Medicine Distributor Challenges GST Audit and ₹40 Lakh Allegedly Coerced Deposit; Delhi High Court Refuses to Quash Show-Cause Notice, Leaves All Objections Open for Adjudication
Can GST Show-Cause Notice Be Quashed Because Audit Reply Was Not Properly Considered? Delhi High Court Says Adjudicating Authority Must Examine Objections
Facts
Dhruv Medicos Pvt. Ltd., a private company engaged in distribution of medicines, challenged proceedings arising from an audit conducted under the Central Goods and Services Tax Act, 2017. Its principal challenge was to a Demand-cum-Show Cause Notice No. 137 dated 27 June 2025 issued under Section 74 of the CGST Act. DHRUV MEDICOS
The company also challenged Audit Report No. 111/2025-2026 dated 29 April 2025 and sought protection concerning ₹40,10,153 deposited through Form GST DRC-03 on 25 March 2025, alleging that the payment had been extracted under coercion. DHRUV MEDICOS
The audit commenced through Form GST ADT-01 dated 6 September 2024, initially covering the period from 1 April 2018 to 31 March 2023. Dhruv Medicos furnished documents and information between November 2024 and January 2025 and responded to further requisitions. DHRUV MEDICOS
An onsite audit was conducted between 20 and 25 March 2025. The company alleged that during this audit the authorities attempted to extend the scope beyond the period specified in the original notice. DHRUV MEDICOS
Alleged Coercive Recovery of ₹40.10 Lakh
The company’s principal grievance concerned payment of ₹40,10,153 through DRC-03 on 25 March 2025.
Dhruv Medicos asserted that the payment was not voluntary. It claimed that it requested a formal communication or audit memo explaining the alleged liability before making payment, but was nevertheless required to deposit the amount during the audit itself. DHRUV MEDICOS
Four days later, on 29 March 2025, it formally complained to the authorities that the payment had been made under coercion and should neither be treated as voluntary nor as an admission of liability. DHRUV MEDICOS
An Audit Memo dated 28 March 2025 was subsequently supplied on 4 April 2025. It required payment of ₹75,41,830 plus applicable interest and penalty. The company complained that adequate workings explaining this figure had not been supplied. DHRUV MEDICOS
Audit Report and Section 74 Proceedings
The Audit Report was issued on 29 April 2025. The ₹40.10 lakh already deposited was appropriated.
According to Dhruv Medicos, the detailed workings supporting the alleged liability were supplied only on 14 May 2025, after the Audit Report had already been finalized, thereby depriving it of an effective opportunity to respond at the audit stage. DHRUV MEDICOS
The Department then issued Form GST DRC-01A dated 2 June 2025, proposing liability and indicating that proceedings under Section 74 would follow in the event of non-payment.
Dhruv Medicos submitted a detailed reply dated 18 June 2025, accompanied by documents and a request for personal hearing. It challenged limitation for FY 2017-18, invocation of Section 74, computation of liability, appropriation of ₹40.10 lakh and the manner in which the audit had been conducted. DHRUV MEDICOS
Nevertheless, the impugned Section 74 show-cause notice followed on 27 June 2025.
Petitioner’s Arguments
The company’s principal legal argument rested upon Rule 101(4) of the CGST Rules, 2017.
It argued that the Rule requires the proper officer to finalize audit findings only after considering the registered person’s reply.
Because the provision uses the expression “shall”, Dhruv Medicos contended that consideration of its response was mandatory rather than discretionary.
Its detailed reply, however, had effectively been disposed of by merely describing it as “non-satisfactory.” According to the petitioner, such treatment did not constitute meaningful statutory consideration. DHRUV MEDICOS
The petitioner also pressed its objections concerning:
- limitation for FY 2017-18;
- coercive recovery of ₹40,10,153;
- improper appropriation of that amount;
- incorrect computation;
- expansion of the audit beyond its permissible scope; and
- substantive objections to the individual audit findings.
Issues
The principal issue was whether the Delhi High Court should exercise writ jurisdiction to interfere with the Section 74 show-cause notice because the petitioner’s detailed response during the audit process had allegedly not been properly considered.
The connected questions concerned whether the Court should, at the SCN stage, determine:
- whether ₹40.10 lakh was voluntarily deposited or coercively recovered;
- whether its appropriation was lawful;
- whether part of the demand was time-barred;
- whether the audit exceeded its permissible jurisdiction;
- whether the tax computation was correct; and
- whether the underlying audit findings were legally sustainable.
Analysis of the Law
1. Audit and Adjudication Are Distinct Stages
The Delhi High Court drew an important distinction between audit proceedings and subsequent statutory adjudication.
The Audit Report represents the culmination of the audit process.
But once a Section 74 show-cause notice is issued, a separate adjudicatory process begins in which the taxpayer can contest the proposed liability before the competent authority. DHRUV MEDICOS
This distinction became central to the Court’s refusal to interfere.
2. Show-Cause Notice Does Not Determine Tax Liability
The Court emphasised that issuance of an SCN does not itself determine the taxpayer’s liability.
The allegations and proposed demands contained in the notice remain subject to adjudication.
Accordingly, Dhruv Medicos retained the opportunity to raise all its factual and legal objections before the adjudicating authority. DHRUV MEDICOS
3. Rule 101(4) Requires Consideration of Taxpayer’s Reply
The Court accepted the legal proposition underlying the petitioner’s Rule 101(4) argument.
Where a statutory provision requires the proper officer to consider the registered person’s reply, that statutory obligation must be complied with. DHRUV MEDICOS
However, this did not automatically invalidate the subsequent Section 74 notice.
The Court found that it could not be said that the authorities had wholly ignored the reply. The impugned proceedings expressly referred to the reply dated 18 June 2025 and recorded that it was considered “not satisfactory.” DHRUV MEDICOS
4. One-Sentence Rejection Does Not Automatically Quash SCN
This is the central proposition of the judgment.
The High Court held that merely because the detailed reply was dealt with in one sentence did not, by itself, justify the Court entering into the underlying tax dispute and quashing the subsequent SCN.
Whether such consideration actually satisfied the statutory requirement—and whether individual objections deserved acceptance, rejection or partial acceptance—could appropriately be examined during statutory adjudication. DHRUV MEDICOS
5. All Objections Remain Open
The Court gave Dhruv Medicos wide liberty to place its entire case before the adjudicating authority.
This expressly included objections relating to:
- irregularities in the audit;
- failure to properly consider the audit-stage reply;
- alleged coercion in obtaining ₹40,10,153;
- appropriation of that amount;
- limitation for FY 2017-18;
- computation of the proposed liability; and
- every other objection otherwise available in law. DHRUV MEDICOS
Importantly, the Court directed that these objections must be considered independently and in accordance with law. DHRUV MEDICOS
6. Court Did Not Decide Whether ₹40.10 Lakh Was Coercively Recovered
The judgment must not be read as accepting the Department’s version regarding the DRC-03 payment.
The High Court expressly stated that it had not determined whether ₹40,10,153 was paid voluntarily or under coercion.
Nor did it determine whether the Department was entitled to appropriate that amount.
Both questions remain open before the adjudicating authority. DHRUV MEDICOS
The Court reiterated that the nature and legal effect of the DRC-03 payment could be specifically raised during adjudication of the Section 74 notice. DHRUV MEDICOS
7. Limitation and Jurisdiction Were Also Left Undecided
Likewise, the High Court did not reject the company’s limitation objection concerning FY 2017-18.
It also did not decide:
- the alleged jurisdictional defect in the audit;
- the correctness of the tax computation;
- validity of individual audit findings; or
- other substantive objections.
Every such issue was expressly preserved for determination by the competent authority. DHRUV MEDICOS
8. Writ Interference Was Premature
The High Court ultimately considered the timing of the writ petition decisive.
Since statutory adjudication under Section 74 had already commenced, the Court found it inappropriate to “interdict the statutory adjudicatory process” merely because the petitioner disputed the treatment of its response during the preceding audit stage.
The proper course was to allow the statutory authority to adjudicate the complete controversy. DHRUV MEDICOS
Contempt Proceedings
During pendency of the writ petition, an allegation was made concerning violation of an interim order, resulting in notice to Respondent No. 5 and a direction for personal appearance.
Respondent No. 5 explained that the relevant order had not been within his notice when the disputed communication was issued.
Since the petitioner was being relegated to statutory adjudication and considering the explanation offered, the High Court declined to continue the contempt proceedings and closed them. DHRUV MEDICOS
Court’s Reasoning
The Court’s reasoning can be reduced to a clear procedural distinction:
An allegedly defective audit does not necessarily justify terminating the subsequent adjudication when the taxpayer still has a full statutory opportunity to contest the demand.
The Court accepted that statutory consideration of the taxpayer’s reply is mandatory. But it did not treat the terse rejection of the reply as sufficient, at this stage, to invalidate the Section 74 notice itself.
Instead, the adjudicating authority must independently examine all the taxpayer’s objections—including the very objection that its response was inadequately considered during audit.
Thus, the Court did not approve the audit findings on merits. It simply declined to adjudicate those disputes prematurely in writ jurisdiction.
Conclusion
The Delhi High Court declined to interfere with the Section 74 show-cause notice dated 27 June 2025.
Dhruv Medicos was granted liberty to raise before the adjudicating authority every objection available in law, including those already raised in the writ petition and its detailed reply dated 18 June 2025. DHRUV MEDICOS
The Court specifically clarified that it had expressed no opinion on:
- the merits of the audit objections;
- proposed tax liability;
- limitation;
- alleged coercion in obtaining ₹40.10 lakh;
- appropriation of the payment; or
- any other substantive defence.
The adjudicating authority was directed to consider those objections independently on their own merits and in accordance with law. The writ petition and pending application were accordingly disposed of. DHRUV MEDICOS
Case Details
Case: Dhruv Medicos Pvt. Ltd. v. Deputy Commissioner, Central GST Circle 5, Audit-I, Delhi & Ors.
Court: Delhi High Court
Case No.: W.P.(C) 10213/2025 & CM APPL. 42602/2025
CNR No.: DLHC010458302025 DHRUV MEDICOS
Bench: Justice Anil Kshetrapal and Justice Bharat Parashar DHRUV MEDICOS
Reserved On: 23 September 2026
Pronounced On: 29 September 2026
Uploaded On: 29 September 2026 DHRUV MEDICOS
Impugned SCN: Demand-cum-Show Cause Notice No. 137 dated 27 June 2025 under Section 74 CGST Act.
Result: Writ petition disposed of without interference with the SCN; all substantive objections preserved for independent adjudication; contempt proceedings closed.
