The Hon’ble High Court of Karnataka vide its order dated 16.08.2022 in the matter of M/s Rajeev Traders Vs. Union of India & Others in Writ Petition No.100849 OF 2022 (T-RES), held that the proper officer at the time of detention of the goods, cannot convert the power to detain the goods and proceed to exercise of his power to confiscate, especially, when the proper officer has the power to determine the tax in a specified manner under Section 73 and 74 of the Act.  The proper officer cannot transform the detention proceedings into a confiscatory proceeding.

Facts: –

• That seven trucks were intercepted while transporting Areca nuts on the 13th of September 2021, at 5:00 PM, at Yamanuru, the Inspector of Hubballi-Dharwad Division (Proper Officer) and the proper officer passed an order of physical verification/inspection of conveyance, goods and documents on the same day, and issued Form GST MOV-02.
• It was stated in the order that the person in charge of the conveyance had not provided any documents for the movement of goods and the documents found to be defective. It was also stated that genuineness of the goods in transit, their quantity, etc., and/or the tendered documents required further verification and the E-Way Bill was not available, therefore, the vehicle was to be stationed at Belagavi and allow the physical verification and inspection of the goods in movement.
• That on 14.09.2021, physical verification of goods and conveyance was conducted and it was stated that the conveyance was carrying Areca nuts and there was a difference in the quantity mentioned in the invoice and the quantity found upon physical verification.
• That on 28.09.2021, the officer passed an order of detention under Section 129 of the CGST Act, 2017 in Form GST MOV- 06. On the very next day on 29.09.2021, the Deputy Director, DGGI, Zonal Unit, Belagavi, proceeded to issue a notice for confiscation of goods, conveyances and levy of penalty under Section 130 of the CGST Act, in Form GST MOV-10, to which the petitioner duly responded with reply dated 27.10.2021.
• Thereafter, the Deputy Director after granting a personal hearing to the authorised representative of the petitioner, proceeded to pass an order of confiscation under Section 130 of the CGST Act on 24.11.2021 by issuing Form GST MOV-11. The Appeal filed against the said order was also dismissed by the Appellate authority, concurring with the findings of the Deputy Director. Being aggrieved the petitioner is before this by way of writ petition.

Petitioner’s Submissions: –

• It was submitted on the behalf of the petitioner that once the goods were detained under Section 129 of the CGST Act, 2017, the proper officer did not have the power to initiate confiscation under Section 130 of the Act. The proceedings under Section 129 cannot be transformed to proceedings under Section 130.
• It was stated that the power of detaining the goods under Section 129 of the CGST Act is only for a limited period and if the owner of the goods or the person in-charge of the goods comes forward to pay the tax and penalty, the proper officer was bound to release the detained goods and conveyance.
• It was contended that the proper officer was required to issue a notice specifying the tax and penalty payable and thereafter pass the order for payment of tax and penalty and if such payment was made, the proceedings, in fact, are deemed to have been concluded. It was stated that only if the person transporting the goods or the owner of the goods fails to pay the tax and penalty as provided under Section 129(1) of the CGST Act, within 14 days, would the proper officer possess the power to initiate proceedings under Section 130 of the CGST Act.
• It was submitted that the power of confiscation could not be initiated against the petitioner who was a taxable person and who was supplying the goods to a person registered under the CGST Act. It was submitted that the power of confiscation would apply only in respect of those persons who were neither taxable persons nor persons chargeable to tax under the CGST Act. Therefore, it was submitted that the entire proceedings were without jurisdiction and were liable to be quashed.

Respondent’s Submissions: –

• It was submitted on the behalf of the respondents that E-way bill was not available with the person transporting the goods and the same was not even generated, therefore, a clear contravention of the provisions of the CGST Act and the Central Goods and Services Tax Rules, 2017, and for this contravention, the proper officer has the power not only to detain but to confiscate the goods.
• That in view of Circular dated 13th of April 2018, it was permissible for the proper officer to invoke Section 130 directly, if he was of the opinion that the movement of goods was being affected with the intent to evade payment of tax. It was submitted that initially the proper officer did initiate proceedings for detention only, however, on noticing the intent to evade payment of tax, the proper officer decided to invoke his power under Section 130 of the CGST Act and confiscate the goods and conveyances.
• That in the instant case the intent to evade payment of tax was quite clear and therefore, the proceedings initiated for confiscation cannot be found fault with. To support its contention, reliance was place on the fact that the E-Way Bill was not generated and the goods were undervalued when compared with the Valuation Report submitted by CAMPCO.
• It was also submitted that the weight of the goods had been mis-declared and there was a non-declaration of grade and quality of Areca nuts in the Invoice with an intent to undervalue the goods for evasion of tax. Further, it was submitted that this was a case of a non-existent dummy supplier and a recipient, and therefore the proceedings invoked under Section 130 of the CGST Act could not be found fault with.
• Lastly, it was submitted that the petitioner was given an opportunity of hearing and after it was established that the goods were undervalued and mis-declared, the proper officer had rightly come to the conclusion that this was a fit case for passing an order of confiscation. He submitted that the appellate authority after considering all these factors had rightly dismissed the Appeal and there was no justification for entertaining this Writ petition.

Held: –

• The Hon’ble Court after considering the submissions made, facts of the case and the law applicable found that in the instant case, the question to be decided is “Whether the Proper officer, while detaining the goods which are in transit in the exercise of his power under Section 129 of the Act, possess the power to initiate proceedings to confiscate under Section 130 of the Act and thereafter conduct an enquiry and proceed to order confiscation of the goods?”
• The Hon’ble Court found it necessary to take an overview of the CGST Act, and observed that the objective of the Act is to facilitate the levy and collection of tax on intra-state supply of goods and services or both by the Central Government and the charging section provides for the levy of a tax on the supply of goods and services or both on the value of the taxable supply (transaction value) at rates which are notified by the Government on the recommendation of the Council, which should not, however, exceed twenty percent.
• The tax is required to be collected in the manner prescribed and shall be payable by the taxable person (a person liable to be registered and a person who is required to register himself compulsorily under the Act). However, the supply of alcoholic liquor for human consumption is not leviable under the Act and the levy on petroleum crude, high-speed diesel, motor spirit (petrol), natural gas and aviation turbine fuel, shall only be from a date notified by the Government on the recommendation of the Council.
• Under the Act, the time of supply of goods or services is defined and also the value of the taxable supply under the provisions of Chapter IV. The Act also provides for availing input tax credit with the objective of eliminating the cascading effect of taxes.
• The Act mandates that a registered person supplying goods or services is required to issue a tax invoice before or at the time of removal of goods or providing of service and the said tax invoice is required to contain a description, quantity and value of the goods or the service. Further, in order to ensure the supply is accounted for and documented, the Act mandates that every registered person should maintain a true and correct account of the matters prescribed under Section 35 of the Act and also prescribes the length of time for which the records are to be maintained.
• The Hon’ble Court considering the other provisions and Chapters of the Act, found that it is quite evident that the Act fundamentally envisages the taxable person to be self-compliant and encourages the taxable person to be voluntarily tax compliant. The provisions are framed in such a manner that it rewards compliance by the taxable person at every stage of the levy being collected and the revenue steps in only when there is a default.
• The Hon’ble Court discussing Chapter XIV and XV, found that these chapters provide for a manner in which the default is to be dealt with, by empowering the proper officer to conduct an inspection, search or seizure. If the proper officer conducting the inspection has reasons to believe that any goods are liable for confiscation or has reason to believe that the documents or goods which would be relevant for any proceedings are secreted away, he can either search and seize such goods or documents or books or things or authorise any other officer to do so. However, the goods seized or property seized is liable to be released on provisional basis on the payment of applicable tax, interest and penalty.
• That Section 68 empowers the Government to require the person in charge of a conveyance carrying any consignment of goods of certain value to carry with him such documents and devices as may be prescribed.
• Further, Chapter XV deals with Demands and Recovery, and provides for the provisions for the determination of tax which is not paid either by error or by way of fraud and also provides for general provisions relating to determination of tax. Section 73 provides for determination of tax which is not paid or short paid and where fraud or suppression is not involved, while, Section 74 provides for determination of tax which is not paid or short paid by way of fraud or suppression.  In both the cases , a notice calling upon a person chargeable with tax to show cause as to why the amount specified in the notice along with applicable interest and penalty should not be paid by him, will be issued, however, in case of fraud and suppression i.e., Section 74, the amount of penalty would be equivalent to the amount of tax mentioned in the show cause notice. Thus, there is a marked difference in the matter of imposition of penalty when it comes to a proceeding for determination of tax based on the fraudulent conduct of the person chargeable with tax.
• That in case of Section 73, the liability of penalty can be avoided if the person chargeable to tax pays the amount of tax with applicable interest, on the basis of its own ascertainment. Later, if it is found that the actual amount of tax payable has been paid, the proceedings are deemed to have concluded. However, if the proper officer is of the view that the actual tax payable has not been paid, he is empowered to issue a notice calling upon the person to pay the shortfall. If this demand is complied with, the proceedings stand concluded.
• Thus, there is a clear element of incentivising and also disincentivising persons chargeable with tax which is built into the statutory scheme, when it comes to the determination of tax.
• That in case of Section 74 also if the taxable person is willing to prevent the show cause notice, may pay the applicable tax with interest and 15% of the tax payable, a relatively minor penalty before the issuance of show cause notice.
• Thus, even in cases where an element of fraud or wilful misstatement or suppression is involved, the law treats the offender with lenience by imposing a penalty of just 15%, if the offender voluntarily acknowledges his impropriety and pays the applicable tax and interest before he receives a notice in that regard. However, if the proper officer is of the view that the tax has not been paid correctly or short-paid, he can issue a show cause notice for recovery of the remaining amount, and in that case the amount of penalty would increase to 25%.  If the person chargeable pays this shortfall along with the applicable interest and the penalty of 25% of the applicable tax, then, the proceedings come to an end.
• That if the person chargeable with tax chooses to contest the proceedings further and forces the proper officer to make a determination of the tax and interest, he is burdened with the payment of 50% of the tax as a penalty.
• It is quite evident from the perusal of the provisions that the law showers a certain amount of leniency even if there is a wrongdoing. In both the above-mentioned cases, it is to be observed that the law does not intend to confiscate the goods itself as a penal measure and the law only ensures that the applicable tax with interest and penalty is recovered from the wrongdoer.
• Now, Section 129 provides for detention, seizure and release of goods and conveyances in transit. This is a provision that is enacted solely to empower the authorities to detain goods and conveyances while they are in transit and thus differs with the power conferred to conduct an inspection, search and seizure under Section 67 of the Act.
• The first part of the Section 129 talks about the detention & Seizure of goods in transit in case of contravention of the provisions of the Act, however, the second part casts an obligation upon the proper officer for the release the goods and conveyances and the documents related to them which have been detained or seized, if the owner of the goods comes forward to pay the applicable tax on such goods and a penalty equal to 100% of the tax payable on such tax. Thus, if the owner comes forward and pays the applicable tax and also an equivalent amount of tax as a penalty or furnishes a security equivalent to applicable tax and penalty, the owner is entitled, as a matter of right, to get the goods released to his custody.  However, if a person other than the owner comes forward to pay the applicable tax and also a penalty equal to 50% of the value of goods reduced by the tax amount paid.
• The Hon’ble Court after perusal of provisions of Section 129, found that the authorities have been empowered under Section 129 to seize the goods and conveyances which are used to transport the goods while they are in transit, if the provisions of the Act are contravened. However, if the owner comes forward and pays the applicable tax, interest or penalty equivalent to the tax, the proper officer is bound to realise the goods and the conveyances. If a person other than the owner comes forward and pays the applicable tax and 50% of the value of the goods (reduced by the tax paid), the authorities are bound to release the goods and conveyances.  The owner of the goods or a person other than the owner gets a statutory right to obtain the release of the goods and conveyances detained under Section 129 if they comply with the conditions specified in clauses (a), (b) or (c) of Section 129(1).
• Therefore, it indicates that the true intent to detain the goods or the conveyances is to ultimately facilitate the recovery of the applicable tax and if the same is paid along with the penalty, the goods and conveyances are bound to be released.
• Moreover, the whole proceedings come to an end, if the in view of Section 129(5) the owner pays the applicable tax, interest and penalty complying with the order. Though, if the order is not complied within 14 days, the authorities have the right to initiate proceedings under Section 130.  Thus, the power of confiscation when goods and conveyances are seized would be available only when the applicable tax and penalty is not paid. This once again establishes that the primary intent of the law is to recover the applicable tax and penalty and only if this is not achieved, the power of confiscation is required to come into play.
• Thereafter, the Hon’ble Court on perusal of the provisions and situations laid down in Section 130, found that in all the situations mentioned in Section 130, the goods would not be only liable for confiscation, but also would be liable to penalty as specified under Section 122. Though, the proper officer adjudging the confiscation can give an option to the owner to pay a fine, which he deems fit. The upper limit is that the fine shall not exceed the market value of the goods less the applicable tax, while the lower limit is that the fine shall not be less than the aggregate of the fine and penalty payable under Section 129 (1) of the Act.
• It is to be noted that an order of confiscation cannot be made unless an opportunity of being heard is afforded to the person. The title to the goods and conveyances would vest in the Government and the proper officer adjudging the confiscation is entitled to take possession of the confiscated things and he is also empowered to dispose of the goods or conveyance if the fine in lieu of confiscation is not paid within three months.
• Similarly, in case of Section 67 when the goods and documents are seized during inspection, search from the business premises of the taxable person, the proper officer is bound to release them on a provisional basis if a bond is executed and security furnished as prescribed or if the applicable tax, penalty and interest are paid. In the same manner, the proper officer is bound to release the goods and conveyance under Section 129 of the Act, on the payment of applicable tax and penalty.
• Thus, in both cases, the proper officer is bound to release the goods or conveyances if the applicable tax and penalty prescribed is paid. The statutory framework, thus, indicates that the power to detain and seize is only designed to ensure that the applicable tax and penalty is collected and on such payment being made, the goods or conveyances cannot be detained or seized and they are required to be released.
• Further, from scrutiny of returns, if it appears that the tax has not been paid either by reason of an error or by way of fraud, the applicable tax can be determined under Section 73 & 74 of the Act, with the ultimate intent to ensure that the applicable tax is realised with penalty and interest.
• With the above, it becomes clear that the power to confiscate is the ultimate penal measure provided under the Act and is, therefore, to be exercised with great care and caution and as a last measure. This power to confiscate, given the statutory framework, is a distinct and independent power conferred under the Act which can be exercised only in cases where the power to detain and seize has not been invoked. Once the power to inspect, seize or detain the goods and conveyances is invoked either under Section 67 of the Act or under Section 129 of the Act, the power to confiscate under Section 130 would not be available. This is evident from Section 129 (6) which states that proceedings under Section 130 can be invoked only if the applicable tax and penalty are not paid despite an order being passed in that regard.
• Therefore, the procedure adopted by the proper officer in the present case, to initiate confiscation after invoking his power under Section 129 to detain and seize the goods is contrary to the statutory scheme.
• That the reliance placed on behalf of the respondents on a Circular dated 13.04.2018, which clarifies that if the proper officer is of the opinion that the movement of the goods is with intent to evade payment of tax, he could directly invoke confiscation proceedings under Section 130. This argument of the revenue cannot be accepted for the reasons that (i) If, the owner of the goods or a person other than the owner comes forward to abide by the stipulations contained in Section 129, he is bound to release the goods and the conveyances. Thus, the positive obligation to release the detained goods cannot be bypassed or overridden by permitting the proper officer to invoke confiscatory proceedings under Section 130 of the Act; (ii) As per Section 129(6), the power available to initiate confiscation proceedings would be available to the proper officer only if the owner of the goods or the conveyances fail to pay the applicable tax and penalty within 14 days; (iii) Thirdly, the proper officer cannot be given the discretion to choose the manner in which he would penalise the wrongdoer when the statutory framework has been designed in such a way that even a wrongdoer is treated leniently. (iv) through a Circular, while exercising its power under Section 168, can issue instructions for the uniform implementation of the Act cannot vest the Commissioner to prescribe a set of instructions which go against the grain of the statutory provisions.
• It was held by the Hon’ble Court that that the power to detain under Section 129 cannot be converted to a proceeding under Section 130 of the Act since both these provisions operate independently of each other and in completely different contexts. The power to detain is only to stop the transit of the goods and thereby prevent its movement till the tax and penalty is paid. However, the power to confiscate is the process of divesting the owner of the goods of all title to the goods for a contravention of the provisions of the Act and Rules.
• That even in the case, where the proceedings have initiated against a person who had a fraudulent intent of evading payment of tax under Section 74, the provisions provide for payment of penalty of 50% and be absolved of his wrongdoing. Therefore, it would not be proper for the Commissioner to permit the proper officer to initiate confiscation proceedings under Section 130 after the power of detention had already been invoked under Section 129 of the Act.
• It was held that when goods are detained while in transit, the proper officer cannot initiate an enquiry which is contemplated under Section 73 or Section 74 or Section 130. It is to be kept in mind when a specific provision is enacted for dealing with a specified situation such as the goods being in transit and that very provision demarcates the extent of the power that the proper officer can exercise, that provision cannot be sidestepped and resort be had to some other provision which enables the very confiscation of the goods.
• The Commissioner by issuing a circular has basically devised a new procedure contrary to the one provided under the statute, which is impermissible. Thus, the reliance placed on the Circular can be of no avail and the power to switch over to the confiscatory proceedings midway when the goods are detained in transit would not be available to the proper officer.
• That in the instant case, the goods were intercepted while in transit on 13.09.2021 and the proper officer also passed an order of detention on 28.09.2021 (MOV-6) and on the passing of this order, the owner of the goods or the owner of the conveyance secured a right under Section 129 to get the goods released. However, the proper officer, thereafter proceeded to issue a notice of confiscation (MOV-10). Thus, the proper officer basically nullified the statutory right of the owner of the goods or the non-owner to get the goods released on compliance with the conditions specified in Section 129(1) (a) to (c), which would render the entire confiscatory proceedings illegal.
• It was noticed by the Hon’ble Court that Section 122, provides that every registered person who supplies any goods on which tax has not been paid or short paid for any reason other than fraud shall be liable to a penalty of ten thousand rupees or ten percent of the tax due, whichever is higher. If on the other hand, it is by reason of fraud, the registered person would be liable to a penalty of ten thousand rupees or the tax due, whichever is higher.
• In other words, for transporting the goods without an e-way bill, the taxable person would be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded. In respect of the act of supplying the goods without paying tax or with a shortfall, the registered person would be liable to pay a penalty of ten thousand rupees or ten percent of the tax due (if it was by error) or a penalty of ten thousand rupees or the tax due. That in the instant case, the goods were accompanied by a tax invoice, which indicated payment of tax but an E-way bill had not been generated. Thus, the proper officer could have only imposed a penalty of ten thousand rupees or the amount equivalent to the tax evaded.
• Further, it is not in dispute in the instant case that the tax invoice did not contain the particulars as required under Section 31 of the Act. Thus, the requirement of the law that a tax invoice is required to be issued containing the particulars was complied with.
• However, in the present matter the proper officer, stated that the goods appear to be undervalued and the weight of the goods were mis-declared and the grade and quality of the areca nuts were not mentioned. As discussed, Rule 46 does not mandate the market value of the goods or a prescribed value of the goods is required to be mentioned in the Tax invoice and the Rule also does not state the grade or quality of the goods are required to be mentioned.
• Thus, the proper officer, at the time of detention of the goods, cannot obviously convert the power to detain the goods and proceed to exercise of his power to confiscate, especially, when the proper officer has been empowered to determine the tax in a specified manner under Sections 73 and 74 of the Act.
• As far as the allegation that the goods appear to be grossly under-valued, it is to be stated that the basis for this allegation was a valuation report given by CAMPCO. However, Under Section 15 of the Act, the value of the supply of goods would be the transaction value and a transaction value would be the price that is paid or payable for the supply of goods. When the supplier and recipient are not related and the price is the sole consideration of the supply, then for the purpose of the Act, the transaction value i.e., the price actually paid would be the value of the goods that is sought to be supplied. In the light of this particular definition of the value of taxable supply in Section 15, the authorities could not have proceeded on the assumption that there was an undervaluation.
• In fact, in confiscation proceedings, the concept of determining the under-valuation of the goods would not really arise since that is an exercise which has to be undertaken under Section 74 of the Act against the registered person. Further, in a proceeding under the Act, the market value of the goods is not relevant unless in certain specified circumstances. For all normal purposes, the value would have to be determined as per Section 15 of the Act which would be the price actually paid or payable.  Therefore, the entire basis that there was undervaluation was completely incorrect and the consequential conclusion that there was under-valuation with an intent to evade payment of tax, cannot also be accepted.
• It was held by the Hon’ble court that the entire procedure adopted by the proper officer from converting the detention proceedings into a confiscatory proceeding, ultimately leading to the order of confiscation is wholly illegal and contrary to the statutory scheme of the Act. Moreover, the Appellate authority mechanically accepted the reasoning of the proper officer and dismissed the appeal of the petitioner, without examining the statutory scheme of the Act.  Therefore, the impugned orders cannot be sustained and the same are quashed.

The Hon’ble Court with the above findings allowed the Writ Petition with the directions to the respondents the pay the petitioners the sale proceeds of the auction, as the confiscated goods have already been sold in a public auction, after deducting the penalty prescribed under Section 129(1)(a) of the Act.  The proper officer shall also release the conveyance, if it is not released.  It is however, made clear that the proper officer would be at liberty to initiate proceedings for the determination of tax as provided under Section 73 or Section 74 of the Act and the passing of this order will not in any way be construed as an opinion rendered on the merits of any of the allegations made against the petitioner.