Telangana High Court Declines to Quash GST DRC-01 at Show-Cause Stage in Royalty Dispute

Overview

The Telangana High Court in M/s. S.Shivraj Reddy Constructions Vs Assistant Commissioner (ST) & Others declined to interfere with a Form GST DRC-01 show-cause notice (SCN) at the pre-adjudication stage. The assessee, a mining contractor, had approached the Court primarily to challenge the proposed levy of GST on royalty for quarry operations.

Reiterating settled principles governing writ jurisdiction under Article 226, the Court held that when a statutory mechanism for adjudication is available, High Courts should ordinarily refrain from interrupting proceedings at the stage of a show-cause notice, especially when multiple issues are involved. Instead, the assessee must file objections before the proper authority and pursue statutory remedies against any adverse final order.

Background of the Dispute

Commercial Arrangement and Mining Operations

  • The assessee is a partnership firm engaged in extraction of minor and major minerals.
  • On 23.10.2020, it executed a Memorandum of Understanding-cum-Agreement with M/s. Reya Minerals.
  • Under this agreement, the assessee undertook:
    • Raising of minerals,
    • Crushing operations, and
    • Marketing of quarry output,
      on a royalty payment basis.

The royalty arrangement formed the core of the assessee’s business model, and the proposed levy of GST on such royalty payments later became the key legal issue raised before the High Court.

Trigger for the Show-Cause Notice

Information was shared by the Senior Audit Officer, Audit Management Group-3, Office of the Accountant General, Hyderabad regarding certain discrepancies in the GST compliance of the assessee. Acting on this audit input, respondent No.1 – Assistant Commissioner (ST) issued a notice in:

  • Form GST DRC-01 dated 24.01.2025,
  • bearing ARN No. AD360125011405M,
  • covering the tax period 2021–22.

The DRC-01 notice:

  • Recorded that specific discrepancies had been noticed upon audit examination.
  • Proposed a tax liability along with interest on the net tax payable.
  • Called upon the assessee either to:
    1. Discharge the tax and interest liability through Form GST DRC-03, or
    2. Submit a detailed objection in Form GST DRC-06 within 15 days from the date of receipt, if the proposals were disputed.

Instead of submitting objections in Form GST DRC-06, the assessee invoked writ jurisdiction of the High Court under Article 226, seeking interference with the DRC-01.

Relief Sought in the Writ Petition

Initially, the writ petition was filed questioning the entire show-cause notice in Form GST DRC-01. However, during the course of hearing, counsel for the assessee modified the scope of relief sought:

  • The challenge was narrowed down only to the levy of GST on royalty arising out of the quarry agreement with M/s. Reya Minerals.
  • The assessee expressed that it was willing to allow the departmental process to continue in respect of the other discrepancies mentioned in the DRC-01.

In effect, the assessee attempted to segregate one component of the notice (royalty-related GST demand) for immediate judicial scrutiny while permitting the remaining issues to be decided by the adjudicating authority.

Assessee’s Core Contentions

The primary submissions on behalf of the assessee can be summarised as follows:

  1. Questionable legality of GST on royalty
    • The assessee contended that the proposed levy of GST on royalty payments connected with mineral extraction was legally contestable and raised important questions warranting immediate judicial consideration.