No GST Payable On Machinery Returned For Testing Without Fresh Consideration: Karnataka High Court

The Karnataka High Court held on 25 June that a company does not incur GST liability when it returns machinery to a seller for testing without any fresh consideration, as the movement does not amount to a taxable supply.

A Division Bench of Justices S.G. Pandit and Rajesh Rai K dismissed the State's appeal and upheld the Single Judge's order reducing the penalty imposed on AAM India Manufacturing Corporation Pvt. Ltd. to Rs.25,000, while directing the Department to refund the remaining amount deposited by the company. It held:

“The re-transportation would not attract consideration and the instant transaction does not come within the purview of Section 7(1)(a) of CGST/KGST Act,”

AAM India Manufacturing Corporation Pvt. Ltd. purchased hydraulic fixtures and tooling body machines from Coimbatore in July 2020 and transported them to its manufacturing unit in Maharashtra.

After making certain customisations, the company sent the machines back to the supplier for testing through a delivery challan. However, it did not generate an e-way bill before transporting the machinery. During transit, GST authorities intercepted the vehicle, detained the goods and demanded Integrated Goods and Services Tax (IGST) along with penalty.

The State argued that the return movement of the machinery amounted to a separate taxable transaction because the company had failed to generate an e-way bill. It also contended that the company could not claim the benefit available under Section 129 of the Central Goods and Services Tax/Karnataka Goods and Services Tax Act (provisions dealing with detention, seizure and release of goods and conveyances in transit).

Rejecting the State's contention, the Court observed that Section 7(1)(a) of the CGST/KGST Act treats a transaction as a "supply" only when a person makes it for consideration. Since the company returned the machinery only for testing and no fresh consideration was involved, it held that the movement did not constitute a taxable supply. It, however, clarified that the company had to comply with the e-way bill requirement under GST Rules. The Bench observed:

“The CGST/KGST Act and Rules provide for certain exemptions from generating E-way bills in certain cases. However, the same does not cover the subject re-transportation/”

Further, the judges held that the company violated the GST Rules by transporting the machinery without an e-way bill. However, they ruled that the violation attracted only the statutory penalty for non-compliance and did not make the company liable to pay GST on the movement.

Accordingly, the High Court dismissed the State's appeal and confirmed the refund of the excess amount collected from AAM India Manufacturing Corporation Pvt. Ltd.

For Appellants: Jyoti M Maradi, HCGP

For Respondent: Prakash Shah, Senior Counsel for Mohan Maiya G.L., Advocate