Telangana HC Sends GST Royalty Dispute Back to Adjudicating Officer at SCN Stage

Background of the royalty dispute

S. Shivraj Reddy Constructions was engaged in activities involving extraction of minor and major minerals. The firm had entered into a memorandum of understanding-cum-agreement dated 23 October 2020 with Reya Minerals.

Under the arrangement described in the proceedings, the taxpayer undertook quarry-related operations such as raising and extracting minerals, crushing the material and marketing or selling the output on a royalty-payment basis.

Information received from the office of the Accountant General led the State Tax authorities to examine the taxpayer's GST compliance for assessment year 2022-23.

GST DRC-01 notice issued to the taxpayer

The proper officer issued a show-cause notice in Form GST DRC-01 dated 24 January 2025 under ARN AD360125011415L.

The notice identified proposed discrepancies and called upon the taxpayer either to discharge the proposed tax and interest through Form GST DRC-03 or to submit objections in Form GST DRC-06 within the time stated in the notice.

Instead of completing the reply and adjudication process, the taxpayer approached the Telangana High Court and questioned the notice, particularly the proposed levy of GST on royalty.

Why the High Court declined immediate interference

The Court treated the impugned DRC-01 as a show-cause notice and found that the statutory adjudication process had not yet concluded.

At this stage, the proper officer had not passed a final order determining the taxpayer's liability. The taxpayer still had an opportunity to submit facts, legal grounds and supporting records before the authority.

The High Court therefore declined to decide the royalty issue prematurely and directed the taxpayer to pursue the reply process before the proper officer.

GST on royalty was not finally decided

The order does not hold that GST is payable on the royalty involved in the case. It also does not hold that royalty is outside GST.

The Court left the issue open for examination during adjudication. If the final order is adverse, the taxpayer remains free to challenge both the levy on royalty and the other findings through the remedies available under law.

This distinction is important because disposal of a writ petition at the notice stage is not a judgment on the substantive taxability of the transaction.

Role of Forms DRC-01, DRC-03 and DRC-06

Form GST DRC-01 communicates the proposed tax, interest and penalty arising from a show-cause notice under the GST framework.

Form GST DRC-03 is used for specified voluntary payments or payments made during proceedings. A payment should be made only after the taxpayer understands the proposal and obtains case-specific advice.

Form GST DRC-06 is the prescribed reply to the show-cause notice. It should contain a clear statement of facts, preliminary objections, legal submissions, reconciliation and supporting evidence.

What a reply on GST royalty should examine

• The exact nature of the mining, quarrying or contractual rights granted to the taxpayer.
• The person to whom royalty was paid and the statutory or contractual basis of payment.
• Whether the transaction amounts to a supply under the CGST and State GST laws.
• The applicable service classification and rate notification for the relevant tax period.
• Whether reverse charge applies and who bears the tax liability.
• The correct time of supply and value of the alleged taxable service.
• Whether tax has already been discharged, reported or reconciled in the returns.
• The effect of binding judicial decisions and any pending proceedings on the same legal issue.
• Limitation, jurisdiction and procedural compliance in issuing the notice.
• The calculation of tax, interest and penalty in the annexures to DRC-01.

Courts ordinarily avoid interfering with a show-cause notice

A show-cause notice is generally the beginning of adjudication, not its conclusion. The notice gives the taxpayer an opportunity to explain why the proposed demand should not be confirmed.

High Courts ordinarily expect the taxpayer to use this opportunity and allow the statutory authority to pass a reasoned order. Early writ interference is normally reserved for exceptional circumstances such as clear absence of jurisdiction, a fundamental procedural defect or another serious illegality.

Whether such an exception exists always depends on the notice, pleadings and facts of the individual case.

Practical compliance checklist

• Download the complete DRC-01 and every annexure from the GST portal.
• Record the date of service and calculate the reply deadline accurately.
• Reconcile royalty payments with agreements, challans, ledgers and financial statements.
• Identify the precise legal provision, notification, classification and rate relied upon by the department.
• Prepare a transaction-wise and tax-period-wise reconciliation.
• Address jurisdiction and limitation objections at the beginning of the reply.
• Attach the memorandum, mining or quarry documents, royalty records and invoices.
• Request a personal hearing and preserve proof of the request.
• File Form GST DRC-06 within time and retain the acknowledgement.
• Ensure the adjudication order deals with every material objection and document.

Key takeaways

• The case is Writ Petition No. 19108 of 2026 before the Telangana High Court.
• The disputed notice was Form GST DRC-01 dated 24 January 2025 for assessment year 2022-23.
• The taxpayer challenged the proposed GST levy on royalty before a final adjudication order was passed.
• The High Court declined to decide the dispute at the show-cause-notice stage.
• The taxpayer was directed to submit objections before the proper officer.
• The issue of GST on royalty remained open for challenge after adjudication.
• The ruling does not declare royalty taxable or exempt under GST.

Conclusion

S. Shivraj Reddy Constructions v. Assistant Commissioner (ST) reinforces the importance of presenting a complete defence during GST adjudication. A taxpayer should not assume that a High Court will examine the merits merely because the show-cause notice raises an important legal question.

The immediate task is to file a detailed DRC-06 reply supported by agreements, royalty records, return reconciliations and the applicable legal authorities. The resulting adjudication order can then be evaluated and challenged through the appropriate remedy if necessary.