Recovery Based on GSTR-1 vs 3B Mismatch Remanded; Invoice Cancellation Claim Must be Proven

Recovery Based on GSTR-1 vs 3B Mismatch Remanded; Invoice Cancellation Claim Must be Proven

Issue

Whether the department can initiate recovery proceedings under Section 79 (via Form GST DRC-01D) for a liability declared in GSTR-1 but not paid in GSTR-3B, when the taxpayer claims the underlying contract did not fructify and invoices were cancelled post-facto, but failed to substantiate this claim in their reply to the intimation (Form GST DRC-01B).

Facts

• The Transaction: The petitioner raised invoices on a recipient and reported them in GSTR-1, creating a tax liability on the portal.

• The Cancellation: The petitioner claimed that the contract ultimately did not fructify, and no services were actually provided. Consequently, they did not report the liability or pay the tax in GSTR-3B.

• The Mismatch: The system flagged the discrepancy between GSTR-1 (Liability) and GSTR-3B (Nil/Lower Payment). The department issued an intimation in Form GST DRC-01B under Rule 88C.

• The Reply: The petitioner filed a reply in Part-B of Form GST DRC-01B, simply asserting that the invoices had been cancelled post-facto.

• The Action: Finding the reply unsatisfactory/incomplete, the department initiated recovery proceedings under Section 79 by issuing Form GST DRC-01D.

• Petitioner’s Plea: The petitioner challenged the recovery, arguing that no tax is payable since no supply took place.

Decision

• The Madras High Court disposed of the writ petition by remanding the matter to the department for a fresh decision.

• Reply Was Incomplete: The Court held that the petitioner’s reply in Part-B was “incomplete.” Merely stating that invoices were cancelled is not sufficient to rebut the statutory liability created by GSTR-1.

• Supply vs. Payment: The Court reiterated that under GST, if a service is provided, tax is payable regardless of whether the supplier has received payment from the recipient. The petitioner needs to prove that no service was provided at all.

• Evidence Required: To substantiate the claim of “no supply,” the petitioner must produce their Annual Books of Account showing that the transaction was not recorded as revenue/receivable. Unilateral cancellation of invoices without corroborating books is ineffectual.

• Opportunity: In the interest of justice, the Court granted the petitioner 30 days to file a detailed reply with proper evidence (books, contract correspondence). The Officer was directed to pass a fresh order thereafter.

Key Takeaways

• GSTR-1 is a Self-Admission: Data filed in GSTR-1 is treated as a self-admission of liability. To negate it, the taxpayer must provide strong, documentary evidence (like cancelled contracts, correspondence, or audited books) proving the supply never took place.

• Rule 88C Compliance: A “one-line” reply to a DRC-01B intimation is risky. Taxpayers must attach supporting documents to explain why the GSTR-1 liability should not be recovered.

• Credit Note Route: The proper mechanism to nullify a GSTR-1 invoice is usually issuing a Credit Note in a subsequent period. Simply ignoring it in GSTR-3B triggers automated recovery actions.