GST Demand Cannot Be Sustained On New Grounds Not Put To Taxpayer In Notice: GSTAT Bengaluru

On 27 October, the Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru, held that an appellate authority cannot uphold a GST demand on grounds that were never communicated to the taxpayer through a show-cause notice.

A Bench comprising Judicial Member Prabhakaran P M and Technical Member Ravi Jesuraj S set aside the GST demand against Fortinet Technologies India Private Limited, holding that the department had failed to issue a proper show-cause notice and that the appellate authority had introduced new grounds to sustain the demand. It observed:

“The first appellate authority could not confirm the demand on a new legal basis (Section 9(4), or forward charge on recoveries from employees) that was never put to the Appellant in any notice; a point raised by the Appellant in defence does not become a charge against it.”

Fortinet challenged a demand for July 2017 to March 2018 concerning expenses recorded under the heads “hiring charges, loan documentation charges” and other expenses. Following an audit, the department issued Form GST DRC-01, summarising a proposed demand for alleged non-payment of tax under the reverse charge mechanism under Section 9(3) of the Central Goods and Services Tax Act, 2017.

However, it did not issue a separate show-cause notice setting out the allegations and their factual and legal basis.

The adjudicating authority confirmed Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) demands of Rs. 1,09,815 each, along with interest and penalty. It passed the order before receiving Fortinet's reply and without granting a personal hearing.

Subsequently, the Joint Commissioner of Commercial Taxes (Appeals) upheld the demand, reasoning that Fortinet had received outdoor catering services from an unregistered supplier and collected meal charges from its employees.

The Tribunal held that Form GST DRC-01 is only a summary accompanying a show-cause notice and cannot replace the notice required under Section 73(1) of the Act. Referring to Rule 142 of the Central Goods and Services Tax Rules, 2017, it noted that the summary must be served “along with” the statutory notice, which must clearly specify the allegations the taxpayer is required to answer.

It also held that the failure to grant a personal hearing violated Section 75(4) of the Act, which mandates a hearing when an adverse decision is contemplated. Although Fortinet filed its reply more than 30 days after communication of the demand summary, the delay did not extinguish its right to be heard before an adverse order was passed.

Further, the Bench noted that the original demand rested on alleged non-payment of tax under Section 9(3), whereas the appellate authority relied on the alleged receipt of outdoor catering services from an unregistered supplier and the collection of meal charges from employees. These grounds had not formed the basis of the original adjudication proceedings.

On merits, it observed that Section 9(3) applies to notified categories of supplies, while Section 9(4) concerns supplies received from unregistered persons. Outdoor catering services were not among the services notified under Section 9(3).

Moreover, it said that Section 9(4) applied during only part of the relevant period, from 1 July 2017 to 12 October 2017, subject to the applicable exemption. The department had neither identified the correct statutory basis for the demand nor established the relevant transactions and taxable value.

Accordingly, the GSTAT quashed the CGST and SGST demands of Rs. 1,09,815 each, along with interest and penalties, set aside the adjudication order dated 25 April 2023 and the appellate order dated 27 June 2025, and directed the refund of any pre-deposit with interest in accordance with law.

Counsel for Appellant: Deepak Vasudeva Rao, Advocate; Ramya K S, Chartered Accountant

Counsel for Respondent: Priya Basappa, Deputy Commissioner and Authorised Representative