The Madras High Court has held that the non-maintenance of job work records can trigger GST demand under Section 74 of the CGST Act, 2017.

The bench of Justice C. Saravanan remanded GST assessment orders involving substantial tax, interest, and penalty demands arising from alleged violations of the job work provisions under Section 143 of the GST law, while holding that the Department was justified in invoking Section 74 proceedings. 

The dispute arose after a surprise inspection conducted by the GST Department on September 23 and 24, 2024. Following the inspection, authorities initiated proceedings alleging that the taxpayer had dispatched goods to a sister concern engaged in job work activities without maintaining the records mandated under Section 143 of the GST Acts and Rule 45 of the GST Rules. 

According to the Department, the taxpayer failed to demonstrate that the goods sent for job work were returned within the prescribed statutory period. The authorities therefore treated the transactions as deemed supplies and raised demands for tax, interest, and penalties. 

The impugned orders confirmed the following liabilities:

The cumulative exposure exceeded ₹13 crore, including tax, interest, and penalties. 

The taxpayer argued that the show cause notices did not contain the necessary ingredients required for invoking Section 74, which deals with cases involving fraud, wilful misstatement, or suppression of facts.

It was also contended that technical difficulties prevented the filing of Form GST ITC-04, the statutory statement used to report movement of goods sent to and received from job workers. The taxpayer maintained that the transactions were genuine job work transactions involving a sister concern and therefore should not attract the severe consequences contemplated under Section 74. 

The State Tax Department relied upon the show cause notices and contended that they specifically referred to the statutory consequences arising under Sections 143(3), 143(4), and Rule 45.

The Department argued that where goods sent for job work are not returned within the prescribed period and proper records are not maintained, the law deems the movement of goods to be a taxable supply from the date on which the goods were originally dispatched. Consequently, tax, interest, and penalty become recoverable. 

The Court examined the framework of Section 143 and Rule 45, which permit a principal manufacturer to send inputs or capital goods to a job worker without payment of tax, subject to compliance with prescribed conditions.

The court noted that the statutory scheme requires maintenance of proper documentation and filing of Form GST ITC-04. The Court observed that there were no records before it demonstrating that the goods allegedly sent for job work had actually been returned within the period prescribed under Section 143. In such circumstances, the GST law treats the movement as a deemed supply liable to tax. 

The Court further observed that under the GST system of self-assessment, the Department necessarily relies upon records maintained by taxpayers. Where discrepancies emerge during scrutiny or inspection, proceedings under Section 74 may be invoked. 

A significant aspect of the judgment is the Court’s rejection of the taxpayer’s argument that Section 74 could not have been invoked.

Referring to a separate common judgment delivered in a larger batch of GST cases, the Court held that the threshold for invoking the extended limitation period under Section 74 is lower under the GST regime than under earlier indirect tax laws. The Court observed that only in cases involving bona fide mistakes would the machinery of Section 74 ordinarily not be available. 

Consequently, the challenge to the assessment orders on the ground that the Department lacked jurisdiction to invoke Section 74 was rejected. 

While upholding the Department’s authority to initiate proceedings, the Court found merit in the taxpayer’s contention that the dispute could potentially be revenue neutral.

The Court observed that if the goods sent for job work had ultimately suffered tax either in the hands of the principal manufacturer or the job worker, the issue would require detailed factual verification. Since this involved disputed questions of fact, the Court considered it appropriate to remit the matter back to the adjudicating authority. 

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