Transit State Lacks Jurisdiction To Levy GST Penalty Without Taxable Transaction: Allahabad High Court

The Allahabad High Court has held that a State through which goods merely transit cannot invoke Section 129 of the Central Goods and Services Tax Act, 2017, to detain goods and levy penalty for the absence of an e-tax invoice where no taxable transaction takes place within that State.

A Division Bench of Justices Saumitra Dayal Singh and Swarupama Chaturvedi on 14 May allowed a writ petition filed by Maruti Enterprises and connected matters, holding that the Uttar Pradesh GST authorities lacked jurisdiction to levy penalty because the goods were travelling from West Bengal to Delhi and merely passed through Uttar Pradesh. The Bench held:

“to the extent, the respondent GST authorities of the State of U.P. do not dispute that the goods/Areca nuts originated from the State of West Bengal and were being transported to the State of Delhi, as evidenced by a valid e-Way Bill and physical Tax Invoice, to the extent there is not an iota of allegation, either that the goods were different or that they either originated from or were meant for consumption inside the State of U.P. or that the documents produced are bogus, no jurisdiction arose to those authorities to penalise those goods, U.P. being a pure transit State.”

Maruti Enterprises, registered under the Delhi Goods and Services Tax Act, purchased areca nuts from A.K. Enterprises, a dealer registered under the West Bengal Goods and Services Tax Act. The consignment was accompanied by a tax invoice-cum-challan and a valid e-way bill.

The goods were intercepted at Gautam Budh Nagar, just before exiting Uttar Pradesh, and detained on the ground that they were not accompanied by an e-tax invoice as required under the CGST Rules.

The authorities issued a show-cause notice under Section 129(3) of the CGST Act. The petitioner acknowledged that the non-generation of the e-tax invoice was a technical lapse. They rejected the explanation, imposed penalty, and subsequently cancelled the petitioner's GST registration during the pendency of the writ petition.

The principal issue before the Court was whether the GST authorities in Uttar Pradesh had jurisdiction under the CGST Act, the Uttar Pradesh GST Act, the Integrated Goods and Services Tax Act, 2017, and the relevant Rules to detain goods and levy penalty when the goods were merely passing through the State in the course of inter-State transportation. The Bench observed:

“The cross-empowerment is between the authorities of the Union and the individual States but not between authorities of two or more States. Thus, the State GST authorities of one State are not empowered or permitted to proceed against an assessee mapped to the State GST authority of another State. Such authority may only seek to act on the strength of cross-empowerment viz-a-viz an assessee falling in its territorial jurisdiction, but mapped to the central GST authority, in that State, viz-a-viz transactions in that State.”

The Court held that a transit State cannot levy a penalty where the goods are neither supplied nor intended for consumption within that State. While the Uttar Pradesh authorities were entitled to verify the documents accompanying the goods, any action regarding the supplier's turnover or compliance obligations could only be initiated by the authorities having jurisdiction over the registered supplier or purchaser. It further observed:

“…if there is no amount of "tax payable" on such goods (in the State of U.P.), there may not arise any levy of penalty inside the State of U.P. In absence of any allegation or finding of goods being different, and in absence of any doubt as to the e-Way Bill, it is undoubted that the goods originated from the State of West Bengal and were meant for supply in the State of Delhi. In absence of the levy provision (under IGST Act), being applicable to such transaction, (on admitted facts), no tax may become payable in the State of U.P.”

It also held that the obligation to generate an e-tax invoice depends upon the supplier's turnover and statutory compliance. A purchaser cannot be expected to verify the supplier's turnover before entering into a transaction. Since the authenticity of the physical tax invoice was never questioned, the purchaser could not be penalised solely because the goods were not accompanied by an e-tax invoice.

Holding that Uttar Pradesh, as a purely transit State, lacked jurisdiction to impose the penalty, the Bench observed:

“in view of complete lack of a foundation - to levy any tax in the State of U.P., on such transaction, on admitted facts, the lack of e-Tax Invoice remains an unexplained anomaly noticed by the GST authorities of the State of U.P., causing no tax effect in the State of U.P. At most, the same may be marked on the documents, produced before those authorities and such fact be communicated to the concerned authorities in the State of West Bengal and Delhi.”

Accordingly, the High Court allowed the writ petition and the connected matters.