Madras High Court Refuses To Quash Canon India GST Notices, Says Taxpayer Must Reply Before Challenge

The Madras High Court has held that a taxpayer must first respond to a GST show cause notice before challenging the invocation of Section 74 of the Goods and Services Tax (GST) law (which deals with tax demands involving alleged fraud, suppression or wilful misstatement).

Justice C. Saravanan dismissed Canon India Pvt. Ltd.'s writ petitions challenging the GST DRC-01 show cause notices but granted the company 30 days to file detailed replies. He observed:

"The fact that the Petitioner has not replied to the intimation in GST DRC-01A all dated 11.06.2024 for the Assessment Years 2018-2019 and 2019-2020 itself invites the invocation of machinery under Section 74 of the respective GST Enactments in view of definition of the expression “Suppression” in the Explanation-2 to Section 74 of the respective GST Enactments which came to be deleted only later by virtue of Finance (No.2) Act, 2024 (15/2024) dated 16.08.2024."

Canon had challenged the GST DRC-01 show cause notices issued on 13 July 2024, contending that they were barred by limitation, issued without jurisdiction and violated principles of natural justice. It also argued that the proceedings would affect its eligibility under the Authorised Economic Operator (AEO) Programme administered by the Central Board of Indirect Taxes and Customs (CBIC).

Rejecting the challenge, the Court noted that the show cause notices were preceded by GST DRC-01A intimations. It observed that Canon had either failed to respond or had not fully participated in the proceedings for certain tax periods.

Further, the Bench held that Canon's challenge involved disputed factual issues, including whether the extended limitation period under Section 74 had been validly invoked. It observed that such issues could not be decided in writ proceedings and had to be examined by the adjudicating authority after considering the company's reply. It noted:

"Even if Section 74 of the respective GST Enactments was wrongly invoked, it is for the Petitioner to establish the case by filing a reply in Form GST DRC-06. It is not possible to straight away to come to a conclusion that invocation of machinery under Section 74 of the respective GST Enactments was without jurisdiction without a proper reply from the Petitioner and adjudication by the Respondents."

Moreover, the Bench observed that each assessment year constituted an independent tax period and that proceedings under Section 74 could not be challenged merely because proceedings relating to later years had been dealt with differently. It also held that even if Canon believed that Section 73 of the GST law (which applies to tax demands not involving fraud or suppression) should have been invoked instead of Section 74, the company had to establish the same before the adjudicating authority through an appropriate reply.

Accordingly, the High Court dismissed the writ petitions but permitted Canon to submit replies to the show cause notices within 30 days. It directed the tax authorities to consider the replies and pass fresh orders in accordance with law.

For Petitioner: Mr. Krishna Srinivasan, Senior Counsel

For Respondent: Mr. C. Harsharaj, Special Government Pleader