The Gauhati High Court has set aside a Goods and Services Tax (GST) show cause notice seeking recovery of ₹4.37 crore from a government highway contractor, holding that the stringent provisions of Section 74 of the Central Goods and Services Tax (CGST) Act, 2017 cannot be invoked merely because tax was not paid or an incorrect tax position was adopted.

The bench of Justice Soumitra Saikia emphasised that fraud, wilful misstatement or suppression of facts coupled with an intention to evade tax must be established before the extended limitation mechanism under Section 74 can be invoked. 

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The petitioner/assessee had been awarded a National Highway project involving the realignment and construction of a two-lane highway with paved shoulders between KM 603 and 637 of NH-37 in Assam. The agreement was executed on December 8, 2010, when VAT was applicable. The contractual price of approximately ₹141.21 crore included 5% VAT applicable at that time. 

The project was ultimately completed on October 30, 2020, and a completion certificate was issued on December 21, 2020. During execution, running bills were prepared by the Assam PWD, NH Works, countersigned by the contractor’s representative and thereafter forwarded to the Ministry of Road Transport and Highways for approval. The payments were released after the departmental and Ministry-level process. 

The dispute concerned price-adjustment amounts relating to the prolonged execution of the project. A bill dated October 25, 2022, reflected price adjustments of ₹36.47 crore, out of which approximately ₹34.39 crore was paid to the petitioner after deductions. According to the petitioner, the departmental bill did not separately include any additional GST component on the price-adjustment amount. 

The petitioner contended that the receipt of the price-adjustment amount was duly reflected in its audited balance sheet for FY 2022-23 and was also disclosed in its GST filings. However, since the underlying works agreement had been entered into in 2010, before the introduction of GST, the petitioner claimed that it was under a bona fide belief that the subsequent price-adjustment amount was not liable to GST.

The Court noted that the original contract had contemplated 5% VAT, whereas works-contract services under the GST regime attracted 18% GST. The controversy essentially arose over the GST treatment and timing of taxation of the price-adjustment amounts relating to a contract originally entered into before July 1, 2017 but executed partly after the introduction of GST. 

The Directorate General of Goods and Services Tax Intelligence (DGGI), Guwahati Zonal Unit, initiated an investigation into the alleged non-payment of GST on the price-adjustment receipts. The investigation was conducted under Section 67(1) of the CGST Act, while the petitioner was also summoned under Section 70. 

During the investigation, the petitioner’s authorised representative stated that, according to the petitioner’s understanding, GST liability was approximately ₹82.07 lakh and that ₹30 lakh had already been deposited on March 30, 2024. The petitioner maintained that there had been no intention to evade tax and sought closure of the proceedings. 

The authorities subsequently issued a show cause notice dated August 4, 2024 under Section 74(1) of the CGST Act, demanding GST of ₹4,37,73,372 for the period July 2017 to March 2023. The notice also proposed appropriation of the ₹30 lakh already deposited, along with interest and penalty under Section 74 and Section 122(2)(b). 

The principal issue before the Court was whether the GST authorities could invoke Section 74(1) merely on the allegation that the taxpayer had incorrectly assessed and discharged GST, without establishing the statutory ingredients of fraud, wilful misstatement or suppression of facts with intent to evade tax.

Section 74(1), as considered by the Court, applies where tax has not been paid or has been short-paid, or where other specified GST irregularities have occurred, by reason of fraud, wilful misstatement or suppression of facts to evade tax. 

The Court therefore examined whether the material on record demonstrated the necessary intention to evade tax.

The GST authorities defended the notice by contending that the petitioner had filed NIL monthly returns and failed to make the necessary tax payment despite receiving the price-adjustment amounts.

According to the Revenue, the amounts were disclosed as exempt in the annual GST return only after the investigation and the petitioner had allegedly suppressed material facts with an intention to evade tax. The authorities relied on the fact that substantial amounts, including approximately ₹32.78 crore and ₹3.687 crore, had been received during FY 2022-23. 

The Revenue therefore maintained that the Section 74 notice was legally sustainable and that the extended period of limitation had properly been invoked.

The Gauhati High Court extensively considered a series of Supreme Court decisions dealing with the meaning of “suppression”, “wilful misstatement” and the conditions required for invoking an extended limitation period.

Referring to Pushpam Pharmaceuticals Co. v. CCE, the Court noted the Supreme Court’s principle that suppression in taxation law involves deliberate non-disclosure of correct information with the object of avoiding payment of duty. Mere omission does not automatically amount to suppression, particularly where the relevant facts were known to both sides. 

The Court also considered Anand Nishikawa Co. Ltd. v. CCE, where the Supreme Court held that mere failure to declare does not amount to wilful suppression and that a positive act on the part of the assessee is necessary to establish wilful suppression. 

Similarly, relying on Continental Foundation Joint Venture Holding v. CCE, the High Court noted that mere failure to furnish correct information cannot constitute suppression unless it is accompanied by a deliberate attempt to evade payment of duty. The burden lies on the Revenue when it seeks to invoke the extended limitation period on that basis. 

The Court further referred to CCE v. Chemphar Drugs and Liniments, Cosmic Dye Chemical v. CCE, CCE v. Ballarpur Industries Ltd., Uniworth Textiles Ltd. v. CCE, CCE v. H.M.M. Ltd. and Associated Cement Companies Ltd. v. Commissioner of Customs while examining the statutory requirement of wilful conduct and intention to evade tax. 

A significant factor considered by the High Court was that the petitioner had not concealed the receipt of the price-adjustment amounts.

The Court recorded that the petitioner had disclosed the receipt in its audited balance sheet, Income Tax filings and annual GST return. It had also made a declaration before the GST authorities regarding receipt of the amount. 

The Court observed that the Income Tax and GST returns were public documents accessible to the tax authorities. Since the receipt of the price-adjustment amount itself had been disclosed, the Court found it difficult to characterise the conduct as suppression or misstatement for the purpose of invoking Section 74(1). 

The High Court also considered the circumstances surrounding the petitioner’s classification of the amount as exempt.

The petitioner had taken the position that the price-adjustment receipts relating to a contract executed before the GST regime were not taxable. The Court found that the surrounding circumstances supported the petitioner’s contention that this was a bona fide tax position rather than a deliberate attempt to evade tax.

Importantly, the Court noted that the Assam PWD and the Ministry had themselves not included GST charges in the bills while preparing or approving the price-adjustment payments. According to the Court, this circumstance strengthened the petitioner’s explanation that the tax treatment was based on a genuine understanding of the transaction. 

The Court further noted that the petitioner had been paying GST on other receivables, which also weighed against the conclusion that the taxpayer had deliberately attempted to evade GST. 

The High Court laid down that the conditions precedent for invoking Section 74(1) must exist before the Revenue can use the provision and consequently obtain the benefit of the extended limitation period.

The Court held that the consistent principle emerging from the Supreme Court authorities was that there must be a clear intention to evade payment of tax. In the absence of the requisite statutory ingredients and such intention, the Revenue cannot invoke Section 74(1) merely by issuing a show cause notice. 

On the facts of the case, the Court found that the petitioner had disclosed the material receipt in its balance sheet, Income Tax filings and GST annual return. The Court therefore held that the mere failure to pay GST on the amount, when accompanied by the petitioner’s stated bona fide belief regarding taxability, could not automatically be equated with deliberate suppression. 

The Court ultimately concluded that the allegation of wilful suppression was not supported by the material on record. The petitioner had disclosed the price-adjustment receipts and had also informed the tax authorities regarding the receipt.

The High Court observed that an omission would not constitute wilful suppression unless it could be shown to be a deliberate attempt to escape tax. In the present case, the Court found no such deliberate conduct. 

The Court therefore held that the issuance of the Section 74(1) show cause notice was manifestly erroneous and arbitrary, as the conditions precedent for exercising jurisdiction under Section 74 were absent. In particular, the Court found no established element of fraud, wilful misstatement or suppression of material facts necessary to invoke the provision and extend the limitation period. 

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