M/s World Phone Internet v. Superintendent, Range & Ors.

GST update /2026-27/0046

*GST UPDATE*

**Taxpayer is eligible to the benefit of reduced penalty @ 15% of the total penalty*

even in the cases where SCN is issued directly bypassing the requirement of

issuing DRC-01A where the intention of the taxpayer is to settle the disputed

matter by paying the disputed tax along with interest and penalty.

Writ Tax No.: 2707 of 2026

Court: High Court of Allahabad

Case Title: M/s World Phone Internet v. Superintendent, Range &

Ors.

Outcome: Writ Petition was dismissed

Judgement Date: 25.05.2026

BRIEF FACTS OF THE CASE:

M/s World Phone Internet (petitioner) was served with a Show Cause Notice

(SCN) in FORM DRC-01 for the F.Y. 2019-20 against which a reply was filed by

the petitioner. Subsequently, the allegations proposed by the impugned SCN were

later confirmed by order-in-original in FORM DRC-07. Petitioner was willing to

settle the proceedings by paying the disputed tax along with interest and penalty

at reduced rate of 15%. However, Revenue did not allowe to settle penalty @ 15%

and demanded 25% penalty on the ground that the SCN was issued. Petitioner

sought a relief by preferring writ tax before the Hon’ble High Court.

QUESTION BEFORE HON’BLE COURT:

? Whether benefit of reduced penalty of 15% under section 74(5) can be

granted where DRC-01A is not issued and DRC-01 is issued directly?

? Whether the word “may” used in the Rule 142(1A) makes the requirement

of issuance of DRC-01A directory or mandatory?

BRIEF ARGUMENTS BY PETITIONER:

Petitioner submitted following contentions: -

? It was argued that benefit of Sec 74(5) of the CGST Act 2017 has been confined

in the case of the petitioner.

? Furthermore, no opportunity was granted to the petitioner prior to the show

cause notice which led to denial of the statutory right and benefit of Section

74(5) to pay up the disputed demand along with interest and reduced penalty.

? Provisions of Section 74(5) provides that dispute can be concluded by paying

reduced penalty i.e. penalty @15% instead of full penalty demand created by

the order-in-original.

? Furthermore, Rule 142(1A) requires issuance of DRC-01A prior to the issuance

of show cause notice.

Therefore, benefit of Section 74(5) of settlement of demand by paying

penalty @15% should be extended.

BRIEF ARGUMENTS BY REVENUE DEPARTMENT:

Revenue Department contended that:

? It was argued that Rule 142(1A) is directory and not mandatory. Hence,

issuance of DRC-01A is not mandatory.

? Furthermore, it is at discretion of the adjudicating authority to issue or not to

issue DRC-01A. Hence, Section 74(5) benefit can be extended only when

DRC-01A is issued.

? Notification No. 79 of 2020 dated 15.10.2020 substituted the word proper

“officer may” in place of “proper officer shall” which clearly indicates that the

rules are directory w.e.f. 15.10.2020. Hence, reliance cannot be placed upon

Skyline Automation Industries vs. State of U.P.

? The stage of issuance of DRC-01A was passed long time ago and after that

when the DRC-01 was issued, reply was given against the same by the

petitioner. Hence, the stage of Section 74(5) does not exist any long.

? And even at the stage of issuance of Show cause notice DRC-01, petitioner is

eligible to conclude the proceedings and claim the benefit of 25% of the

penalty.

FINDINGS & JUDGEMENT:

Following are the findings of the Court in the instant case:

? It was held that a person can never be aware of issuance of SCN unless an

intimation is issued to the person before issuance of such notice. Hence, in

such case, situation where benefit of settlement of dispute to be provided to

the taxpayer will not arise.

? Prior to amendment made in Rule 142(1A), “proper officer shall” phrase

was used, interpretation of which clearly means that no SCN shall be issued

unless there is issuance of DRC-01A prior to DRC-01. Although Rule

142(1A) uses the word “may”, the Court held that the Rule cannot be

interpreted in a manner that defeats the principal Act. Delegated legislation

must always be read consistently with the parent statute. The Court reasoned

that if Rule 142(1A) is treated as entirely discretionary, the statutory benefit

under Section 74(5) would become illusory because the taxpayer would

never know the ascertained liability before issuance of the show cause

notice. Such an interpretation would create a conflict between the Act and

the Rules, which is impermissible.

? It was held that the Rule 142(1A) is wholly for the benefit of the noticee

who is willing to wind up the proceedings without contesting the

adjudication. Along with that, the said rule is also in the benefit of the

Revenue, as it leads to collection of revenue without adjudication.

? Based on above, it was held that Provision of Rule 142(1A) have to be read

in conjunction with Section 74(5) of the Act and to the extent Section 74(5)

there is no doubt that Section 74(5) is the part of statutory scheme which is

provided for finalisation of demand proceeds before issuance of the show

cause notice by paying the penalty @15% of the total penalty.

? It was held that no reliance can be placed upon the decision of Delhi High

Court in the case of Manpar Exim Inc vs. Additional Director DGGI and

Ors. in which it was held that in case where DRC-01A was not issued, DRC

01 can be held to be invalid. However, as in the present case, there is no such

challenge made by the petitioner. Hence, the instant case is limited to the

right to avail the settlement against the payment of 15% penalty of the total

penalty.

? Hence, it can be rightly held that provisions of Section 74(5) read with Rule

142(1A) are mandatory to the extent no demand of penalty higher than 15%

may be raised in the first place and issuance of DRC-01A is mandatory.

? Further, that whenever DRC-01A is not issued, the noticee shall remain

entitled to benefit of Section 74(5) up to the stage of filing reply to the show

cause notice.

? In the present case, as the petitioner has chosen to avail that right , hence, he

should be allowed to pay the disputed amount in accordance with Section

74(5) read with Rule 142(1A).In continuation of above, it was held that

benefit shall not be granted where the taxpayer chooses to appear in reply to

SCN and contest the liability and that the rules of procedure exists to give

benefit to the statutory scheme laid down by the legislature.

? The contentions laid down by the Revenue, does not support the statutory

intent to give mandatory effect to provisions of Section 74(5) of the Act read

with Rule 142(1A) because, the penalty amount gets increased from 15% to

25%.

Thus it is held that this petition is allowed, allowing the petitioner to pay

the disputed demand along with interest and penalty @15% in accordance

with Section 74(5) and interest computed on the date of issuance of SCN

on DRC-01, treating the same to be a notice issued on DRC-01A(on that

date). The amount is required to be paid within 1 month.

AUTHOR’S COMMENT:

This judgement reinforces the principle that wherever there is any benefit accruing

through a statutory provision of the law to the taxpayer, such benefit should be

extended to the taxpayer by interpreting the provision accordingly. Such benefit

should be granted even when a section or a rule is directory and not mandatory as

per the statute. Revenue should have lenient approach where the taxpayer is

willing to conclude the proceedings as it will create a win-win situation for

Revenue and Taxpayer both. At the same time, it also signals that taxpayers must

be careful in drafting replies to SCNs , if they do not expressly seek the benefit of

Section 74(5), the department may argue that the right stands waived.

Further, this judgement assists in fast and swift conclusion of proceedings in the

cases where the taxpayer is willing to settle the proceedings accepting the

discrepancy.

VARIOUS SECTIONS AND RULES REFERRED IN THE INSTANT

CASE:

Section 73, Section 74(5), Section 50 of CGST Act 2017

Rule 142(1A) of CGST Rules 2017

Manpar Exim Inc vs. Additional Director DGGI and Ors.[ 2026 (105) G.S.T.L.

259 (Del.)].

Skyline Automation Industries vs. State of U.P. [2023 (68) G.S.T.L. 235 (All.) /

(2023) 2 centax 100 (All.)]

Notification No. 49 of 2019 dated 09.10.2019.
CA Pradeep Jain

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