Section 75(7) of GST Act Prohibits Demand Confirmation on Unspecified Grounds

Tvl. Glo Shipping Logistics Pvt. Ltd. Vs State Tax Officer (Madras High Court)

The Madras High Court recently heard the writ petition filed by Tvl. Glo Shipping Logistics Pvt. Ltd., challenging the GST assessment order issued by the State Tax Officer. The company, a non-vessel operating common carrier, was under scrutiny for various tax-related discrepancies in the 2019-2020 period. The key issues in the assessment included underreporting of output tax, overclaiming of input tax, and incorrect claims related to exempt supplies and non-business transactions.

A show-cause notice was issued in May 2024, outlining the tax liabilities of ₹21,77,761, comprising SGST, CGST, and IGST. The petitioner responded with detailed explanations, asserting its role as an ocean freight service provider. However, the final assessment order, dated 31st August 2024, contradicted this claim, categorizing the petitioner as an intermediary. This reclassification led to a significant increase in the total tax demand to ₹96,83,029, including additional penalties and interest.

The petitioner argued that it was not given an opportunity to respond to the reclassification as an intermediary, which was introduced only in the final order. This, according to the petitioner, violated the principle of natural justice, as well as Section 75(7) of the GST Act, which mandates that the final demand should not exceed the amounts specified in the initial show-cause notice. The court concurred with this argument, agreeing that the shift in the assessment’s basis was an infringement of procedural fairness.

The court set aside the impugned order and allowed the petitioner to treat the assessment as a new show-cause notice. The petitioner was granted three weeks to submit a fresh response, and the authorities were instructed to reconsider the matter in light of the new submissions. The case was disposed of with this direction, and if the petitioner failed to comply within the given timeline, the original assessment order would stand restored.

This ruling reinforces the importance of adhering to the principles of natural justice and ensures that any change in the grounds for tax demand is communicated to the taxpayer, providing them with a fair opportunity to respond. The judgment underscores the strict application of Section 75(7) of the GST Act, which aims to prevent arbitrary decisions that may harm the taxpayer.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

The present writ petition is filed challenging the impugned assessment order dated 31.08.2024 on the premise that the impugned order traverses beyond the show cause notice thereby suffers from violation of principle of natural justice apart from being contrary to the mandate under Section 75(7) of the GST Act.

2. The petitioner herein is a private limited company providing non-vessel operating common carrier services specializing in both full container load and less than container goods (grouped shipments).The petitioner is registered under the GST Act and has filed its return and paid appropriate taxes for the period 2019-20. On examination of the information furnished in the return under various heads the following defects were noticed:

(i) Under declaration of output tax

(ii) Excess claim of Input Tax

(iii) Under Declaration of Ineligible Input Tax Credit

(iv) Claim of Input Tax on non business transaction and exempt supplies contrary to the restriction under Section 17 of GST Act, 2017.

(v) Input tax claimed from dealers with canceled registration certificate, defaulter in filing returns and non tax payers.

3. A show cause notice was issued in form DRC01 dated 21.05.2024 wherein the tax liability was arrived at 21,77,761/- comprising of Rs.7,58,287/- (SGST), Rs.7,58,287/- (CGST) and IGST Rs.6,61,187/-. In response, the petitioner had submitted its detailed reply dated 19.06.2024, 21.06.2024 and 26.07.2024. On consideration of the reply, the impugned order has been passed by the respondent authority whereby the petitioner’s claim that they are Ocean Freight Service providers was rejected and they were instead treated as intermediary and the consequential interest and penalty was increased from Rs.21,77,761/- to Rs.96,83,029/-. The following table in the show cause notice and the order of assessment is relevant and thus extracted here under: 

(ii) FORM GST DRC 07 dated 31.08.2024

 Order under Section 73 

4. It was thus submitted by the learned counsel for the petitioner that they never had an opportunity to respond to the case of the respondent that the petitioner would qualify as an intermediary which resulted in consequential increase in the tax liability inasmuch as it was set out only in the impugned order for the first time. It was also submitted that departure from show cause notice attract sub-section (7) to Section 75 of the GST Act, 2017 which reads as under:

“Section 75. General provisions relating to determination of tax.-

 (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.”

 5. At this juncture, it was submitted by the learned counsel for the respondent that inasmuch as the petitioner’s status as intermediary was set out in the impugned order for the first time which resulted in the increase in the demand of taxes and the consequential interest and penalty in the impugned order being in excess of the amount specified in the notices, the petitioner may treat the impugned order of assessment as a show cause notice and submit their reply within a period of 3 weeks from the date of receipt of a copy of this order. If any such reply is filed the same would be considered and orders would be passed on merits in accordance with law after affording the petitioner a reasonable opportunity of hearing.

6. In view thereof, the impugned order dated 31.08.2024 is set aside. It is open to the petitioner to submit their reply within a period of 3 weeks from the date of receipt of a copy of this order. If for any reason the petitioner does not file their reply within the stipulated period i.e., 3 weeks from the date of receipt of a copy of this order, the impugned order of assessment shall stand restored.

7. Accordingly, the writ petition stands disposed of. Consequently, connected miscellaneous petitions are closed.