Extended Limitation Justified for Fictitious ITC, but SCN Omission Nullifies Gobichettipalayam Adjudication Order

Extended Limitation Justified for Fictitious ITC, but SCN Omission Nullifies Gobichettipalayam Adjudication Order

Issue

Whether the Department was justified in invoking the extended period of limitation based on inspection findings of circular trading, and whether a final tax demand (DRC-07) can be sustained without issuing a prior Show Cause Notice (DRC-01) following a court-ordered remand.

Facts

• Dual Registrations: The petitioner-assessee operated two distinct GST registrations—one located at Gobichettipalayam and the other at Erode.

• Departmental Scrutiny: A departmental inspection conducted on September 9, 2021, triggered a scrutiny process under Form GST ASMT-10, alleging reciprocal/circular transactions and the passing of fictitious Input Tax Credit (ITC) without any actual supply of goods.

• Gobichettipalayam Procedural History: For the Gobichettipalayam registration, previous best-judgment assessment orders (ASMT-13) were set aside in a prior writ petition and remitted back to the authority. Post-remand, the department directly issued a final demand order (DRC-07) without serving a proper Show Cause Notice in Form GST DRC-01.

• Erode Procedural History: For the Erode registration, the department strictly followed the statutory pipeline, issuing a pre-notice intimation (DRC-01A), followed by a proper Show Cause Notice (DRC-01), receiving the assessee’s reply (DRC-06), and then passing the final order (DRC-07).

Decision

On Extended Limitation (In Favor of Revenue)

• Prima Facie Justification: The inspection findings and the initial ASMT-10 intimations contained sufficient material indicating circular trading and fictitious ITC. These facts prima facie justified invoking the extended limitation period under Section 74.

• Lower Threshold Under GST: The threshold for invoking the extended period of limitation under the GST regime stands lower compared to erstwhile indirect tax enactments. The challenge to its invocation was held untenable.

On Non-Service of Show Cause Notice (Partly in Favor of Assessee / Remanded)

• Gobichettipalayam Order Set Aside: Once an ASMT-10 is issued and replied to via ASMT-11, the matter must either conclude in ASMT-12 or proceed orderly through DRC-01A and a formal SCN under DRC-01. Skipping the DRC-01 step post-remand violated the statutory scheme. The Gobichettipalayam DRC-07 order was set aside and ordered to be treated as a DRC-01 notice for fresh de novo adjudication.

• Erode Order Upheld: Because the Erode registration proceedings strictly adhered to the procedural ladder (DRC-01A → DRC-01 → DRC-06 → DRC-07), it suffered no procedural infirmity and was not interfered with.

Key Takeaways

1. Lower Bar for Fraud Extensions: The GST law requires a lower threshold for revenue authorities to trigger the extended period of limitation for fraud or willful misstatement compared to old pre-GST tax regimes. Circular trading data is sufficient to invoke it.

2. SCN is Non-Negotiable: Even in post-remand proceedings where an earlier order has been set aside by a court, the department cannot bypass the absolute statutory requirement of issuing a formal Show Cause Notice (DRC-01). A final demand (DRC-07) without an SCN is legally unsustainable.