The Gujarat High Court has quashed a GST show-cause notice and adjudication order against a solar energy company, holding that retrospective application of a valuation formula cannot, by itself, establish fraud, suppression of facts or deliberate tax evasion necessary to invoke Section 74 of the Central Goods and Services Tax Act, 2017.
The bench of Justice A.S. Supehia and Justice Vaibhavi D. Nanavati set aside the notice dated June 30, 2025, and the adjudication order dated December 24, 2025. However, it preserved the authorities’ right to initiate fresh proceedings, where legally warranted, to examine compliance with applicable tax rates. It separately permitted fresh proceedings, if required under law, for January 1 to March 31, 2019.
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The petitioner/assessee supplies and installs solar power generating systems under composite contracts. The dispute arose from the department’s position that these transactions required a different tax treatment from that adopted by the company.
The judgment records that solar power generating systems were covered by Entry 234 of Schedule I to Notification No. 01/2017–Central Tax (Rate), dated June 28, 2017, carrying a 5% GST rate. The dispute also involved provisions prescribing an 18% rate for relevant services.
Notification No. 24/2018–Central Tax (Rate), dated December 31, 2018, introduced an explanation prescribing a deemed division of the gross consideration. Under this formula, 70% of the consideration was treated as the value of goods, while the remaining 30% was treated as the value of the specified taxable service.
The explanation became effective on January 1, 2019. Subsequently, Circular No. 163/19/2021-GST, dated October 6, 2021, clarified that GST on renewable energy projects could be paid using the same formula for the earlier period from July 1, 2017, to December 31, 2018.
The department relied on this framework to initiate the impugned proceedings for financial year 2018–19.
The company argued that the authorities had ignored an earlier High Court judgment dated July 17, 2025, concerning proceedings for financial year 2017–18. In that matter, the court had found that the notice did not disclose fraud, wilful misstatement or suppression of facts.
The company also relied on Circular No. 47/21/2018-GST, dated June 8, 2018. It contended that where goods and services were separately shown, each was taxable at its applicable rate.
According to the company, its invoices separately disclosed goods and services, attracting rates of 5% and 18%, respectively. It argued that its tax treatment followed the framework applicable when the transactions occurred.
The company further submitted that the explanation introduced through the December 2018 notification took effect only on January 1, 2019. Its subsequent application to an earlier period could not justify treating the company’s earlier conduct as fraudulent or suppressive.
Assistant Government Pleader Raj Tanna, representing the State, submitted that scrutiny of the returns revealed that the company had discharged its output tax liability at 5%.
The department argued that the transactions involved commissioning, installation and testing, in addition to the supply of solar products. It maintained that the consideration therefore had to be apportioned between goods and services in the ratio of 70:30.
Relying on the notifications and the October 2021 circular, the State contended that the tax framework contemplated this treatment for composite solar power supplies. It also pointed out that the company had not challenged the circular extending the formula to the earlier period.
On this basis, the department defended its invocation of Section 74.
The High Court held that the notice and adjudication order travelled beyond the scope of Section 74.
The bench observed that the deemed 70:30 valuation formula was introduced for the first time through the December 31, 2018 notification, effective January 1, 2019. Its subsequent application to an earlier period did not automatically establish that the company had acted fraudulently when raising invoices and paying tax under the framework then applicable.
The court explained that fraud, suppression of facts and a deliberate intention to evade tax must be evaluated against the regulatory framework existing at the relevant time. These elements cannot simply be inferred from a subsequent retrospective tax treatment.
Accordingly, the court held that the ingredients necessary to invoke Section 74 and its extended five-year limitation period were not established merely by alleging non-payment according to the retrospectively applied formula.
The bench also noted that the notice and order did not allege a violation of the tax payment requirements under the original GST framework and the relevant notification discussed in the judgment.
While granting relief, the High Court left open the department’s ability to examine the company’s invoices to determine whether they complied with the applicable rates for goods and services.
The bench also expressly permitted fresh proceedings, if required under law, for January 1 to March 31, 2019—the period after the notification introducing the 70:30 formula became effective.
The ruling therefore does not grant a blanket exemption from GST or finally determine every aspect of the company’s tax liability. Its central finding is that retrospective application of the valuation formula, without the necessary elements of fraud or suppression, cannot sustain the impugned Section 74 proceedings.
The court quashed both the notice and the adjudication order, reserving the rights and contentions of the parties in any subsequent proceedings.
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