GST Cannot Be Levied On Penalty Imposed On TASMAC Employee For Stock Shortage: Madras High Court

The Madurai Bench of the Madras High Court on 14 August held that GST cannot be levied on a penalty imposed on an employee for shortage of liquor stock, observing that such a penalty arising from an employer-employee relationship cannot, by itself, be treated as a supply of service under GST law.

A Division Bench comprising Justices M. Dhandapani and N. Dilip Kumar made the observation while dismissing an intra-court appeal filed by the Tamil Nadu State Marketing Corporation Limited (TASMAC). It held:

“The penalty imposed upon the private respondent is in respect of an alleged shortage of stock while discharging his duties as an employee of the appellant. The relationship between the appellant and the private respondent is one of employer and employee and not one of supplier and recipient of goods or services.”

The case concerned a TASMAC Supervisor posted at Shop No. 6547 in Kiranur, Pudukkottai District. TASMAC imposed a penalty of Rs. 1,41,435 on him after finding a shortage of liquor stock at the shop. The Corporation also collected GST and interest on the penalty.

The dispute arose after the nationwide COVID-19 lockdown was announced on 24 March 2020. The Supervisor had been instructed to close the shop at 6 p.m. Due to the sudden closure, he could not complete the usual closing formalities, including stock verification, preparation of accounts and remittance of the day's sale proceeds.

Following an inspection that revealed a stock shortage, TASMAC issued a show-cause notice to the Supervisor and subsequently imposed the penalty along with GST. The employee then challenged the levy before the High Court.

A Single Judge had earlier directed TASMAC to conduct a fresh enquiry concerning the collection of GST on the penalty. TASMAC challenged that order before the Division Bench.

TASMAC argued that Section 7 of the Central Goods and Services Tax Act, 2017 (which defines the scope of “supply” under GST law), read with Paragraph 5(e) of Schedule II, permitted the levy of GST in connection with an obligation to refrain from an act, tolerate an act or situation, or do an act.

The Division Bench rejected the argument, holding that Paragraph 5(e) of Schedule II had to be understood in the context of a supply of services. In the present case, TASMAC imposed the penalty on the Supervisor for an alleged stock shortage while he was discharging his employment duties.

It emphasised that the relationship between TASMAC and the Supervisor was that of employer and employee, and not that of supplier and recipient of goods or services. It held:

"The imposition of penalty upon the private respondent for the alleged shortage of stock cannot, by itself, be construed as a supply of service so as to attract the provisions of Section 7 of the Central Goods and Services Tax Act, 2017, read with paragraph 5(e) of Schedule II. The said provision cannot be invoked merely for the purpose of collecting GST on the penalty imposed upon an employee in the course of an employer-employee relationship."

Accordingly, the Division Bench dismissed TASMAC's appeal and upheld the direction for a fresh enquiry concerning the GST component. There was no order as to costs.

For Appellant: H. Arumugam, Advocate

For Respondent: No Appearance