Telangana HC Remands GST Demand on Raw Cotton Transactions — RCM Liability and Composite Order Under Sections 73 & 74 of CGST Act Challenged
Case Background
Case: Shalimar Industries Vs Assistant Commissioner (Telangana High Court)
The Telangana High Court recently intervened in a significant GST dispute involving Reverse Charge Mechanism (RCM) liability on raw cotton transactions, covering financial years 2017-18 through 2022-23. The Court set aside the appellate order dated 12.03.2026 and directed the appellate authority to conduct a fresh hearing and pass a reasoned order in accordance with law.
The matter arose from a GST demand — inclusive of tax, interest, and penalty — aggregating to Rs. 1,54,33,258/-, which had been confirmed through an order-in-original dated 17.11.2024 (along with a summary in Form GST DRC-07 dated 21.11.2024) and subsequently upheld through the appellate order dated 12.03.2026.
The Core Dispute: RCM on Raw Cotton Purchases
At the heart of the controversy was the department's treatment of the assessee's raw cotton purchases as attracting Reverse Charge Mechanism (RCM) liability under the Central Goods and Services Tax Act, 2017. The assessee, Shalimar Industries, strongly contested this characterisation, arguing that:
- The raw cotton in question was procured for trading purposes, and not for ginning activities.
- Since the purchases were made for trading and not for manufacturing or processing, the RCM liability sought to be imposed was factually and legally incorrect.
- Detailed documentary evidence — including invoices, e-way bills, bank statements, and reconciliation statements — had been submitted before the authorities to substantiate this position.
Despite the submission of this documentary record, the assessee contended that the authorities had failed to apply their mind to the evidence and had mechanically confirmed the demand without offering any substantive reasoning.
Procedural History: From Original Order to Writ Petition
Order-in-Original and GST DRC-07
The proper officer passed the order-in-original dated 17.11.2024, followed by issuance of a summary in Form GST DRC-07 on 21.11.2024, fastening GST liability including RCM on raw cotton transactions for the period FY 2017-18 to FY 2022-23.
Appellate Stage
Aggrieved by the original order, the assessee availed the appellate remedy. However, the appellate authority confirmed the demand through its order dated 12.03.2026, without engaging meaningfully with the detailed submissions, documentary evidence, and specific legal contentions raised by the assessee.