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 means 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.

[KASTURI SETHI]

In continuation of my above reply

You are to take shelter of those judgements wherein the department has failed to discharge burden of proof regarding invocation of extended period on the basis of ingredients mentioned in Section 74.

[Shilpi Jain]

The department will always invoke s 74 it is upto you to prove otherwise.

If you have disclosed the transaction appropriately in the return and since this is an interpretational issue you could contest that s 74 is not applicable

[Sadanand Bulbule]

The dispute before the GSTAT concerned Sterling & Wilson Pvt. Ltd. vs Commissioner of CT GST Odisha - 2026 (2) TMI 726 - GSTAT NEW DELHI, arising from a mismatch between GSTR-1 and GSTR-3B returns for FY 2018-19, where the department alleged short payment of about Rs. 27 lakh with interest and penalty. The taxpayer argued the difference resulted from credit/debit notes, advance adjustments, and technical return-filing limitations, not tax evasion. Earlier authorities had reduced the allegation from fraud to non-fraud but still confirmed tax and interest. The Tribunal held that no intent to evade tax was established, emphasised that reconciliation issues alone do not justify fraud proceedings, and clarified that if fraud provisions fail, fresh tax determination must be done by the proper officer. Consequently, the matter was remanded for reconsideration with an opportunity for the taxpayer to amend returns and present supporting evidence, reinforcing procedural fairness and proper factual examination in GST disputes, 

Refer; Order dated 11/02/2026 of the GSTAT Principal bench. 

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, Agree with you. The judgement posted by you can be very useful for the party, We have not full SCN here. There may be other factors/issues for invocation of Section 74. 

[vinod jadhav]

Thank you Sadanand Ji and Kastri Sethi Ji of your valuable input. 

The above issue has been raised by the department in GST audit. The detailed SCN point is reproduced below.

On verification of Work contract agreement copy submitted by Tax payer. It is very clear that the Tax payer C is a sub to sub contractor of the State Project.

In view of the above, The Tax payer M/s A is sub to sub-contract of this above mention project.

Further as per SR No 3, clause (ix) of Notification 11/2017-Central Tax (rate) dt 28.06.2017 as amended upto 25.01.2018, works contract service provided by a sub-contractor to the main contractor providing services in relation to construction of canal, dam or other irrigation works etc comes under slab rate of 12%.

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 (vii)), only then first Sub contractor comes under the slab rate of 12% and for others works sub-contractors have to pay 18%.

In view of the above, it is very clear that the tax payer M/s A is providing services as a sub to sub contractor in this project not the first sub-contractor. Hence he is not eligible to get the benefit of exempted rate of GST @12 or 5%. The TP has to pay the differential tax @ 13%.. The details of Short payment is as detailed below:

[Sadanand Bulbule]

2026 (2) TMI 726 - GSTAT NEW DELHI - M/s Sterling & Wilson Pvt. Ltd. Through Zarine Yazdi Daruvala Versus Commissioner, Odisha, Commissionerate of CT GST & Ors. Sanjukta Gantayat.

 

AI Summary

Section 74 fraud invocation challenged where return disclosures and interpretational rate dispute suggest Section 73 applies instead. Dispute whether invoking the extended limitation under Section 74 is sustainable where a subcontractor charged a lower GST rate for irrigation works; department contends only first-tier subcontractors qualify for the reduced rate under Notification 11/2017-CT (Rate) Sl. No. 3(ix), alleging sub to subcontractor short-paid tax. Contributors argue that disclosure in GSTR returns and absence of concealment or falsification make the issue interpretational, properly falling under Section 73, and stress the department bears the burden to prove wilful misstatement or suppression to justify Section 74.