The Goods and Services Tax Appellate Tribunal (GSTAT), Bengaluru Bench, has held that a summary issued in Form GST DRC-01 cannot substitute a statutory show cause notice under Section 73(1) of the GST law and ruled that a delayed reply does not take away a taxpayer’s right to a personal hearing before an adverse order is passed.
The Bench of Prabhakaran P M (Judicial Member), and Ravi Jesuraj S, (Technical Member) set aside CGST of ₹1,09,815 and SGST of ₹1,09,815, together with the consequential interest and penalties. It also found that the Revenue had failed to establish reverse charge liability on merits.
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The appellant/assessee which provides software development, information technology software and technical support services, underwent a GST audit for the financial year 2017-18.
The audit initially raised four issues concerning transitional credit of Krishi Kalyan Cess, differences in input tax credit, reverse charge liability on various expenses, and blocked input tax credit.
Following the company’s explanations, several objections were dropped. The company agreed to reverse the disputed cess credit and paid the amount relating to blocked credit with interest. It continued to contest the reverse charge objection.
Of the 19 expense items examined under that objection, 17 were accepted during the audit. Two entries relating to “office meals” remained disputed.
The department subsequently issued Form GST DRC-01 dated March 21, 2023, describing the issue as non-payment of tax on “Hiring Charges, Loan Documentation Charges etc under Reverse Charges u/s 9(3).” Its statement of grounds merely referred to the final audit report in Form GST ADT-02.
No separate show cause notice was issued.
The adjudicating authority passed an order dated April 25, 2023, signed on April 26, confirming tax, interest and penalty aggregating to ₹4,75,500. The company’s detailed reply was communicated on April 28, after the order had been passed. No personal hearing was granted before adjudication.
The first appellate authority upheld the demand on June 27, 2025, prompting the company to approach the Tribunal.
The Tribunal held that a show cause notice forms the foundation of adjudication proceedings.
Examining Section 73(1) and Rule 142(1), the Bench explained that Form GST DRC-01 is a summary that must be served along with the statutory notice. It cannot independently perform the function of that notice.
“The summary accompanies the notice; it does not replace it,” the Tribunal observed.
The Bench emphasised that a taxpayer must know the factual allegations and legal grounds on which a demand is proposed so that an effective defence can be presented.
It referred to judicial decisions recognising the essential role of a proper show cause notice, including the Supreme Court’s decisions in Metal Forgings, Brindavan Beverages and Armour Security (India) Ltd.
Applying those principles, the Tribunal concluded that the adjudication order passed without a notice under Section 73(1) was without authority of law and contrary to natural justice.
The Tribunal also rejected the treatment of audit findings as an adequate basis for confirming tax without following the statutory adjudication process.
It explained that Section 65(7) permits the proper officer to initiate action under Section 73 or Section 74 when an audit detects unpaid tax or other discrepancies. The audit itself does not dispense with those proceedings.
Consequently, neither the final audit report in Form GST ADT-02 nor a DRC-01 summary could replace the required show cause notice.
The Bench further observed that amounts identified during an audit do not become confirmed tax arrears merely because they appear in the audit report. Liability must be determined through the procedure prescribed by law.
The Tribunal considered whether Section 160, which protects proceedings against certain mistakes, defects or omissions, could save the demand.
It held that the provision did not apply.
The complete absence of a notice under Section 73(1) was not a minor procedural defect. A summary containing no grounds could not be treated as a notice that substantially complied with the statute.
The dispute also concerned the absence of a notice, rather than a defect in its service. The company had raised this objection throughout the proceedings.
On the denial of a personal hearing, the Tribunal noted that the company had submitted its reply beyond 30 days from communication of the DRC-01 summary.
However, that delay did not extinguish its right to be heard.
The Bench explained that Section 75(4) makes a hearing mandatory where an adverse decision is contemplated. The confirmation of tax, interest and penalty was plainly an adverse decision.
The absence of a personal hearing therefore constituted a separate violation of the statutory requirement and principles of natural justice.
The Tribunal found that the first appellate authority had introduced grounds that were not properly addressed in the adjudication order.
The appellate authority had relied on the meal supplier’s registration status and alleged recovery of meal charges from employees to uphold reverse charge liability.
The Tribunal held that if the appellate authority intended to sustain the demand on a different legal basis—such as Section 9(4) or forward charge liability on employee recoveries—the company had to be informed and given an opportunity to respond.
“A point raised by the Appellant in defence does not become a charge against it,” the Bench observed.
The demand also failed on merits.
The Tribunal distinguished Section 9(3), which concerns notified categories of supplies attracting reverse charge, from Section 9(4), which, during the relevant period, addressed supplies received by registered persons from unregistered suppliers.
It noted that outdoor catering was not among the services notified under Section 9(3).
As regards Section 9(4), the Tribunal observed that the liability relevant to the dispute operated from July 1, 2017, to October 12, 2017, after which an exemption took effect. Even during that initial period, qualifying intra-State supplies from unregistered persons up to ₹5,000 a day were exempt.
The Revenue had neither identified the supplies falling within the applicable period nor excluded transactions covered by the daily exemption.
The Bench also noted that similar meal-related expense entries had been accepted during the audit without an apparent distinction explaining why the disputed entries were treated differently.
It held that the authorities had failed to identify the correct charging provision, applicable notification and factual basis for the demand.
“Tax demand cannot be created based on assumptions or presumptions,” the Tribunal stated.
The Bench further stressed that GST liability could not be established without identifying the supply, its value and the person liable to pay tax. An observation in the audit report about deductions from employees did not, by itself, establish the liability confirmed in the proceedings.
The company also challenged the communications and adjudication order because they did not bear a Document Identification Number or Reference Number.
The Tribunal declined to invalidate the proceedings on that ground for the relevant period.
It noted that the CBIC’s DIN circulars bind CBIC officers, while Karnataka’s specific circular requiring RFNs for physically generated communications was issued on May 23, 2023—after the DRC-01 and adjudication order in this case.
Accordingly, the absence of DIN/RFN was not the basis on which the appeal succeeded.
The Tribunal set aside both the adjudication order dated April 25, 2023, and the appellate order dated June 27, 2025.
It quashed the combined CGST and SGST demand of ₹2,19,630, along with interest under Section 50 and the penalties imposed at 10% of the respective tax amounts.
The Tribunal directed that any pre-deposit be refunded with interest in accordance with law. No order as to costs was made.
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