GSTR-1 vs Seigniorage Payments: When Mismatch Can Trigger Section 74 Extended Limitation

Background of the Dispute

The Madras High Court in KPR Enterprises v. State Tax Officer examined whether a major gap between the seigniorage fee paid for quarrying operations and the value of outward supplies declared in Form GSTR-1 is enough to justify invoking the extended period of limitation under Section 74 of the CGST Act and TNGST Act.

KPR Enterprises was engaged in quarrying activities but, due to its inability to operate the quarry itself, it engaged a contractor to extract boulders from its quarrying site. The price arrangement with the contractor was based on professional advice, and the contractor allegedly discharged the related GST liability on the boulder sales.

The assessee argued that what it sold were rock boulders that were not easily measurable for precise quantity-based valuation. Nevertheless, the State authorities compared:

• The seigniorage fee paid to the Government for extraction of minerals, and
• The turnover reported as outward supplies in Form GSTR-1

and identified a substantial discrepancy, which became the basis for invoking Section 74 proceedings.

Timeline of Events and Proceedings

Inspection and Initial Intimation

• An inspection was conducted at the premises of KPR Enterprises in March 2024.
• Following the inspection, Intimation Notices in Form GST DRC-01A dated March 20, 2024 were issued for the tax periods:
  • 2018-2019
  • 2019-2020
  • 2020-2021
• The assessee submitted its reply to these intimations on March 23, 2024.

Show Cause Notices and Replies

• Subsequently, Show Cause Notices in Form GST DRC-01 dated April 02, 2024 were issued (the SCNs).
• The assessee filed detailed replies to these SCNs on June 25, 2024.

Assessment Orders under Section 74

The State Tax Officer (the Respondent) passed assessment orders on July 15, 2024 (the Impugned Orders) invoking Section 74 of the CGST Act and TNGST Act. The tax liability was computed on the basis of the seigniorage fee payments and the estimated quantity of boulders quarried.

The key figures relied upon by the Respondent were:

Against an aggregate seigniorage fee of Rs. 60.18 lakhs for these three years, the assessee had reported outward supplies in Form GSTR-1 of only Rs. 34,09,433/-.

Using the National Standard Method for estimating the expected turnover from the quantity of minerals extracted (as inferred from seigniorage paid), the Respondent concluded that the assessee had significantly under-reported its taxable supplies.

On this basis, demands were raised under Section 74, along with the extended limitation period, on the allegation of suppression of turnover.

Assessee’s Key Contentions

KPR Enterprises challenged the Impugned Orders by way of writ petitions before the Madras High Court. The primary grounds urged were:

1. Improper invocation of Section 74 extended limitation

   • The assessee argued that the Impugned Orders did not contain any clear or specific finding regarding:
     • “fraud”,
     • “willful-misstatement”, or
     • “suppression of fact”
       which are mandatory elements for applying Section 74 and its extended 5-year limitation period.
   • According to the assessee, without a clear allegation and finding of such culpable intent, only Section 73 (with normal limitation) could be invoked.

2. Lack of proper opportunity of personal hearing

   • The assessee contended that no effective personal hearing was afforded prior to passing the Impugned Orders, rendering the orders violative of principles of natural justice.

3. No revenue loss due to contractor’s GST payment

   • It was contended that the contractor, who actually extracted and sold the boulders, had already paid GST on such supplies.
   • Therefore, the assessee argued that the exchequer suffered no loss, and any further demand on the assessee would be unjustified and duplicative.

On these bases, the assessee sought to have the Impugned Orders set aside in writ jurisdiction.