The Karnataka High Court has granted interim relief in a challenge to a GST show cause notice concerning defence works contracts, after the company questioned the invocation of Section 74 on the ground that the notice contained no allegation of suppression, misrepresentation or fraud.
The bench of Justice B.M. Shyam Prasad passed the interim order in a petition challenging a show cause notice dated August 28, 2026, covering the financial years 2020–21, 2021–22 and 2022–23. The proceedings were initiated under Section 74 of the Central Goods and Services Tax Act, 2017, and the Karnataka Goods and Services Tax Act, 2017.
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The bench granted the interim order as prayed for until further orders, while allowing the tax authorities to complete their pleadings and seek its vacation or an early disposal of the petition. The order does not finally decide the validity of the notice or the company’s tax liability.
Appearing for the company, Senior Advocate G. Shivadass submitted that the demand related to works contracts executed by the assessee Limited and its other entities across India for defence establishments.
According to the submissions recorded in the order, payments under these contracts were made through an arrangement described as “Milestone Payments”. Under this arrangement, payment became payable upon reaching a contractual milestone, rather than upon completion of the entire contract or against a running bill.
The company submitted that it maintained its books of account on an accrual basis, as required by law, and that the accounting closure could sometimes extend beyond the milestone requirement. It maintained that taxes were offered as and when payments were received.
This distinction between accrual-based accounting and receipts under the milestone payment arrangement formed a central part of the company’s explanation for the dispute.
The assessee also contended that the proceedings had been commenced on the basis of its annual returns without considering the different returns filed by its entities across the country.
Its counsel submitted that the demand covered both Central GST and Integrated GST. The company’s case was that the authorities needed to consider the returns filed across its entities alongside the payment arrangement governing the defence contracts.
These assertions were recorded as the company’s submissions; the interim order does not make a final determination on their correctness.
The principal legal objection concerned the basis for invoking Section 74. Senior counsel argued that there was not even a reference to suppression, misrepresentation or fraud in the show cause notice.
He further submitted that such an allegation could not arise in the circumstances outlined by the company. According to the company, even proceedings under Section 73 could not be supported by an allegation of short payment or non-payment because tax had been offered within the required cycles on the payments received.
A separate objection concerned the issuance of a single notice for multiple tax periods. Counsel submitted that the Court would also have to examine this issue. The Court has not yet ruled on the permissibility of combining those periods in one notice.
The Court considered the submissions alongside the reasons recorded in the show cause notice for invoking Section 74. It also took into account the company’s stated position that taxes had been offered for every payment received, without default.
On that basis, the Court granted the interim relief sought, effective until further orders. However, the text of the order does not separately reproduce the interim prayer or specify its precise scope.
The respondents were given liberty to complete their pleadings and seek vacation of the interim order or early disposal. Standing counsel Aravind V. Chavan was called upon to accept notice for the respondents, and the petition was directed to be relisted on December 16, 2026.
The dispute therefore remains pending, including the questions surrounding invocation of Section 74, the treatment of milestone payments, consideration of returns filed across entities, and the use of one notice for multiple financial years.
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