An important aspect of a taxing statute is the demand of the tax which appears to the authorities as not paid. GST is primarily a self-assessed tax. But situations arise when it appears to the tax authorities that the tax has not been correctly self-assessed, or it has been outrightly evaded. The situation may also go beyond a demand simpliciter and warrant a penal action. The tax authorities will be required to call upon the taxpayer to pay the tax, or to explain his tax-conduct and then determine his tax liability. Under CGST, the mechanism for determination of tax demand is envisaged under Chapter XV of the CGST Act, 2017, mainly under sections 73 to 76 ibid. These sections broadly cover following matters.

Section 73. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised for any reason other than fraud or any willful-misstatement or suppression of facts.

Section 74. Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful misstatement or suppression of facts.

Section 75. General provisions relating to determination of tax.

Section 76. Tax collected but not paid to Government.

At the heart of the matter are the two twin sections, that is, sections 73 and 74. This article focuses on the process of demand determination under these sections.  Both these sections contain similar situations of determination of tax but have a major difference — the fault line of intent and conduct of the tax-payer separate the two sections.

To understand the matter, it would be appropriate if we start with unpacking of the relevant provisions of Section 73 along the lines of “wh” words: What, Why, Who, Whom, When, and HoW. Between the lines, we would also find answers to how various important issues like the jurisdiction, the limitation, the principle of natural justice, and the alternate dispute resolution are dealt with under GST law.

Anatomy of Tax Determination Proceedings Under GST

1. WHAT are categories in which tax is to be determined

The categories or situations in which tax to be determined under this section are

  • Tax not paid
  • Tax Short Paid
  • Tax erroneously refunded
  • input tax credit wrongly availed or utilized

2. Why tax determined under this section.

The tax is to be determined under this section if it relates to demands other than for the reason of fraud or any wilful misstatement or suppression of facts to evade tax.

3. WHO will determine the tax: The Jurisdiction.

Sub-sections (1), (2), (3), (5), (6), (7), (9) and (10) of the Section 73 refer laconically to “the proper officer”, for implementing the provisions of Section 73. The sub-sections (1), (3) and (9) are important for deciding the jurisdiction. The sub-section 73 (1) requires that where it appears to the proper officer that the specific situations of demand have arisen, he will serve a show cause notice; the sub-section 73 (3) requires that the he will issue a “Statement” for the subsequent period, and the sub-section (9) requires that the “proper officer” will determine the amount of tax, interest and a penalty and issue an order.

This brings into focus who is the proper officer, for the purpose of Section 73. As per section 2 (91) of the CGST Act: proper officer” in relation to any function to be performed under this Act means the Commissioner or the officer of the central tax who is assigned that function by the Commissioner in the Board. Practically, it means a functional jurisdiction, and proper officer is an officer who has been the assigned the specified function by the Commissioner/ Joint Secretary in the Board (CBIC). As per the S No. 4 of the Circular No. 3/3/2017-GST, dated 5-7-2017, the Superintendent of Central Tax is the proper officer for various provisions of section 73. However, vide Circular No. 31/05/2018-GST, dated 9-2-2018, this jurisdiction has been redefined with monetary jurisdiction as follows:

Sl. No. Officer of Central Tax Monetary limit of the amount of central tax (including cess) not paid or short paid or erroneously refunded or input tax credit of central tax wrongly availed or utilized for issuance of show cause notices and passing of orders under sections 73 and 74 of CGST Act Monetary limit of the amount of integrated tax (including cess) not paid or short paid or erroneously re-funded or input tax credit of integrated tax wrongly availed or utilized for issuance of show cause notices and pass-ing of orders under sections 73 and 74 of CGST Act made applicable to matters in relation to integrated tax vide Section 20 of the IGST Act Monetary limit of the amount of central tax and integrated tax (in-cluding cess) not paid or short paid or erroneously re-funded or input tax credit of central tax and integrated tax wrongly availed or utilized for issuance of show cause notices and passing of orders under sections 73 and 74 of CGST Act made applicable to integrated tax vide Section 20 of the IGST Act
(1) (2) (3) (4) (5)
1. Superintendent of Central Tax Not exceeding Rupees 10 lakhs Not exceeding Rupees 20 lakhs Not exceeding Rupees 20 lakhs
2. Deputy or Assistant Commissioner of Central Tax Above Rupees 10 lakhs and not exceeding Rupees 1 crore Above Rupees 20 lakhs and not exceeding Rupees 2 crores Above Rupees 20 lakhs and not exceeding Rupees 2 crores
3. Additional or Joint Commissioner of Central Tax Above Rupees 1 crore without any limit Above Rupees 2 crores without any limit Above Rupees 2 crores without any limit

For territorial jurisdiction, one may refer to Central Tax Notification 2/2017-CT dated 19.06.2017, and amending Notifications 79/2018-C.T., dated 31-12-2018 and 2/2022-C.T., dated 11-3-2022.

So far as proceedings initiated by Audit Commissionerates and DGGI are concerned, they have been empowered to issue show cause notices but not to issue determination orders (adjudication orders), for which only the officers of executive Commissionerate have been appointed as proper officers — CBIC Circulars 31/05/2018-GST, dated 9-2-2018 and 169/01/2022-GST dated 12.03.2022 .

3. How the Tax will be determined under Section 73.

The process of determination of tax is divided in two stages: the show cause stage and the adjudication stage.  The process starts with the proper officer serving a show cause notice as to why the person concerned (or the Noticee) should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty leviable under the provisions of CGST Act or the rules made thereunder.

Show Cause Notice  Stage of Demand

The show cause notice is the foundation on which the entire edifice of the demand is situated. It is the nerve center of the litigation process.The expression used in the statute is: the proper officer SHALL serve notice. The principle of natural justice require that the person whose interest are going to be adversely affected must be informed of the specific charges against him so that he may defend himself, and the charges must be conveyed with an open mind.  The Hon’ble Apex Court in Oryx Fisheries Private Limited v. Union of India [2011 (266) E.L.T. 422 (S.C.)] observed that:

“It is well settled that a quasi-judicial authority, while acting in exercise of its statutory power must act fairly and must act with an open mind while initiating a show cause proceeding. A show cause proceeding is meant to give the person proceeded against a reasonable opportunity of making his objection against the proposed charges indicated in the notice.

25. Expressions like “a reasonable opportunity of making objection” or “a reasonable opportunity of defence” have come up for consideration before this Court in the context of several statutes.

26. A Constitution Bench of this Court in Khem Chand v. Union of India and Others, reported in AIR 1958 SC 300, of course in the context of service jurisprudence, reiterated certain principles which are applicable in the present case also.

27. Chief Justice S.R. Das speaking for the unanimous Constitution Bench in Khem Chand (supra) held that the concept of “reasonable opportunity’ includes various safeguards and one of them, in the words of the learned Chief Justice, is :

“(a) An opportunity to deny his guilt and establish his innocence, which he can only do if he is told what the charges leveled against him are and the allegations on which such charges are based;”

28. It is no doubt true that at the stage of show cause, the person proceeded against must be told the charges against him so that he can take his defence and prove his innocence. It is obvious that at that stage the authority issuing the charge-sheet, cannot, instead of telling him the charges, confront him with definite conclusions of his alleged guilt. If that is done, as has been done in this instant case, the entire proceeding initiated by the show cause notice gets vitiated by unfairness and bias and the subsequent proceeding become an idle ceremony.

29. Justice is rooted in confidence and justice is the goal of a quasi-judicial proceeding also…”

Under GST law, Hon’ble Jharkhand High Court in case of NKAS Services Pvt. Ltd. v. State Of Jharkhand [2022 (63) G.S.T.L. 18 (Jhar.)] held that “In absence of clear charges which the person so alleged is required to answer, the noticee is bound to be denied proper opportunity to defend itself. This would entail violation of principles of natural justice”.

In  Mahadeo Constuction Co. v Union Of India [2020 (36) G.S.T.L. 343 (Jhar.)], Hon’ble Jharkhand High Court held that “Liability for payment of interest is not automatic but notice is required to be issued under Section 73 or 74 of Central Goods and Services Tax Act, 2017 even for recovery of interest under Section 50 ibid – Amount of interest cannot be termed as an amount payable under the Act or the Rules till such adjudication is completed by the Proper Officer”.[1]

Further, the demand determination order cannot travel beyond the grounds mentioned in the show cause notice. The Apex Court in Commissioner of Customs, Mumbai v. Toyo Engineering India Limited [2006 (201) E.L.T. 513 (S.C.)] held that the Department cannot travel beyond show cause notice. In Commissioner of C. Ex., Bhubaneswar-I v. Champdany Industries Ltd. [2009 (241) E.L.T. 481 (S.C.)]  , the Supreme Court held that It is well settled that unless the foundation of the case is made out in the show-cause notice, Revenue cannot in Court argue a case not made out in its show-cause notice.”  The case law relating to the erstwhile Excise/ Service Tax and Customs Law would be applicable under GST law as well. In fact, this principle is now also incorporated under section 75 (7) which reads as:

“(7) The amount of tax, interest and penalty demanded in the order shall not be in excess of the amount specified in the notice and no demand shall be confirmed on the grounds other than the grounds specified in the notice.”

As per Rule 142 (1) of the CGST Rules, 2017, the proper officer shall serve, along with the

(a) notice issued under section 52 or section 73 or section 74 or section 76 or section 122 or section 123 or section 124 or section 125 or section 127 or section 129 or section 130, a summary thereof electronically in FORM GST DRC-01,

(b) statement under sub-section (3) of section 73 or sub-section (3) of section 74, a summary thereof electronically in FORM GST DRC-02, specifying therein the details of the amount payable.

The Madras High Court in  V.R.S. Traders v.  Assistant Commissioner (State Taxes), Chennai [2022 (64) G.S.T.L. 423 (Mad.)] held that  “The DRC-01 notice under Section 74(1) of the Act, which is also mandatory to be issued before passing the impugned order of assessment has not been issued in this case. In the absence of any such notice, the proceedings, which is culminated in the order of assessment, which is impugned herein, is, no doubt, vitiated.”

The Jharkhand High Court in NKAS Services (mentioned supra) held that a summary of show cause notice as issued in Form GST DRC-01 in terms of Rule 142(1) of the JGST Rules, 2017 cannot substitute the requirement of a proper show cause notice.

The Jharkahnd High Court in Juhi Industries Pvt. Ltd. v. State Of Jharkhand [2022 (64) G.S.T.L. 406 (Jhar.)] held that:

“Rule 142(1)(a) of the JGST Rules provides that the summary of show cause notice in Form DRC-01 should be issued “along with” the show cause notice under Section 74(1). The word “along with” clearly indicates that in a given case show cause notice as well as summary thereof both have to be issued. As per Rule 142(1)(a) of the JGST Rules, the summary of show cause notice has to be issued electronically to keep track of the proceeding initiated against the registered persona whereas a show cause notice need not necessarily be issued electronically”.

Mode of Service of Show Cause Notice

Importantly, the expression used for a show cause notice and a statement is “serve”. Section 169 expounds the meaning of service of notice as follows:

SECTION 169. Service of notice in certain circumstances. — (1) Any decision, order, summons, notice or other communication under this Act or the rules made thereunder shall be served by any one of the following methods, namely :—

(a) by giving or tendering it directly or by a messenger including a courier to the addressee or the taxable person or to his manager or authorised representative or an advocate or a tax practitioner holding authority to appear in the proceedings on behalf of the taxable person or to a person regularly employed by him in connection with the business, or to any adult member of family residing with the taxable person; or

(b) by registered post or speed post or courier with acknowledgement due, to the person for whom it is intended or his authorised representative, if any, at his last known place of business or residence; or

(c) by sending a communication to his e-mail address provided at the time of registration or as amended from time to time; or

(d) by making it available on the common portal; or

(e) by publication in a newspaper circulating in the locality in which the taxable person or the person to whom it is issued is last known to have resided, carried on business or personally worked for gain; or

(f) if none of the modes aforesaid is practicable, by affixing it in some conspicuous place at his last known place of business or residence and if such mode is not practicable for any reason, then by affixing a copy thereof on the notice board of the office of the concerned officer or authority who or which passed such decision or order or issued such summons or notice.

(2) Every decision, order, summons, notice or any communication shall be deemed to have been served on the date on which it is tendered or published or a copy thereof is affixed in the manner provided in sub-section (1).

(3) When such decision, order, summons, notice or any communication is sent by registered post or speed post, it shall be deemed to have been received by the addressee at the expiry of the period normally taken by such post in transit unless the contrary is proved.

In Kashi Bartan Bhandar v.  State of U.P. [2018 (19) G.S.T.L. 403 (All.)], the Allhabad High Court held that it is only if the mode of service as provided in the earlier parts of Section 169 are not practicable that the authorities can resort to service of notice by affixation. In this regard the words “if none of the modes is practicable” are relevant and important. The use of the aforesaid words clearly indicates that it is only after the authorities are satisfied that all earlier methods are not practicable for service of notice that resort can be taken for service of notice by affixation.

In an interesting case cited as  Real Time Technology v. CESTAT, Kolkata [2019 (29) G.S.T.L. 238 (Gau.)] before Hon’ble Gauhati High Court, the adjudication order was marked as “ by registered post with A/D”  but was however, according to the Department, delivered personally. The petitioner was challenging that the order was not personally delivered at all. The Hon’ble High Court observed that “when a particular mode for service is prescribed by the author of the Order-in-Original, we are of the considered opinion that such mode has to be complied with and no other mode is permissible, though a number of modes, otherwise, is provided in Section 37C of the Central Excise Act, 1944”.

Statement for subsequent period

As per the provisions of sub-sections (3) and (4) of section 73, where a notice has been issued for any period under sub-section (1), the proper officer may serve a statement for such periods other than those covered under sub-section (1), on the person chargeable with tax. The service of such statement shall be deemed to be service of notice on such person under sub-section (1), subject to the condition that the grounds relied upon for such tax periods other than those covered under sub-section (1) are the same as are mentioned in the earlier notice.

Adjudication Stage of demand

The section 73 (9) prescribes that the proper officer shall, after considering the representation, if any, made by person chargeable with tax, determine the amount of tax, interest and a penalty equivalent to ten per cent. of tax or ten thousand rupees, whichever is higher, due from such person and issue an order. As per section 75 (6), the proper officer shall set out the relevant facts and the basis of his decision and, as per Section 75 (7), the amount of tax, interest and penalty demanded in the order shall not be in excess of the amount specified in the notice and no demand shall be confirmed on the grounds other than the grounds specified in the notice. As per Rule 142 (4) of the CGST Rules, 2017, the representation/ reply of the Noticee is to be in the FORM GST DRC-06, and as per Rule 142 (5), a summary of the order issued shall be uploaded electronically in FORM GST DRC-07, specifying therein the amount of tax, interest and penalty, as the case may be, payable by the person concerned.

Personal Hearing

Section 73(9) enjoins that the proper officer shall pass the determination order only after considering the representation of the Noticee. Further, section 75 (4) enjoins that an opportunity of hearing shall be granted where a request is received in writing from the person chargeable with tax or penalty, or where any adverse decision is contemplated against such person. Thus, if an adverse action is contemplated, personal hearing is obligatory even if there is no written request in this regard.

Hon’ble Bombay High Court in  BA Continuum India Pvt. Ltd. v. Union Of India [2021 (49) G.S.T.L. 370 (Bom.)] held that:

The expression ‘opportunity of being heard’ is not an expression of empty formality. It is a part of the well-recognized principle of audi alteram partem which forms the fulcrum of natural justice and is central to fair procedure. The principle is that no one should be condemned unheard”.

Hon’ble Calcutta High Court in case of  Sesa International Ltd. v Director General Of Foreign Trade [2016 (342) E.L.T. 481 (Cal.)] held that

No order can be passed or action can be taken by the State or a statutory authority or any authority within the meaning of Art. 12 of the Constitution, without affording an opportunity of hearing to the parties who are likely to be adversely affected by such order or action. Any order of such an authority which is likely to visit a party with adverse civil consequences can only be passed after observing the principles of natural justice. The doctrine of audi alteram partem enshrines the principle that nobody can be condemned unheard. Before depriving or divesting a citizen of valuable property, the State or a statutory authority must give an adequate and meaningful opportunity of hearing to that party

Under GST Law, Hon’ble Telangana High Court in CSK Realtors Ltd. v. Asstt. Commissioner of Service Tax, Hyderabad  [2020 (42) G.S.T.L. 34 (Telangana)] held that, “the very purpose of personal hearing is to enable the assessing officer to get enlightened or to enlighten the assessee about the nature of the claim made by them, and once the assessee seeks personal hearing, the denial of such opportunity would vitiate the order passed.”

 Pre –SCN Consultation: Collaborative Resolution at a Nascent Stage of Dispute

A sub-rule (1A) was inserted in Rule 142 of the CGST Rules, 2017 vide Notification No. 49/2019-Central Tax dated 09.10.2019 which provided for obligatory Pre-SCN consultation in case of proposed demand under section 73 (1) or 74 (1) of the CGST Act, 2017 and also provided for mandatory communication of the details of any tax, interest, and penalty as ascertained by the tax officer, in Part –A of the Form GST DRC-01A. This was a good step as the dispute could be resolved in a collaborative approach between the taxpayer and the Department. This was also in conformity with the recommendations of the First Report of Tax Administration Reform Commission (TARC).[2]

However, the Notification 79/2020-Central Tax dated 15.10.2020 substituted the words “proper officer shall” with the words “proper officer may”, and this notification also omitted the expression “shall” before the expression “communicate”, making this important dispute resolution mechanism as discretionary.

The Hon’ble Delhi High Court in Victory Electric Vehicles International Pvt. Ltd. v. Union of India[3][2022 LiveLaw (Del) 950], in a customs case, held that,

With the docket explosion that Courts are experiencing, this [pre-SCN consultation] is a wholesome provision, which the revenue needs to scrupulously adhere to”.

However, as observed above, in GST, the adherence to provision is now at the discretion of the “proper officer”.

4. When Tax can be determined under this Section: the Limitation

As per Halsbury’s Laws of England, long dormant claims have more of cruelty than justice in them. Rights of action, be of the citizens or of the state must be exercised within a reasonable time. Tax demands, which can throw a business out of whacks, are subject to statutory limitations.

The time limit provided under Section 73 (10) is three years from the due date for furnishing of annual return for the financial year to which the tax not paid or short paid or input tax credit wrongly availed or utilised relates to or within three years from the date of erroneous refund. This can be called normal period of limitation. The time limit prescribed under sub-section 73 (10) for passing the order under sub-rule (9) is the primary and main limitation, and the time limit for issuance/ service of SCN as prescribed under sub-rule 73 (2) is derived from this limitation (under section 73 (10)) and is worded as, “The proper officer shall issue the notice under sub-section (1) at least three months prior to the time limit specified in sub-section (10) for issuance of order”.

This emphasis on time limit for determination of demand is a significant departure from the earlier provisions of central excise/ service tax law. The focus is now on the completion of assessment rather than mere issuance of show cause notice.  As per Section 75 (10) “The adjudication proceedings shall be deemed to be concluded, if the order is not issued within three years as provided for in sub-section (10) of section 73”.

5. WHOM is the Notice to be served/ Against WHOM the demand is to determined           

As per the provisions of Section 73 (1), the respondent would be the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been made, or who has wrongly availed or utilized input tax credit. An important Circular No. 171/03/2022-GST dated 06.07. 2022 has been issued by the policy wing of CBIC.

Demand Under Section 74 of the CGST Act, 2017

The provisions under the twin Section 74 are similar to the Section 73, except to the extent that the Demand is to be determined under this section where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful misstatement or suppression of facts to evade tax.

As per Explanation 2 of section 74, “for the purposes of this Act, the expression “suppression” shall mean non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer”. The major consequence of demand under this section is that amount of demand can be determined for 5 years instead of three years, and the show cause notice under sub-section (1) is to be issued/served at least six months prior to the time limit specified in sub-section (10) for issuance of order. The adjudication proceedings shall be deemed to be concluded if the order is not issued within five years as provided for in sub-section (10) of section 74. Further, this section involves harsher penal provisions.

Conclusion

The GST provisions are now five years old. The assessment, scrutiny, audit, and demand activities are expected to be expedited in view of the limitation provisions kicking in. The provisions of section 73 to 75 are the nucleus of the demand determination process, and a thorough understanding of these provisions is expected to be useful to the taxpayers, the tax professionals, and the Departmental officers.

[1] Department’s appeal against this order is pending in the Supreme Court [Union of India v. Mahadeo Construction Co. – 2021 (52) G.S.T.L. J120 (S.C.)]

[2] https://taxguru.in/wp-content/uploads/2014/06/TARC-Report.pdf

[3] https://www.livelaw.in/news-updates/preventing-docket-explosion-pre-scn-consultation-delhi-high-court-211332

*****

Disclaimer: The views, thoughts, and opinions expressed in the text belong solely to the author and are purely for academic purposes; these are not legal opinion of any sort. For any query, the author can be reached at viney.go@gmail.com

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One Comment

  1. Pankaj Mahajan says:

    Author has thorough knowledge of the topic and has guided through provisions in a wonderful manner. Complete process and provisions explained in lucid manner.

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