SCN issued under section 74 for fraudulent intent or suppression of facts

[vinod jadhav]

One of my customer has mistakenly charged GST at 12% instead of 18% on irrigation works. As per Notification No. 11/2017-CT (Rate), Sl. No. 3(ix), works contract services provided by a subcontractor to a main contractor in relation to construction of canal, dam, irrigation works, etc., are taxable at 12%. The allegation in SCN is as below.

'It is clear from the above that if main contractor is awarded works contract for construction of canal, dam, irrigation works, pipeline etc (covers everything mentioned in clause (iii) or (vi)), only then first Sub contractor comes under the slab tate of l2% and for others works sub-contractors have to pay 18%.' 

Can the department invoke Section 74 for short payment of tax? Shouldn’t this case fall under Section 73 instead?

[Sadanand Bulbule]

The dispute is purely interpretational in nature, concerning the applicability of Sl. No. 3(ix) of Notification 11/2017-CT(R) to subsequent sub-contractors. As the transactions were fully disclosed in GSTR-1 and GSTR-3B, there is no "suppression" as defined in Explanation 2 to Section 74.

Following the ratio in MRF Ltd Vs. Additional Director, DGGI, [2025 (12) TMI 1442] the invocation of Section 74 is without jurisdiction and the proceedings should be limited to Section 73.

 

 

[YAGAY andSUN]

The impugned Show Cause Notice proposing demand under Section 74 of the CGST Act, 2017 is legally unsustainable both on merits and on the question of invocation of the extended period. The dispute, at best, pertains to classification and applicable rate of tax on works contract services allegedly covered under Notification No. 11/2017-CT (Rate), Sl. No. 3(ix). The entire transaction was duly recorded in the books of accounts, tax invoices were issued, and outward supplies were correctly disclosed in GSTR-1 and GSTR-3B returns. There is neither allegation nor evidence of suppression of turnover, falsification of records, misrepresentation of facts, or any positive act indicating intent to evade tax. It is a settled principle of law that a mere difference of opinion regarding interpretation of a notification or rate of tax does not constitute fraud, wilful misstatement, or suppression within the meaning of Section 74. In absence of mens rea and any deliberate concealment, invocation of Section 74 and the extended limitation period is arbitrary and contrary to law.

Without prejudice, the applicability of GST at 12% under Sl. No. 3(ix) depends upon the nature of the main contractor’s contract and the nexus of the subcontracted work with irrigation or canal construction falling under Sl. No. 3(iii) or 3(vi). The issue is thus purely interpretational and fact-based. Even assuming, without admitting, that the rate applied was erroneous, the case would at most fall within the ambit of Section 73 dealing with tax not paid or short paid without fraud or suppression. Consequently, the proposal for imposition of penalty equivalent to tax under Section 74 is liable to be dropped and the proceedings deserve to be quashed to that extent.

[KASTURI SETHI]

                      Yes.   Section 74 can be invoked if there is wilful-misstatement or suppression of facts to evade tax. This is a case of mis-     declaration of rate of tax. Such misdeclaration is covered under Section 74,  if it is wilful i.e. with an intent to evade tax.

                                The burden of proof is cast upon the department. There are case laws to this effect.

AI Summary

GST rate dispute on irrigation works subcontracting: whether invoking fraud provisions or ordinary recovery is appropriate. The department contends the 12% concession applies only to a first subcontractor where the main contract covers canal, dam or irrigation works, making other subcontractors liable at 18%. Whether section 74 can be invoked depends on proof of deliberate evasion or suppression of facts; absent such proof a bona fide mistake about applicable rate is typically recoverable under section 73.