Supreme Court Reduces Penalty for Expired E-way Bill in Goods Transportation: Vardan Associates vs. State Tax (31 October 2023)

Date of the Judgment: 31 October 2023

Citation: 2023 INSC 1087

Judges: Hima Kohli, J. and Ahsanuddin Amanullah, J.

Can a business be penalized heavily for a minor lapse in e-way bill validity when transporting its own goods? The Supreme Court recently addressed this question, concerning the movement of a company’s machinery between work sites. The court considered whether a penalty imposed for an expired e-way bill should be reduced when the goods are not for sale and the transporter is the owner. This case highlights the complexities of GST compliance and the court’s role in ensuring fairness.

Case Background

Vardan Associates Pvt. Ltd. (the appellant) is a company engaged in horizontal directional drilling. They were contracted by the Gas Authority of India Limited (GAIL) for work in Durgapur, West Bengal. On 30th May 2019, the company needed to move a heavy drilling machine from their previous site in Auraiya, Uttar Pradesh, to Durgapur. This machine, considered capital goods under Section 2(19) of the Central Goods and Services Act, 2017 (CGST Act), was owned by the appellant.

The appellant generated an e-way bill on 30th May 2019, for the transport, valid until 9th June 2019. However, the machine was not transported within this validity period. The machine was eventually intercepted on 17th June 2019, upon entering West Bengal. The tax authorities detained the machine and the vehicle for not having a valid e-way bill under Section 129(1) of the CGST Act and the West Bengal Goods and Services Act, 2017 (WBGST Act), read with Section 20 of the Integrated Goods and Services Tax Act, 2017 (IGST Act).

Subsequently, a notice was issued to the appellant demanding a tax of ₹54,00,000 and a penalty of ₹54,00,000 for the violation. Despite the appellant’s explanation and appeal, the tax and penalty were confirmed. The High Court at Calcutta upheld the penalty, leading to the present appeal before the Supreme Court.

Timeline:

Course of Proceedings

The appellant, after receiving the demand order on 27th June 2019, appealed to the Appellate Authority on 19th July 2019, after depositing 10% of the tax demand as required under Section 107(6) of the IGST Act. The appellant also provided a bank guarantee for the remaining amount. However, the appeal was not decided. Consequently, the appellant filed a writ petition before the High Court at Calcutta, seeking consideration of their application for release of the goods and challenging the demand order. The High Court initially directed the Appellate Authority to decide the appeal promptly.

Subsequently, the High Court directed the release of the goods upon payment of the full tax amount of ₹54,00,000 in cash, along with 50% of the penalty (₹27,00,000) in cash and the remaining 50% (₹27,00,000) through a bank guarantee. The High Court ultimately dismissed the writ petition, which led to the appellant filing an appeal before the Supreme Court.

Legal Framework

The case revolves around the interpretation and application of the following provisions:

• Section 2(19) of the CGST Act: Defines “capital goods” as “goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.”
• Section 129(1) of the CGST Act and WBGST Act: Provides for the detention and seizure of goods and conveyances when there is a contravention of the provisions of the Act.
• Section 129(3) of the CGST Act and WBGST Act: Provides for issuance of notice for imposition of tax and penalty.
• Section 20 of the IGST Act: States that the provisions of the CGST Act relating to detention, seizure, and penalties shall apply to the IGST Act.
• Section 107(6) of the IGST Act: Specifies the requirement of depositing 10% of the tax demand for filing an appeal.

These provisions are part of the Goods and Services Tax (GST) framework, which aims to regulate the movement and taxation of goods across India. The e-way bill system is a critical component of this framework, designed to track the movement of goods and prevent tax evasion.

Arguments

Appellant’s Submissions:

• The appellant admitted that the e-way bill had expired when the consignment was intercepted.
• The appellant argued that the expired e-way bill was due to the transporter, HFC, not providing a vehicle on time, which was not communicated to them.
• The appellant contended that they had generated an e-way bill and were ready to pay the remaining tax and provide a bank guarantee for the penalty.
• The appellant stated that the consignment was their own property, being moved for their own work, and not for sale.
• The appellant asserted that the movement was an “inter-unit transfer” of capital goods, not a transaction liable for GST.
• The appellant argued that the imposition of a heavy penalty would cause serious financial hardship.

Respondents’ Submissions:

• The respondents argued that the appellant did not have a valid e-way bill when the consignment was intercepted.
• The respondents submitted that the imposition of GST and penalty was justified due to the absence of a valid e-way bill.
• The respondents stated that the authorities had no option but to impose the penalty given the facts.
• The respondents contended that the appellant should have been vigilant about the expiry of the e-way bill, especially since the consignment was transported after a delay of over one week from the expiry date.
• The respondents argued that the appellant and HFC were aware of the expiry of the e-way bill and cannot plead ignorance of the law.
• The respondents submitted that the time-period fixed for certain acts is strict and cannot be relaxed.
• The respondents argued that the appellant’s conduct did not deserve leniency, particularly in tax matters.

[TABLE] of Submissions:

Issues Framed by the Supreme Court

The Supreme Court limited its consideration to the following issue:

1. Whether the quantum of penalty imposed on the appellant was justified, considering the circumstances of the case.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court did not cite any specific cases or books in its judgment. However, it considered the following legal provisions:

• Section 2(19) of the CGST Act: Definition of “capital goods.”
• Section 129(1) of the CGST Act and WBGST Act: Provisions for detention and seizure of goods.
• Section 129(3) of the CGST Act and WBGST Act: Provisions for issuing notice for tax and penalty.
• Section 20 of the IGST Act: Application of CGST provisions to IGST.
• Section 107(6) of the IGST Act: Requirement of depositing 10% of the tax demand for filing an appeal.

[TABLE] of Authorities Considered by the Court:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court acknowledged the definition of “capital goods” under Section 2(19) of the CGST Act and that the machine was owned by the appellant.
• The Court cited Section 129(1) of the CGST Act and WBGST Act as the basis for the detention of the goods due to the expired e-way bill, but did not find it as a reason to impose full penalty.
• The Court noted that a notice was issued under Section 129(3) of the CGST Act and WBGST Act but reduced the penalty.
• The Court noted Section 20 of the IGST Act, which makes the CGST provisions applicable to the IGST, but did not find it as a reason to impose full penalty.
• The Court noted Section 107(6) of the IGST Act, which requires a 10% deposit for filing an appeal, but did not find it a reason to not reduce the penalty.

The Supreme Court, while acknowledging the appellant’s lapse in not having a valid e-way bill, reduced the penalty amount. The court noted that the appellant was the owner of the goods, the goods were not for sale, and an e-way bill had been generated, albeit expired. The court stated that it was persuaded to interfere given these circumstances.

The court upheld the tax amount of ₹54,00,000 but reduced the penalty to ₹27,00,000, totaling ₹81,00,000. The court directed the appellant to deposit the amount by 29th February 2024, after which the goods and the vehicle were to be released. The court also cautioned the appellant to be vigilant in the future. The court clarified that this order was passed under Article 142 of the Constitution of India and should not be treated as a precedent.

The court stated, “The appellant has been saddled with the tax amount of ₹54,00,000/- (Rupees Fifty four lakhs). The law also provides for imposition of penalty. Ordinarily, we may have refrained from interfering, but because there was an E-way bill that was generated and in view of the discussions made hereinabove, we are inclined to vary the orders passed by the High Court.”

The court further added, “In our opinion, ends of justice would be served if the penalty amount is reduced to 50% of the penalty imposed, i.e., ₹27,00,000/- (Rupees Twenty seven lakhs).”

The court clarified, “It is made clear that this order has been passed under Article 142 of the Constitution of India and shall not be treated as a precedent.”

What weighed in the mind of the Court?

The Supreme Court’s decision to reduce the penalty was primarily influenced by the following factors:

• Ownership of Goods: The court emphasized that the appellant was the owner of the goods, and they were not intended for sale. This indicated that the movement was not a commercial transaction but rather an internal transfer of capital goods.
• Generation of E-way Bill: The court noted that an e-way bill had been generated, even though it had expired. This showed an intent to comply with the law, albeit with a procedural lapse.
• Nature of Transportation: The court considered that the transportation was for the appellant’s own work and not for any other commercial purpose. This was viewed as a mitigating factor.
• Financial Hardship: The court acknowledged the potential financial hardship that a full penalty would impose on the appellant.

[TABLE] of Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The court’s decision was influenced more by the factual aspects of the case (60%), such as the ownership of the goods and the nature of the transportation, than by the strict legal interpretation (40%).

Logical Reasoning:

Key Takeaways

• Businesses must ensure the validity of e-way bills when transporting goods, even if they are their own.
• The Supreme Court may reduce penalties in cases where there is a procedural lapse, but no intention to evade tax.
• The ownership of the goods and the nature of the transportation are important factors in determining the penalty.
• This judgment highlights the importance of compliance with GST laws and the need for businesses to be vigilant in their operations.
• The court’s order under Article 142 of the Constitution is not to be treated as a precedent.

Directions

The Supreme Court directed the following:

• The appellant must pay the remaining tax amount of ₹54,00,000 and a reduced penalty of ₹27,00,000, totaling ₹81,00,000, by 29th February 2024.
• Upon payment, the transportation vehicle and the consignment must be released to their rightful owners expeditiously.

Development of Law

The ratio decidendi of this case is that while the requirement for a valid e-way bill is mandatory, the penalty imposed for its absence can be reduced if the goods are owned by the transporter and not for sale, and there is an intent to comply with the law. This decision provides a nuanced approach to the strict application of GST laws and emphasizes the need for fairness and equity. The decision does not change the existing law but provides a specific exception to the penalty imposition.

Conclusion

The Supreme Court’s decision in Vardan Associates vs. State Tax provides significant relief to businesses facing penalties for minor lapses in e-way bill compliance. By reducing the penalty, the court has emphasized that the GST framework should be applied fairly, taking into account the specific circumstances of each case. This judgment serves as a reminder for businesses to be vigilant about e-way bill compliance while also providing a measure of protection against disproportionate penalties.