2023 (3) TMI 1358 - HC - GST

Tax assessment under Section 130 GST Act invalid due to improper procedure and lack of intent proof

HC held that tax assessment under Section 130 GST Act was invalid as department failed to follow proper procedure under Section 74. Penalty under Section ... Confiscation and levy of penalty under Section 130 - Assessment/determination of tax only under Sections 73 or 74 and not by Section 130 - Service of notice in certain circumstances under Section 169 - Valuation of goods and inadmissibility of sole reliance on eye-estimation - Penalty requiring proof of contravention coupled with intent to evade - Requirement of issuance of show cause notice prior to order under Section 130(4)Assessment/determination of tax only under Sections 73 or 74 and not by Section 130 - Confiscation and levy of penalty under Section 130 - Tax cannot be assessed or determined by exercise of powers under Section 130; determination of tax liability must follow the procedure in Section 73 or Section 74. - HELD THAT: - Having considered this Court's earlier decision in M/s Metenere Limited and the statutory scheme, Section 130 provides for confiscation of goods and levy of penalty where specified conditions are met but does not authorise quantification and raising of tax as if under Sections 73 or 74. The department in the present case quantified tax and imposed penalty by resorting to Section 130 processes while parallel proceedings under Section 74 were also instituted, which is impermissible. Consequently the tax assessment and penalty that were determined solely on the basis of actions under Section 130 are unsustainable. [Paras 11, 12, 13]The tax assessment/determination made under Section 130 is unsustainable; tax must be quantified only by resort to Sections 73 or 74 as applicable.Penalty requiring proof of contravention coupled with intent to evade - Confiscation and levy of penalty under Section 130 - Penalty under Section 130(1) cannot be validly imposed unless the facts fall within the clauses of Section 130(1), and in particular contraventions attracting Clause (ii) or (iv) are not made out in this case. - HELD THAT: - A plain reading of Section 130(1) shows penalties flow from specific mischiefs: not accounting for goods post point of supply (Clause (ii)) or contraventions with intent to evade (Clause (iv)). The liability to pay tax arises at point of supply; mere presence of goods in excess of records does not establish liability under Clause (ii). Further Clause (iv) requires establishment of contravention coupled with intent to evade tax, which is absent from the show cause notice and orders. Therefore penalty under Section 130 cannot be sustained on the material on record. [Paras 14, 15]The penalty levied under Section 130 is not attracted on the facts of this case and is therefore unsustainable.Service of notice in certain circumstances under Section 169 - Requirement of issuance of show cause notice prior to order under Section 130(4) - Service of the show cause notice on the firm's accountant did not satisfy the modes of service prescribed by Section 169(1)(a), and therefore service was invalid. - HELD THAT: - Section 169 prescribes specific modes of service, including tender to the taxable person or to his manager or authorised representative. Service on the accountant of the firm was not one of the specified persons under Section 169(1)(a). Although the respondent produced a show cause notice and asserted service, the statutory prescription does not contemplate service on the accountant in the manner effected; accordingly the service is invalid and the proceedings vitiated on that ground as well. [Paras 16, 17, 18]Service of notice as claimed is invalid under Section 169 and vitiates the proceedings.Valuation of goods and inadmissibility of sole reliance on eye-estimation - Valuation of supply under Section 15 - Valuation of goods cannot be done solely on the basis of eye-estimation; valuation must follow Section 15 read with applicable Rules (including Rule 27), and the appellate authority erred in revaluing goods without resort to the prescribed method. - HELD THAT: - Section 15 and the Rules framed thereunder govern valuation of taxable supplies; there is no provision authorising valuation by mere eye-estimation. The departmental valuation by eye-estimation was rejected by the appellate authority, yet the appellate authority proceeded to quantify the value differently without following the statutory mandate. Thus the valuation process adopted at both stages does not conform to Section 15 and the Rules and is unsustainable. [Paras 19]Valuation based solely on eye-estimation is impermissible; the valuation in the impugned order is not sustainable for not following Section 15 and the Rules.Final Conclusion: Writ petition allowed. The impugned order dated 29.01.2019 is set aside on the grounds that tax was impermissibly quantified under Section 130 (instead of Sections 73/74), penalty was not justified by the material, service of the show cause notice was invalid, and valuation by eye-estimation was improper; the deposit by the petitioner shall be refunded subject to the outcome of Section 74 proceedings in accordance with law. Issues Involved:1. Whether tax can be assessed/determined in exercise of powers under Section 130 of the GST ActRs.2. Whether penalty can be levied only on the allegations that at the time of verification of goods, the goods in excess were found at the premisesRs.3. Whether the service of notice as claimed by the respondent satisfies the requirement contemplated under Section 169 of the GST ActRs.4. Whether the valuation of goods can be done on the basis of eye estimation alone and on the basis of production capacity and/or the consumption of electricity etcRs.Summary:Issue I: Tax Assessment under Section 130 of the GST ActThe court analyzed whether tax can be assessed under Section 130 of the GST Act. Referring to the judgment in the case of M/s Metenere Limited, the court reiterated that the demand for tax must be quantified and raised as prescribed under Section 73 or Section 74 of the Act. The court concluded that the exercise of assessing tax and penalty under Section 130 was not stipulated by the Act and was unsustainable, particularly since the department had already undertaken the exercise under Section 74.Issue II: Penalty Levy Based on Excess GoodsThe court examined the applicability of Section 130(1) for levying penalties. It was noted that Clause (ii) of Section 130(1) could only be invoked if the liability to pay tax arises at the point of supply. For Clause (iv) to apply, there must be a contravention of the Act or Rules with an intent to evade tax. The court found no such allegations in the show cause notice or orders, thus holding that neither Clause (ii) nor Clause (iv) of Section 130(1) was applicable.Issue III: Service of Notice under Section 169 of the GST ActThe court evaluated whether service of notice to the petitioner's accountant satisfied the requirements of Section 169. It was determined that service on the accountant was neither contemplated nor provided for under Section 169(1)(a). Therefore, the service of notice was deemed invalid, rendering the proceedings liable to be quashed.Issue IV: Valuation of Goods Based on Eye EstimationThe court addressed the valuation of goods, emphasizing that Section 15 of the GST Act and the corresponding rules do not prescribe valuation based on eye estimation. The appellate authority had erred by accepting the valuation done on eye estimation and subsequently valuing the goods differently without following the prescribed methods under Section 15 and the rules. Consequently, the impugned order was found unsustainable.Conclusion:The writ petition was allowed, and the impugned order dated 29.01.2019 was set aside. The amount deposited by the petitioner was ordered to be refunded, subject to the outcome of the demand quantified under Section 74 of the Act.