DGGI Lacked Jurisdiction to Invoke S. 74 against NCS Pearson Amidst Pending Writ on Taxability of GMAT Type-III Tests under ODAIR Services: Karnataka HC Quashes SCN [Read Order]

Justice S.R. Krishna Kumar, held that the SCN was issued by the DGGI without jurisdiction since the issue of taxability of GMAT Type-III tests under OIDAR services was already pending adjudication before the Court.

The petitioner, NCS Pearson Inc., had been engaged by the Graduate Management Admission Council (GMAC), USA, to administer GMAT tests in India. While the Authority for Advance Rulings (AAR) in May 2020 had held that Type-II tests fell under OIDAR services but Type-III tests did not (owing to significant human intervention), the Appellate AAR (AAAR) later reversed this finding in November 2020, ruling that even Type-III tests qualified as OIDAR.

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Pearson challenged the AAAR’s decision through W.P. No. 3555/2021, where the High Court had granted interim protection against coercive recovery.

Despite the pendency of this writ, the Directorate General of GST Intelligence (DGGI), Chennai, issued an SCN dated 12 February 2024 under Section 74, alleging “wilful suppression” and demanding tax on Type-III test services for 2017-2021.

The company argued that the jurisdictional facts required to invoke Section 74, fraud, wilful misstatement, or suppression, were absent. It contended that it had transparently disclosed all details of test modalities and transactions before the AAR and AAAR, where the Revenue itself had participated.

Hence, no allegation of non-disclosure or deliberate concealment could stand. Further, the petitioner submitted that the issuance of an SCN when the classification issue was sub judice amounted to an attempt to bypass judicial scrutiny.

The Revenue defended the SCN, claiming that Pearson had knowingly failed to pay GST, misreported values in GSTR-5A returns, and under-applied tax rates, thereby justifying action under Section 74.

However, the Court rejected these arguments, noting that suppression under Section 74 requires deliberate intent to evade tax, not mere errors or omissions. Since the authorities already possessed complete knowledge of the transactions through earlier proceedings, the allegation of wilful suppression was unsustainable.

The Court further held that jurisdictional facts cannot be assumed or wrongly decided to clothe an authority with powers it does not possess.

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While noting Supreme Court precedents, Justice Krishna Kumar said that Section 74 cannot be invoked mechanically to extend limitation periods unless the stringent test of fraud or suppression is met.

Additionally, since the writ petition challenging AAAR’s ruling on Type-III tests was still pending with interim orders in Pearson’s favour, the issuance of an SCN on the same subject was impermissible.

While concluding that the SCN was illegal, arbitrary, and violative of Article 265 of the Constitution, the Court quashed the notice in its entirety.

The single bench said that tax cannot be collected without clear authority of law and that investigative and adjudicating agencies must respect ongoing judicial proceedings on classification and taxability issues.

Accordingly, the court set aside the show cause notice issued under Section 74 of the GST Act.

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