• system-driven limitations of GSTR-2A/2B.

These are structural consequences, not indicators of suppression.

Critical Legal Principle

There is no statutory presumption that:

difference between books and returns equals undisclosed supply.

Reconciliation is an explanatory mechanism, not a charging tool.

Burden of Proof (Non-Negotiable Rule)

The department must independently prove:

• actual outward supply,

• consideration received,

• tax payable on such supply,

• failure to discharge such tax.

The burden never shifts merely because a difference exists.

Judicial Position

Courts have repeatedly held:

• reconciliation statements are not admissions,

• arithmetical differences require corroborative evidence,

• additions without invoice-level correlation are arbitrary.

Assessment-Stage Objection

Unless the department:

• identifies specific invoices,

• establishes supply-wise linkage,

• demonstrates consideration flow,

➡ reconciliation-based additions cannot survive law.

III. Section 74: Why Mechanical Allegations of Suppression Are Legally Unsustainable

Statutory Threshold of Section 74

Section 74 can be invoked only when all elements co-exist:

1. suppression or wilful misstatement,

2. intent to evade tax,

3. direct nexus between intent and tax loss.

Intent is the sine qua non — and intent cannot be presumed.

What Cannot Constitute Suppression (As per Law)

• Disclosure in returns,

• Data available on GST portal,

• Audited books of account,

• Reconciliations submitted,

• Interpretational or classification disputes.

When facts are on record, suppression is legally impossible.

Judicial Reasoning

Courts have consistently ruled:

• extended limitation demands strict construction,

• penalty provisions require strict proof,

• disagreement with taxpayer’s interpretation is not fraud.

Routine invocation of Section 74 is a colourable exercise of power.

Assessment-Stage Objection

The order must specifically record:

• what fact was concealed,

• how it was concealed,

• how intent to evade is established.

➡ Absence of recorded satisfaction vitiates proceedings entirely.

Integrated Legal Impact

Where additions are founded solely on:

• procedural lapses,

• reconciliation differences,

• mechanical Section 74 allegations,

they suffer from:

• absence of charging foundation,

• failure of burden of proof,

• violation of natural justice,

• lack of jurisdiction.

Such additions are unsustainable at every appellate level.

Final Legal Conclusion

GST is a tax on supplies — not on imperfections.
It penalises evasion — not explanations.
And it demands proof — not presumptions.

Any audit addition unsupported by evidence of supply, computation of tax, and proof of intent is doomed to fail in law.

GST Assessment Additions on Place of Supply & Refunds

 By CA Surekha Ahuja

Refined Legal Objections, Determinative Arguments and Judicial Authority

GST assessment additions commonly arise from two areas:

1. Incorrect determination of Place of Supply (POS) leading to wrong classification of IGST vs CGST/SGST; and

2. Denial or reduction of refunds on procedural or computational grounds.

Both categories of additions fail where the Department departs from statutory POS rules and settled refund jurisprudence.

Place of Supply is the jurisdictional fact.
Refund is a statutory right.
Errors on either front vitiate the demand.

PART I — PLACE OF SUPPLY (POS) ADDITIONS

(IGST vs CGST/SGST disputes)

POS Must Be Determined First — Tax Type Follows Automatically

Legal Position

Under the IGST Act, the nature of supply flows exclusively from the Place of Supply as determined under Sections 10 (goods) and 12 (services).
Absent a reasoned POS determination, any conclusion on IGST or CGST/SGST is jurisdictionally defective.

Statutory Basis

• Sections 7, 8, 10 & 12 — IGST Act

• Article 265 — Constitution of India

Judicial Authority

• Mohit Minerals Pvt. Ltd. – Supreme Court
  Tax can be levied only as authorised by the charging provisions.

Wrong Tax Payment Does Not Create Tax Liability

Legal Position

GST liability does not arise from the head under which tax was paid, but from the statutory character of the supply.
Payment of IGST instead of CGST/SGST (or vice versa) is a rectifiable error, not a taxable event.

Judicial Authority

• Material Recycling Association of India – Gujarat High Court
  Wrong tax payment does not justify additional levy.

• Bharat Petroleum Corporation Ltd. – Delhi High Court
  POS governs tax character, not accounting treatment.

Billing Address or Registration Location Is Legally Irrelevant for POS

Legal Position

The IGST Act provides exhaustive and exclusive POS rules.
Billing address, invoice narration, or location of supplier cannot override statutory criteria.

• Goods → Place of delivery (Section 10)

• Services → Location of registered recipient (Section 12)

Any POS determination based on presumptions is ultra vires the Act.

Judicial Authority

• Bharat Petroleum Corporation Ltd. – Delhi High Court
  Delivery and recipient location are decisive.

Inter-State Supply Cannot Be Presumed Without Evidence of Movement

Legal Position

For goods, inter-state supply requires actual movement pursuant to the supply.
Absent documentary proof, inter-state character cannot be inferred.

Judicial Principle

• Kone Elevator India Pvt. Ltd. – Supreme Court
  Taxability must be determined from facts, not assumptions.

Resulting Legal Consequence on POS

If Place of Supply is incorrectly determined or not determined at all, the entire demand — including interest and penalty — is unsustainable in law.

PART II — REFUND & EXPORT RELATED ADDITIONS

(Section 54 — CGST Act)

Refund Is a Statutory Right, Not a Discretionary Concession

Legal Position

Once substantive conditions under Section 54 are fulfilled, refund cannot be denied for procedural irregularities.
Procedure is intended to regulate, not to defeat, substantive entitlement.

Judicial Authority

• Mangalore Chemicals & Fertilizers Ltd. – Supreme Court
  Substantive benefits cannot be denied for technical lapses.

Inverted Duty Refund Must Follow the Prescribed Formula Only

Legal Position

Rule 89(5) provides a complete and mandatory computational mechanism.
Any deviation or alternative computation by the Department is without authority of law.

Judicial Authority

• VKC Footsteps India Pvt. Ltd. – Supreme Court
  Refund computation must strictly adhere to Rule 89(5).

Export Refunds Cannot Be Denied Due to LUT or Documentation Defects

Legal Position

Exports are zero-rated supplies by statute.
Minor lapses in LUT filing or documentation do not alter the zero-rated character of the supply.

Statutory & Circular Support

• Rules 96A / 96C

• CBIC Circular No. 09/2020

Judicial Authority

• Cosmo Films Ltd. – Gujarat High Court
  Export benefits cannot be denied for procedural lapses.

Excess Refund Allegations Call for Rectification, Not Penal Action

Legal Position

Where excess refund arises from a bona fide computational error, voluntary repayment through DRC-03 suffices.
Interest and penalty are unsustainable in absence of fraud or suppression.

FINAL PRAYER

In view of:

• incorrect or absent determination of Place of Supply, and

• denial or curtailment of refunds on procedural or computational grounds contrary to settled law,

the proposed GST additions, along with consequential interest and penalty, deserve to be dropped in entirety.

CLOSING OBSERVATION

GST law mandates certainty in Place of Supply and fairness in refunds.
Departures from either cannot be sustained on assessment or in appeal.

 

 

GST Audit Defence Compendium: Place of Supply, Procedural Lapses & Refund Disputes

 Place of Supply, Procedural Lapses & Refund Disputes — A Judicially Settled, Evidence-First Framework

By CA Surekha Ahuja

“In GST, the weakest demands are not those involving tax short-payment,
but those where tax is demanded without jurisdiction, denied on procedure, or computed without statutory discipline.”

WHY THESE GST DISPUTES DOMINATE AUDIT AND LITIGATION

Despite years of GST implementation, a disproportionate volume of audit objections continue to arise from:

• Incorrect determination of place of supply

• Penal consequences for procedural and technical lapses

• Rejection or reduction of legitimate refunds and export benefits

These disputes do not arise from legislative gaps.
They arise because numerical return mismatches are examined without applying the charging framework of GST law.

GST is destination-based, intent-sensitive, and evidence-driven.
Audit objections ignoring these fundamentals rarely survive judicial scrutiny.

PLACE OF SUPPLY DISPUTES — JURISDICTION DECIDES TAX, NOT ACCOUNTING DESIGN

Where Audits Commonly Go Wrong

A recurring audit approach is to determine tax type (IGST vs CGST/SGST) based on:

• Invoice location

• Registration state

• Depot or billing office

This approach is legally flawed.

What the Law Mandates

Under the IGST Act:

• For goods, tax follows the destination under Section 10

• For services, tax follows the recipient under Section 12

Once place of supply is established, tax type becomes automatic.
There is no statutory mechanism permitting dual levy.

Judicial Position

High Courts have consistently rejected dual taxation and jurisdictional overreach.

In Bharat Petroleum Corporation Ltd. (Delhi High Court), it was held that:

• Recipient location prevails over internal supply chains

• Tax cannot be re-characterised due to logistics or ERP design

Audit reality:
Where e-way bills, transport documents, and recipient address proofs align, IGST vs CGST demands routinely fail at the first appellate stage.

OIDAR SERVICES — DESTINATION TAX, NOT FOREIGN ORIGIN

Typical Audit Allegation

Foreign digital service providers often treat supplies as exports, leading to allegations of:

• Non-payment of IGST

• Incorrect export classification

Correct Legal Interpretation

Under Section 14 of the IGST Act, OIDAR services are taxed based on:

• Location of the recipient

• Not server location, contract situs, or payment currency

If the recipient is located in India, the supply is taxable in India, and the non-resident supplier must comply through GSTR-5A.

Evidence That Decides the Case

Authorities and courts accept:

• IP address mapping

• Geo-location tools

• Payment gateway country identification

Where such records exist, OIDAR-related SCNs collapse on facts, not law.

DEEMED EXPORTS AND MERCHANT EXPORTS — SUBSTANCE PREVAILS OVER FORM

Audit Objection Pattern

Benefits are denied citing:

• Absence of LUT

• Procedural deviations

• Timing mismatches

Settled Legal Position

Notification 48/2022-CT clarifies that:

• Deemed export eligibility hinges on movement of goods and realisation of consideration

• Procedural lapses cannot defeat substantive export benefits

• ITC reversal is not automatic

Courts have repeatedly held that export incentives cannot be nullified through hyper-technical interpretation.

PROCEDURAL LAPSES — GST IS NOT A PENAL STATUTE BY DEFAULT

Delayed or Non-Filed Returns

SCNs often ignore:

• Portal failures

• Extension notifications

• Absence of revenue loss

Legally:

• Interest under Section 50 compensates delay

• Penalty requires intent

Voluntary payment through DRC-03 before SCN issuance effectively neutralises penalty exposure — a position consistently upheld by appellate authorities.

E-WAY BILL VIOLATIONS — TECHNICAL BREACHES ARE NOT TAXABLE EVENTS

Courts have decisively drawn the line between:

• Procedural irregularities, and

• Tax evasion

In Ashok Gold House (Gujarat High Court), penalties were quashed where:

• Goods were genuine

• Documentation existed

• No intent to evade tax was established

GST enforcement cannot be converted into a revenue tool for logistical imperfections.

REGISTRATION AND ANNUAL RETURN ISSUES — INTENT REMAINS DECISIVE

Delayed registration and non-filing of GSTR-9/9C are often penalised mechanically.

However:

• Section 25(3) allows retrospective registration

• Notification 30/2021-CT exempts eligible taxpayers from GSTR-9C

Where conduct is bona fide and turnover thresholds are met, penalties consistently fail judicial scrutiny.

REFUND AND EXPORT DISPUTES — REVENUE NEUTRALITY CANNOT BE IGNORED

Inverted Duty Structure Refunds

Post VKC Footsteps (Supreme Court, 2022):

• The refund formula under Rule 89(5) stands judicially settled

• Mechanical exclusion of ITC is impermissible

Any deviation is vulnerable to writ jurisdiction.

LUT and Export Procedural Deviations

Courts and CBIC circulars recognise substantial compliance:

• Delayed FIRCs

• LUT extensions

• Documentation timing gaps

If exports are completed and foreign exchange realised, refund denial is legally unsustainable.

Excess Refunds — VOLUNTARY DISCLOSURE AS A SHIELD

Where excess refund arises due to clerical or computation error:

• Section 54(6) permits recovery

• Voluntary DRC-03 disclosure neutralises interest and penalty

Litigation is avoidable where disclosure precedes detection.

HOW THESE DISPUTES ACTUALLY END — PRACTICAL AUDIT INSIGHT

From extensive audit and appellate experience:

• Place of supply disputes fail where destination evidence is clear

• Procedural SCNs fail where intent is absent

• Refund denials fail where export substance is proven

• Revenue-neutral demands do not survive judicial review

CLOSING NOTE — WHY MOST GST DISPUTES ARE AVOIDABLE

GST litigation is rarely about tax evasion.
It is almost always about misreading law in isolation from commerce.

When statutory sequencing, commercial reality, and evidence alignment are presented together, even aggressive audit objections lose force.

In GST audits, clarity resolves more disputes than confrontation.