Bombay High Court Sets Aside ₹32 Crore GST Demand On Pidilite For Non-Supply Of Verification Reports

The Bombay High Court on 20 February set aside a GST demand exceeding Rs. 32 crore against Pidilite, holding that non-furnishing of verification reports relied upon in adjudication amounted to a clear breach of natural justice.

The Division Bench of Justices G.S. Kulkarni and Aarti Sathe quashed the Order-in-Original and remanded the matter for fresh consideration. The Bench observed:

“Non furnishing of verification reports and no opportunity of a fair hearing on the same, in our opinion, certainly amounted to breach of the principles of natural justice, as behind the back of the Petitioner, no opinion could have been formed and expressed in the impugned order without the Petitioner being granted an opportunity to deal with the verification reports.”

Pidilite, engaged in the manufacture of adhesives, industrial resins and construction chemicals, transitioned input tax credit (ITC) from the pre-GST regime into GST under Section 140 of the Central Goods and Services Tax Act, 2017 (CGST Act) read with Rule 117 of the CGST Rules. It filed Form GST TRAN-1 and TRAN-2 in November 2017 to carry forward eligible CENVAT and VAT credit into its GST electronic credit ledger.

In 2018, the Department initiated an audit to verify the transitional credit. After prolonged correspondence, a show cause notice dated 9 December 2021 was issued under Section 73(5) of the CGST Act read with Rule 142, proposing recovery of Rs. 21.73 crore (Central and State tax claimed via TRAN-1) and Rs. 68.54 lakh (Central and Integrated tax claimed via TRAN-2), along with interest and penalty.

Subsequently, the adjudicating authority confirmed a demand of Rs. 15.34 crore under TRAN-1 and Rs. 68.54 lakh under TRAN-2 with interest, and imposed a penalty of Rs. 16.02 crore.

One of the objections recorded in the order was that an amount of Rs. 5.43 crore had been claimed in the wrong column of TRAN-1. The officer observed:

“The taxpayer is appears to be ineligible for Credit of Rs.5,43,66,117/- as the credit were carried forwarded in Column (8) in Table 7(b) instead of Col.6 in table 5(a).”

Another ground for denial was incomplete verification of stock and invoices. The order itself recorded:

“All the invoices could not be verified due to stock declared by the tax payer is very high… Therefore, credit amounting to Rs.13,73,64,064/- appears to be ineligible.”

Pidilite contended that departmental officers had prepared verification reports dated 27 January 2025 and 3 February 2025 after physical verification of records, but copies of these reports were never supplied before the final order was passed.

The High Court found merit in this contention. It held that when verification reports form the foundation of conclusions in an adjudication order, furnishing them to the taxpayer is imperative. Non-supply of such material deprived Pidilite of an effective opportunity of hearing.

The Bench further observed that the impugned order reflected a hurried exercise without complete verification of invoices and records, which could not be sustained in law. It emphasised that officers discharging quasi-judicial functions must pass reasoned orders after full scrutiny of the material and in strict compliance with principles of natural justice.

Accordingly, the Court quashed the Order-in-Original and remanded the matter for de novo adjudication, directing the Department to furnish the verification reports and grant an effective opportunity of hearing, including permitting rectification of the column mismatch in TRAN-1.

Appearance for the Petitioner: Mr.Prakash Shah, Senior Advocate, with Mr.Mohit Raval i/by PDS Legal

Appearance for the Respondent: Ms.Jyoti Chavan, Additional Govt.Pleader with Ms.Sheetal Malvankar, AGP