2025 (6) TMI 1236 - HC - GST

Levy of penalty u/s 129(1)(a) of the Central/State Goods and Services Tax Act 2017 - goods classified as zero rated supply when no tax is payable on such supply - HELD THAT - In the facts of the case the petitioners after receiving the purchase order from the UAE purchased the goods from Gurugram through its sister concern so as to export the same to UAE and therefore the goods in questions are meant for export outside India. As per Section 2(47) of the Act a supply is said to be exempt when it attracts Nil rate of duty or specifically exempted by notification or kept out of the purview of the levy of tax i.e. non GST supply however if the goods or services exempted from payment of tax same would not become a zero rated supply because the inputs which are used for making the goods for manufacture of the goods or providing services had already suffered a tax and only the final product is exempt and when the goods are exempted goods the assessee is not entitled to avail or utilize credit on inputs used for supply of the exempted goods or services only because the goods which are exported suffers no tax and inputs have suffered the tax the availment of tax on input side is not permitted which become the cost for the supplier. Therefore the zero rated supply is only remedy to such anomaly. Section 16 (4) of the IGST Act provides for refund as per the provision of Section 54 of the CGST Act of the inputs or inputs services which are used for the purpose of zero rated supply as per the provisions of Section 54 (3) and the assessee is entitled to get the refund if the IGST is paid along with the export or if no tax is paid and the goods are exported under LUT then proportionate credit is given in the electronic credit ledger. Therefore considering the scheme of the GST Act and the Rules the zero rated supply is admittedly not an exempted supply and it has the same meaning as assigned to Section 16 of the IGST Act and no tax in outward supplies is payable however the credit of input tax is provided for making zero rated supplies even if such supply is an exempt supplies by adding the value of zero rated supply along with the taxable supplies for apportionment of such input tax credit. Though the tax is leviable as per the provision of Section 17 (1) on the interstate supply as per Section 7 of the IGST Act and the goods which are exported outside India is to be treated as interstate supply as per provision of the Section 16 (1) of the IGST Act the same would be zero rated supply and the exporter is not liable to pay any tax on such supply. Therefore no tax is payable on the zero rated supply though leviable as per provision of the IGST Act and therefore the option is given to the petitioner assessee either to give an undertaking or to pay tax which is adjusted by way of credit ledger or refunded as per Rule 89 and/or Rule 96 of the CGST Rules 2017. Impugned order dated 19/11/2024 passed in Form GST MOV-9 is hereby modified by reducing the penalty to Rs.25, 000/- only and the respondents are directed to release the bank guarantee submitted by the petitioners for release of the goods and conveyances after impugned order was passed - As the petitioners have suppressed the relevant facts of placing the order through its sister concerns which was subsequently sought to be amended is also not appreciated and the petitioners are also liable to pay cost of Rs. 10, 000/- for each petition to the respondents for such suppression. Conclusion - i) The penalty imposed under Section 129(1)(a) at 200% of tax payable on zero rated supply was quashed and reduced to Rs. 25, 000/-. ii) The bank guarantee furnished by the petitioners shall be released. iii) Costs of Rs. 10, 000/- per petition imposed on petitioners for suppression of facts. Petition disposed off.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter were:

• Whether penalty under Section 129(1)(a) of the Central/State Goods and Services Tax Act, 2017 ("the Act") can be imposed on goods classified as zero rated supply when no tax is payable on such supply;
• The legal distinction and implications between "zero rated supply" and "exempt supply" under the GST law, particularly in relation to penalty imposition for contravention of Rule 138 of the CGST Rules, 2017 (non-carrying or expiry of e-way bill);
• The interpretation of "tax payable" in the context of penalty under Section 129(1)(a) of the Act and whether penalty calculated as 200% of tax payable can be levied when the tax payable is nil;
• The applicability of penalty provisions when the e-way bill expired during transit of goods meant for export and whether the petitioners' explanation of vehicle breakdown and festival delay absolves them from penalty;
• The extent of penalty that can be imposed on zero rated supplies for procedural contraventions, such as non-compliance with e-way bill requirements;
• Whether the petitioners' failure to disclose correct facts initially affects their entitlement to relief;
• The availability and propriety of invoking extraordinary writ jurisdiction under Articles 226 and 227 of the Constitution of India in the presence of alternative remedy under Section 107 of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether penalty under Section 129(1)(a) can be imposed when no tax is payable on zero rated supply

Relevant legal framework and precedents: Section 129(1)(a) of the CGST Act provides for detention or seizure of goods transported in contravention of the Act and release upon payment of applicable tax and penalty equal to 100% of tax payable on such goods. For exempted goods, penalty is limited to 2% of value or Rs. 25,000 whichever is less.

Section 16 of the IGST Act defines "zero rated supply" to include export of goods or services, where no tax is payable on outward supply but input tax credit is allowed and refundable. Section 54 of the CGST Act provides for refund of unutilised input tax credit or tax paid on zero rated supplies.

Precedents relied upon include:

• Atul Auto Limited vs. State of Gujarat, where the Court held that additional tax cannot be recovered when sales tax itself is not payable;
• J.K. Synthetics Limited vs. Commercial Taxes Officer, where the Supreme Court distinguished between "tax payable" and "tax due" and held that interest cannot be levied if tax is not payable;
• M/s. Boron Rubbers India vs. Union of India, where penalty under Section 129 was reduced in a case involving exempted goods or zero rated supplies.

Court's interpretation and reasoning: The Court emphasized the distinction between "leviable" and "payable" tax. Though tax is leviable on interstate supply under IGST Act, zero rated supplies attract nil tax payable. Therefore, penalty calculated as a percentage of tax payable cannot be imposed where tax payable is nil. The Court noted that zero rated supply is not the same as exempt supply; zero rated supply allows input tax credit and refund, whereas exempt supply does not.

Key evidence and findings: The petitioners' goods were for export to UAE, qualifying as zero rated supply under Section 16(1) of the IGST Act. The petitioners had either furnished a Letter of Undertaking (LUT) or paid IGST refundable under the law. The e-way bill expired during transit due to vehicle breakdown and festival delay, but no tax was payable on the goods transported.

Application of law to facts: Since no tax was payable on zero rated supply, the penalty calculated as 200% of tax payable under Section 129(1)(a) could not be sustained. The Court held that the penalty computation fails in absence of tax payable.

Treatment of competing arguments: The respondents argued that tax was payable as per invoice and that penalty is mandatory for contravention of Rule 138 irrespective of tax status. They relied on the fact that the petitioners commenced movement after expiry of e-way bill and willfully disregarded provisions. The Court distinguished this by noting the difference between tax leviable and tax payable and held that penalty based on tax payable cannot be imposed if tax payable is nil.

Conclusion: No penalty could be imposed at the rate of 200% of tax payable on zero rated supplies where tax payable is nil. Penalty computation under Section 129(1)(a) fails in such cases.

Issue 2: Distinction between zero rated supply and exempt supply and its impact on penalty

Relevant legal framework: Section 2(47) of CGST Act defines exempt supply as supply attracting nil rate or wholly exempt under notifications. Section 16 of IGST Act defines zero rated supply including export of goods or services. The Directorate General of Taxpayer Services circular clarifies that zero rated supplies allow input tax credit and refund, whereas exempt supplies do not.

Court's interpretation and reasoning: The Court explained that zero rated supplies are not exempt supplies. Zero rated supplies allow the supplier to claim refund of input tax credit or pay IGST and claim refund. Exempt supplies do not permit input tax credit. Therefore, penalty provisions for exempt goods (limited penalty) cannot be mechanically applied to zero rated supplies. However, in absence of tax payable, penalty must be limited.

Application of law to facts: The goods were exported and hence zero rated supplies. The petitioners issued normal tax invoices and complied with export formalities. The Court held that zero rated supplies are treated differently from exempt supplies for penalty purposes.

Conclusion: Zero rated supplies attract nil tax payable but allow input tax credit and refund. Penalty under Section 129(1)(a) must be interpreted accordingly.

Issue 3: Whether penalty can be imposed for contravention of Rule 138 when e-way bill expired during transit of zero rated goods

Relevant legal framework: Rule 138 of CGST Rules mandates generation and carrying of valid e-way bill for movement of goods exceeding Rs. 50,000 in value. Sub-rule (10) provides consequences for non-compliance. Section 129(1)(a) permits detention and penalty for contravention.

Court's interpretation and reasoning: The Court acknowledged the procedural contravention of Rule 138 by the petitioners as the e-way bill expired on 04/11/2024 and goods were intercepted on 08/11/2024. However, since the goods were zero rated supplies with no tax payable, the penalty based on tax payable could not be imposed at the maximum rate. The Court referred to the Boron Rubbers India case where a penalty of Rs. 25,000/- was imposed for similar contravention involving exempted or zero rated supplies.

Application of law to facts: The petitioners' goods were detained and penalty imposed at 200% of tax payable. The Court modified the penalty to Rs. 25,000/- acknowledging the contravention but recognizing the nil tax payable status.

Treatment of competing arguments: Respondents argued willful non-compliance as the movement commenced after expiry of e-way bill and no fresh e-way bill was generated. Petitioners cited vehicle breakdown and festival delay as reasons for delay. The Court noted the factual dispute but focused on the legal principle regarding penalty calculation.

Conclusion: Penalty for procedural contravention under Rule 138 can be imposed but must be limited to Rs. 25,000/- when no tax is payable on zero rated supplies.

Issue 4: Effect of suppression of facts by petitioners and availability of alternative remedy

Court's interpretation and reasoning: The Court noted that the petitioners initially failed to disclose correct facts regarding the placing of orders through sister concerns and later amended the pleadings. Such suppression was not appreciated and costs were imposed on the petitioners.

The Court also observed that alternative remedy of appeal under Section 107 of the Act was available to the petitioners but entertained the writ petitions due to the jurisdictional issue concerning penalty computation.

Conclusion: Suppression of facts attracts costs; however, the Court exercised jurisdiction under Articles 226 and 227 due to the legal issue involved.

3. SIGNIFICANT HOLDINGS

"No penalty could have been levied under Section 129 (1) (a) of the Act as no tax was payable on the zero rated supply as per the provisions of Section 16 of the Integrated Goods and Services Tax Act, 2017."

"The expression 'payable' connotes an obligation to pay and that the amount should be justly due and legally enforceable... in case where no tax is payable on the sale or purchase of goods, the legislature did not intend that additional tax should be collected thereon."

"Though there is a contravention of Rule 138 which is procedural in nature, without intention to evade tax, Section 129 provides for levy of penalty whereas in the facts of the case though there is a contravention computation of penalty would fail in absence of any tax payable by the assessee."

"The petitioners are liable to pay the penalty of Rs. 25,000/- only treating such zero rated supply of the goods akin to exempted goods attracting Nil rate of tax."

"The impugned order dated 19/11/2024 imposing penalty at the rate of 200% on the allegedly tax payable on the goods which are being transported as zero rated supply would be without jurisdiction as on plain reading of Section 129 (1) (a) of the Act, no penalty could have been imposed when no tax is payable on the zero rated supply and the computation of penalty would fail."

"The petitioners' suppression of relevant facts and subsequent amendment is not appreciated and they are liable to pay costs for such suppression."

Final determinations:

• The penalty imposed under Section 129(1)(a) at 200% of tax payable on zero rated supply was quashed and reduced to Rs. 25,000/-.
• The bank guarantee furnished by the petitioners shall be released.
• Costs of Rs. 10,000/- per petition imposed on petitioners for suppression of facts.