The Allahabad High Court has held that although issuance of Form GST DRC-01A before a show cause notice is not a jurisdictional requirement invalidating subsequent proceedings, a taxpayer cannot be deprived of the statutory benefit available under Section 74(5) of the CGST Act merely because DRC-01A was not issued. The court directed that the assessee be allowed to settle the dispute by paying tax, interest and penalty at the concessional rate of 15%.

A division bench comprising Justice Saumitra Dayal Singh and Justice Vivek Saran was hearing a writ petition filed by M/s World Phone Internet challenging an adjudication order and DRC-07 issued for FY 2019-20. The petitioner restricted its challenge to the denial of benefits available under Section 74(5) of the GST Act, read with Rule 142(1A) of the CGST Rules.

The petitioner contended that no DRC-01A was issued before the issuance of the show cause notice in Form DRC-01. As a result, it was denied the opportunity to settle the matter at the pre-notice stage by paying tax, interest and a reduced penalty of 15%, as contemplated under Section 74(5).

The Revenue argued that after the amendment of Rule 142(1A), the word “shall” had been replaced by “may”, making issuance of DRC-01A discretionary. It was further submitted that the petitioner had already participated in the adjudication proceedings and therefore could not claim any prejudice.

The High Court observed that Section 74(5) forms an integral part of the statutory scheme and grants a valuable right to a taxpayer to settle a proposed demand before issuance of a formal show cause notice. The Court held that Rule 142(1A) must be interpreted harmoniously with Section 74(5) and cannot be read in a manner that defeats the statutory benefit provided by the Act.

“The provisions of Section 74(5) of the Act read with Rule 142(1A) of the Rules are mandatory to the extent-no demand of penalty-higher than 15% may be raised in the first place, and issuance of notice on DRC-01A is mandatory.” The Bench clarified that non-issuance of DRC-01A does not render the show cause notice without jurisdiction. However, where the taxpayer raises the issue while replying to the show cause notice, the benefit under Section 74(5) cannot be denied.

Thus, the writ petition was allowed. The Court directed that if the petitioner pays the disputed tax, interest and 15% penalty within one month, the adjudication order shall stand satisfied.

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