Karnataka HC Stays GST Demand, Questioning DGGI Jurisdiction and Deemed Valuation.

The case presents two primary legal questions for the High Court’s consideration:

Valuation: Can a deemed valuation ratio (70:30 for goods and services) be arbitrarily applied under a GST notification when the actual, ascertainable values of goods and services are available in a composite contract?
Jurisdiction: Do officers of the Directorate General of GST Intelligence (DGGI) have the legal authority to issue a Show Cause Notice (SCN) under Section 74 of the CGST Act as a “Proper Officer”?

The Directorate General of GST Intelligence (DGGI), Chennai, issued a Show Cause Notice (SCN) to the assessee, a company involved in wind power projects.
The SCN proposed a GST demand based on a deemed valuation, applying a 70:30 ratio for goods and services as per a GST notification, instead of using the actual values specified in the composite contracts.
The assessee challenged the SCN, arguing that the application of a deemed valuation is arbitrary and illegal when the actual bifurcation of contract value between goods and services is available and verifiable.
The assessee cited established legal precedents (Gannon Dunkerley, Wipro) and a Gujarat High Court ruling (Munjaal Manishbhai Bhatt) to argue that such deeming fictions that override actual values are unconstitutional.
A crucial part of the challenge was the assertion that the DGGI, Chennai, lacked the jurisdiction to issue the SCN, as its officers are not the “Proper Officer” designated under the CGST Act for such actions.

The Karnataka High Court, after considering the substantive legal and jurisdictional challenges, granted an interim stay on the operation of the Show Cause Notice.
The court directed that this case be tagged with and heard alongside the pending Selco Solar Light Pvt. Ltd. case, which involves similar questions regarding deemed valuation in the renewable energy sector.

Deemed Valuation Under Scrutiny: The judiciary is actively examining the legality of GST rules that impose a deemed valuation ratio, especially in cases where the actual transactional value of goods and services can be clearly identified.
Jurisdiction of DGGI is a Recurring Challenge: The authority of intelligence officers (DGGI) to issue SCNs and conduct assessments remains a contentious legal issue, with many taxpayers challenging it on the grounds that they are not the designated “Proper Officer.”
Constitutional Principles Apply to Tax Law: The case reinforces that tax laws, including GST, must adhere to constitutional principles. Arbitrary valuation methods that create a statutory fiction contrary to reality can be challenged as being ultra vires.
Interim Stay Provides Immediate Relief: The grant of an interim stay provides significant immediate relief to the taxpayer, halting the adjudication proceedings until the fundamental questions of law and jurisdiction are decided by the court.