Adjudication cannot sustain a demand based on a valuation rule not invoked in the show-cause notice.

The petitioner, a partnership firm engaged in providing construction services, was called upon to pay GST of ₹8,54,870, along with interest and penalty, on the allegation that it had supplied excavated soil valued at ₹1,70,97,395 in exchange for services without issuing tax invoices.

A demand in Form GST DRC-01A was initially issued under Section 74(5) of the Central Goods and Services Tax Act, 2017 (“CGST Act”).

Subsequently, a show-cause notice dated 27 June 2025 was issued under Section 74(1), invoking Rule 28(1)(a) of the CGST Rules, 2017 for valuation of the alleged supply.

The petitioner denied the allegations and contended that it had already paid GST at 5% on the value of the excavated soil.

By order dated 30 March 2026/31 March 2026, the adjudicating authority admitted that Rule 28(a) had been incorrectly invoked in the show-cause notice, but proceeded to apply Rule 27(c) and confirmed the demand, interest and penalty, aggregating to ₹47,87,271, along with interest.

The petitioner challenged the show-cause notice and adjudication order under Article 226 of the Constitution.

Whether the adjudicating authority could confirm the demand by invoking Rule 27(c) of the CGST Rules when the show-cause notice had proceeded under Rule 28(a), without giving the petitioner an opportunity to address the new basis of valuation?

Whether the show-cause notice and the consequential adjudication order were liable to be quashed where the authority itself admitted that Rule 28(a), the provision invoked in the notice, was incorrectly applied?

The Court applied Section 74 of the CGST Act, 2017, which governs determination and recovery of tax allegedly not paid or short-paid by reason of fraud, wilful misstatement or suppression of facts.

It considered Rule 28(a) of the CGST Rules, concerning valuation in specified transactions involving related persons or distinct persons, and Rule 27(c), relied upon by the adjudicating authority for determining the value of the alleged supply.

The governing procedural principle was that an adjudicating authority must confine its decision to the case set out in the show-cause notice and provide a reasonable opportunity of hearing before relying on a materially different legal provision, factual basis or valuation methodology.

Reliance on a new basis without notice causes prejudice and violates the principles of natural justice.

The show-cause notice proceeded on the basis that Rule 28(a) governed the valuation of the excavated soil, although it did not allege or indicate that the supply was made to a related person.

The petitioner specifically challenged the applicability of Rule 28(a) in its reply.

The adjudicating authority subsequently accepted that Rule 28(a) had been incorrectly invoked but, instead of issuing an appropriate notice or permitting the petitioner to respond, applied Rule 27(c) and adopted a different valuation basis.

Since the petitioner had not been given an opportunity to address the applicability or consequences of Rule 27(c), the order travelled beyond the case made in the show-cause notice and caused grave prejudice.

The defect was substantive rather than technical because the change in the applicable valuation provision directly affected the determination of tax liability.

The Court also held that the original show-cause notice was liable to be quashed because the adjudicating authority had itself found that Rule 28(a) had been incorrectly invoked.

Accordingly, the writ petition was allowed; both the adjudication order and the show-cause notice dated 27 June 2025 were quashed and set aside.

The Revenue was left at liberty to initiate fresh proceedings by issuing a fresh show-cause notice.