The Gujarat High Court in the case of MARCOWAGON RETAIL PVT. LTD. & ANR. vs. UNION OF INDIA & ORS. Vide R/SPECIAL CIVIL APPLICATION No. 2234 of 2025 With R/SPECIAL CIVIL APPLICATION No. 2236 of 2025 dated 24.04.2025, reinforces that zero-rated exports cannot attract penalty based on tax component when no tax is actually payable. The Court distinguishes between procedural non-compliance and tax evasion, ensuring fair treatment. By quashing the 200% penalty on a zero-rated supply where no tax was payable, the Court has clarified the scope of Section 129 and preserved the legislative intent behind zero-rating under GST. Also, GST authorities cannot levy harsh penalties for procedural lapses like expired e-way bills, especially when there’s no revenue loss.

Facts of the Case: In this case, the Petitioner engaged in the business of export, transported goods from Gurugram to Mundra Port for export to the UAE. The supply was a zero-rated supply under Section 16(1)(a) of the IGST Act and opted export without payment of IGST under LUT.

Although an E-invoice and e-way bill were duly generated, however, it expired before goods reached the check post. The vehicle was intercepted by State GST authorities, and Form MOV-1 and MOV-2 were issued. Further, a show cause notice in MOV-7 was issued for contravention under Section 129(1). Also, an order in Form MOV-9 dated 19/11/2024 imposed 200% penalty on “tax payable”.

It was argued that no tax was payable as the supply was zero-rated. Hence, penalty under Section 129(1)(a), which is based on “tax payable”, cannot be imposed. If any penalty is imposable at all, it should be in line with exempted goods—limited to ₹25,000 or 2% of value.

Despite the petitioner’s reply and request for hearing, the authority passed the order on 19/11/2024 in Form MOV-9, imposing a penalty of 200% of tax, asserting that tax was “payable” on the goods.

The Petitioner furnished a bank guarantee on 26/11/2024 for the penalty and got the goods released. Exports were completed on 28/11/2024 with fresh shipping bills.

Issue: Whether a penalty under Section 129(1)(a) of the CGST Act, which is computed as a percentage of “tax payable,” can be levied in case of zero-rated export supplies, where no tax is payable on outward supply.

Held that:

The Court referred Section 16(1) of the IGST Act, which provides that export of goods is a zero-rated supply. Zero-rated supplies are taxable supplies, but no tax is payable due to refund mechanisms or use of LUT/bond.

The Court stated that since no tax was payable on the zero-rated supply, penalty based on tax payable could not be computed, and therefore, the very foundation of the penalty order failed. The Court distinguished between “leviable” i.e. tax can be imposed and “payable” i.e. tax is due.

The Court held that Section 129(1)(a) allows for penalty only where tax is payable on the goods. Hence, 200% penalty based on tax payable was without jurisdiction.

The contravention of e-way bill provisions u/r 138 is a procedural lapse, not a substantive evasion of tax. In absence of intent to evade and no actual tax loss to the exchequer, harsh penalties are disproportionate. Reference placed upon CBIC Circular No. 64/38/2018-GST, wherein it is advised leniency in procedural errors where no malafide is involved. Also, Referred judgment in the case of Boron Rubber India, wherein held that even if technically leviable, goods not attracting tax may be equated to exempt goods for penalty purposes.

Thus, the Court limited penalty to ₹25,000 treating it akin to exempted goods for penalty purposes. The Court also directed that the bank guarantee furnished by the petitioners be released, and the penalty order be modified accordingly.

To read the complete judgment 2025 Taxo.online 1180