Wrong-head GST payments require statutory adjustment before intra-State tax demands, interest, or penalties can be sustained.

Adjustment of integrated tax paid under an incorrect tax head must be considered against Central and State tax liability when an inter-State supply is subsequently treated as intra-State. Section 77(2) read with Rule 92 requires the adjudicating authority to account for the tax already paid and issue the prescribed adjustment order. The statutory scheme does not permit interest on the corrected intra-State liability where integrated tax had already been paid. A demand, including interest and penalty, cannot be sustained without considering this adjustment mechanism.

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Issues: Whether integrated tax paid on a transaction initially treated as an inter-State supply, but subsequently treated as an intra-State supply, could be adjusted against the Central and State tax liability, and whether consequential demand of tax, interest and penalty could be sustained.

Analysis: Section 77(2) was read with Rule 92 to require consideration of adjustment of the amount paid under the incorrect tax head against the liability under the correct head. The statutory scheme does not permit interest liability where integrated tax was paid on a transaction subsequently held to be an intra-State supply. The adjudicating authority had raised the demand, including interest and penalty, without considering this conjoint operation or issuing the prescribed adjustment order.

Conclusion: The demand founded on payment of integrated tax under the wrong head could not be sustained without considering adjustment under Section 77(2) and Rule 92; the issue was decided in favour of the assessee.

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