(2026) 1 GSTAT E- Journal 109 (Hyderabad)Composition SchemeDecision: Partly in Favour of Assessee
GSTAT on Composition Threshold Breach: Automatic Exit Under Section 10(3) and Mandatory Cum-Tax Benefit Under Rule 35
The GSTAT Hyderabad Bench held that upon exceeding the ₹1.50 crore turnover threshold, composition eligibility lapses automatically under Section 10(3). However, because composition dealers cannot collect tax separately under Section 10(4), differential liability must be calculated using cum-tax valuation under Rule 35.
Case Name / Parties
M/s. Sri Parameshwara Bricks v. State Tax Officer, Peddapalli Circle & Ors.
Appeal Number
APL/126/HYD/2026 & APL/26/HYD/2026 (Common Order Nos. 001/HYD/2026 & 002/HYD/2026)
Tribunal Bench
Hyderabad Bench
Date of Judgment / Order
20/08/2026
Coram
Shri A.P. Ravi, Member (Judicial) • Shri Duvvuri Krishna Srinivas, Member (Technical)
For Appellant: Shri Srinivas, Advocate
For Respondent: Shri Narender Reddy, State Representative
Facts of the Case
The Appellant, a red clay bricks manufacturer registered under Section 10(1) composition scheme in Telangana, discharged tax at the 1% composition rate. Audit authorities cross-verified E-way bills with turnover reported in Form GST CMP-08 for FY 2020–21 and noticed that E-way bills reflected turnover of ₹1,95,53,800/-, whereas CMP-08 declared only ₹1,44,86,100/-, alleging unassessed differential turnover of ₹50,67,700/-. The Department proposed differential tax demands of ₹1,27,250/- (₹63,625/- each as CGST and TSGST) for FY 2020–21 and ₹6,43,856/- (₹3,21,928/- each as CGST and TSGST) for FY 2021–22. The Proper Officer confirmed the demand under Section 73 at the regular 5% rate with interest and 10% penalty, without extending cum-tax benefit under Rule 35. The First Appellate Authority affirmed the orders in full.
Issues Before GSTAT
- 1Whether the Appellant ceased to be eligible for the composition scheme automatically by force of Section 10(3) upon its aggregate turnover crossing the prescribed ₹1.50 crore threshold.
- 2Whether the benefit of cum-tax valuation under Rule 35 must be extended while computing differential tax liability, given that composition taxpayers are prohibited under Section 10(4) from collecting tax separately from buyers.
- 3Whether the taxpayer's failure to specifically plead or claim the benefit of Rule 35 before the lower authorities disentitles them from receiving a statutory computation benefit.
- 4Whether input tax credit becomes available to the taxpayer upon cessation of composition eligibility.
Relevant Statutory Provisions & Rules
Statutory Sections
Section 10(1) of TSGST/CGST Act, 2017Section 10(3) of TSGST/CGST Act, 2017Section 10(4) of TSGST/CGST Act, 2017Section 2(6) of TSGST/CGST Act, 2017Section 9(1) of TSGST/CGST Act, 2017Section 16 of TSGST/CGST Act, 2017Section 50(1) of TSGST/CGST Act, 2017Section 73 of TSGST/CGST Act, 2017Section 107 of TSGST/CGST Act, 2017
GST Rules
Rule 6(2) of TSGST/CGST Rules, 2017Rule 35 of TSGST/CGST Rules, 2017Rule 138(1) of TSGST/CGST Rules, 2017
Contentions of the Parties
Appellant / Taxpayer Contentions
- •The turnover exceeded the threshold inadvertently due to COVID-19 disruptions and lack of administrative monitoring, without any mala fide intent.
- •The taxpayer acted under a bona fide belief that it remained eligible and did not collect any tax separately from purchasers.
- •The differential demand was computed on full invoice value, effectively charging tax on tax, whereas invoices issued by a composition dealer must be treated as cum-tax under Rule 35.
Respondent / Revenue Contentions
- •Section 10(3) is an automatic statutory forfeiture: the moment turnover crosses ₹1.50 crore, the option lapses by operation of law and regular tax applies.
- •The demand was correctly computed after excluding accepted E-way bill typographical errors.
- •The taxpayer never claimed Rule 35 cum-tax valuation before the Assessing Officer or First Appellate Authority and cannot raise it belatedly before GSTAT.
Findings of GSTAT
Upon aggregate turnover exceeding the statutory ceiling of ₹1.50 crore under Section 10(3), the option availed under the composition scheme lapses automatically by operation of law. Regular rate liability applies by force of statute from the date of such crossing.
Under Section 10(4), a composition taxpayer is strictly prohibited from collecting tax from the recipient and cannot show any tax component on bills of supply. Therefore, the invoice value represents total consideration inclusive of tax.
Where differential tax is subsequently demanded at regular rates on such turnover, the benefit of cum-tax valuation under Rule 35 must be extended. Tax cannot be calculated on an amount that already includes the tax element.
Failure of the taxpayer to specifically claim Rule 35 does not disentitle it from receiving a statutory benefit. As held by the Supreme Court in Unichem Laboratories, the Department is duty-bound to collect only the tax legally due—neither more nor less. It is no part of the Department's duty to augment revenue by depriving an assessee of statutory calculation rules.
The question of input tax credit on post-cessation stock under Section 16 is left open for determination on merits upon proper claim by the taxpayer.
Ratio Decidendi
Key Legal Principle
“While cessation of composition eligibility under Section 10(3) occurs automatically upon crossing the prescribed threshold, differential tax demands must be computed after extending the benefit of cum-tax valuation under Rule 35 of the CGST Rules, as composition taxpayers are barred by Section 10(4) from collecting tax separately.”
Final Decision & Relief Granted
Outcome: The appeals were partly allowed. The cessation of composition eligibility was upheld, but the impugned orders were modified to direct the Proper Officer to recompute differential tax liability under Rule 35 cum-tax valuation formula within two weeks. Consequential interest and penalty to be recalculated afresh.
Relief Granted: Application of Rule 35 cum-tax formula to reduce principal tax demand; recomputation of consequential interest and penalty; question of post-composition ITC left open.
Operative relief was verified against the Tribunal's order and accurately summarized without altering its legal effect.
Practical Implications for Taxpayers
- Composition dealers whose turnover crosses ₹1.50 crore must immediately file Form GST CMP-04 within 7 days and start issuing tax invoices with regular GST.
- If an audit or SCN demands regular tax on turnover exceeding the threshold, demand that the tax be calculated on a cum-tax basis using the Rule 35 formula: `Tax = (Invoice Value × Tax Rate) / (100 + Tax Rate)`.
- Preserve inventory registers as on the date of threshold crossing to claim transition ITC on input stock under Section 18(1)(c).
Practical Takeaways for Tax Professionals
- Invoke the Supreme Court's Unichem Laboratories doctrine whenever assessing officers fail to apply beneficial valuation provisions like Rule 35, even if omitted in the initial reply.
- Audit clients' E-way bills against GSTR-4/CMP-08 to identify typographical quantity errors before audit authorities trigger Section 73 proceedings.
- Ensure interest under Section 50(1) and penalty under Section 73 are recalculated downward proportionately once cum-tax reduction is applied to the principal demand.
SKM
Editorial Commentary
SKM Laws Professional Analysis
The Hyderabad Bench's decision in Sri Parameshwara Bricks is an essential reference point for small-business taxation. While the Tribunal took a strict textual approach to Section 10(3)—holding that exit from the composition scheme is an automatic statutory event requiring no departmental declaration—it balanced this with judicial equity on valuation. Assessing officers routinely treat the entire gross realization of a composition dealer as the net taxable value, imposing regular 5% or 18% GST on top of it. By mandating Rule 35 cum-tax computation, GSTAT prevented double taxation and enforced the principle that taxpayers cannot be denied statutory mechanisms merely because their chartered accountants omitted to cite a specific rule number.
Related Cases & Precedents
(2026) 1 GSTAT E-Journal 174
Enforcing revenue neutrality and statutory adjustment mechanisms.
(2026) 1 GSTAT E-Journal 149
Examining strict statutory conditions in Section 73 demands.
Related GST Tools & Utilities
Source Citation & Forensic References:
Official Citation: (2026) 1 GSTAT E- Journal 109 (Hyderabad)
Source Publication: GSTAT E-Journal, Volume I (Till 31.08.2026), Published by Goods and Services Tax Appellate Tribunal
Journal Pages: 109-117
Legal Information Disclaimer
This case law analysis is published strictly for informational, educational, and research purposes. It does not constitute legal, tax, or professional advice. The ratio decidendi and commentary reflect professional editorial interpretations of the Goods and Services Tax Appellate Tribunal's reported judgment. Readers must refer to the full certified order of the Tribunal before initiating or defending litigation.