Facts of the Case:

The petitioner was engaged in the business of supply and installation of solar power generating systems under composite contracts and had been discharging GST at the rate of 5% on its transactions. The dispute arose when the GST authorities sought to classify the supplies as composite supplies of goods and services, requiring the taxable value to be apportioned in the ratio of 70% towards goods and 30% towards services.

Notification No. 24/2018-Central Tax (Rate) dated 31.12.2018 introduced an Explanation prescribing the 70:30 valuation mechanism with effect from 01.01.2019. Subsequently, Circular No. 163/19/2021-GST dated 06.10.2021 clarified that the same ratio would apply retrospectively to the period from 01.07.2017 to 31.12.2018. Relying on this clarification, the department issued a show-cause notice dated 30.06.2025 under Section 74 of the CGST/GGST Act for FY 2018-19 and passed an order in Form GST DRC-07 dated 24.12.2025. The petitioner challenged these proceedings, contending that the retrospective clarification could not, by itself, establish fraud, wilful misstatement or suppression of facts.

Issue:

Whether the GST authorities could invoke Section 74 of the CGST/GGST Act for alleged non-payment of tax in the 70:30 ratio for composite supplies of solar power generating systems for FY 2018-19. Whether the subsequent retrospective clarification prescribing the 70:30 ratio could, by itself, establish fraud, wilful misstatement or suppression of facts to justify invocation of Section 74.

Held That:

The Gujarat High Court held that the impugned show-cause notice and adjudication order were liable to be quashed and set aside, as the invocation of Section 74 of the CGST/GGST Act was not justified merely on the ground that the petitioner had failed to discharge GST in the ratio of 70% towards goods and 30% towards services for its composite supplies of solar power generating systems. The Court noted that Entry No. 234 of Schedule I to Notification No. 01/2017-Central Tax (Rate) dated 28.06.2017 prescribed a 5% GST rate for solar power generating systems. The specific Explanation providing for the deemed apportionment of the gross consideration in the ratio of 70:30 was introduced through Notification No. 24/2018-Central Tax (Rate) dated 31.12.2018, with effect from 01.01.2019.

The Court observed that although Circular No. 163/19/2021-GST dated 06.10.2021 subsequently clarified that the 70:30 ratio would also apply to the period from 01.07.2017 to 31.12.2018, such retrospective clarification could not, by itself, establish fraud, wilful misstatement or suppression of facts on the part of the petitioner. The existence of these ingredients had to be examined with reference to the statutory and regulatory framework applicable when the relevant transactions were undertaken. A subsequent clarification extending the application of a valuation mechanism to an earlier period could not automatically be treated as evidence of deliberate tax evasion so as to justify the invocation of Section 74 and its extended limitation period.

Accordingly, the Court concluded that the essential ingredients for invoking Section 74 were not established merely because the petitioner had not adopted the retrospectively clarified 70:30 ratio. The impugned show-cause notice dated 30.06.2025 and the consequential order dated 24.12.2025 passed in Form GST DRC-07 were therefore quashed and set aside.

However, the Court clarified that its decision would not prevent the GST authorities from initiating fresh proceedings in accordance with law to examine whether the petitioner had correctly applied the tax rates prescribed under the relevant notifications for the supply of goods and services. The department was specifically permitted to examine the tax liability for the period from 01.01.2019 to 31.03.2019, subject to applicable law. The rights and contentions of both parties were kept open for any subsequent proceedings.

Case Name: ZODIAC ENERGY LTD. v. STATE OF GUJARAT dated 29.09.2026

Citation No. 2026 Taxo.online 3279