Managing Director Vs K. R. Subramanian (Madras High Court)
Summary: The Madurai Bench of the Madras High Court dismissed an intra-court appeal filed by the Managing Director, Senior Regional Manager and District Manager of the Tamil Nadu State Marketing Corporation Limited (TASMAC), upholding the order of the learned Single Judge concerning the collection of GST on a penalty imposed upon an employee for shortage of liquor stock.
The private respondent, K.R. Subramanian, was working as a Supervisor at TASMAC Shop No.6547, Kiranur, Pudukkottai District. Following a shortage of liquor stock at the shop, a penalty of Rs.1,41,435/- was imposed on him, along with GST and interest. He challenged the levy before the Madras High Court in W.P.(MD) No.10355 of 2020. By order dated 18.12.2020, the learned Single Judge allowed the writ petition and directed the appellants to conduct a de novo enquiry regarding collection of GST on the penalty.
The appellants challenged that order in the present intra-court appeal. Their case was that on 24.03.2020, following the nationwide lockdown announced by the Government of India with effect from 6.00 p.m., the respondent had been instructed to close the TASMAC shop at 6.00 p.m. Ordinarily, after the prescribed closing time, the Supervisor would complete closing formalities, including verification of stock, preparation of the day’s accounts and remittance of sale proceeds on the next working day. According to the appellants, the sudden lockdown prevented the respondent from completing those formalities in the usual manner.
It was submitted that the day’s accounts could not be closed, the total sale amount could not be verified and intimated to the District Manager through SMS, and the sale proceeds received between 4.00 p.m. and 6.00 p.m. were consequently kept in the shop locker. An inspection was subsequently conducted and a shortage of stock was found. A show-cause notice was issued proposing a penalty of Rs.1,41,435/- along with interest and GST in accordance with the applicable provisions relating to prevention and detection of fraudulent acts in TASMAC. An order dated 28.07.2020 thereafter imposed the penalty along with GST.
The appellants further contended that although the respondent had paid the entire amount including GST, the learned Single Judge had set aside the collection of GST along with the penalty and directed a de novo enquiry. According to the appellants, this direction was unsustainable because Section 7 of the Central Goods and Services Tax Act, 2017, read with the relevant provisions of Schedule II, enabled GST to be collected along with the penalty imposed on the employee.
The Division Bench specifically questioned whether the GST Act authorised the appellants to collect GST on the penalty imposed upon the employee for shortage of stock. In support of their position, the appellants relied upon Section 7 of the CGST Act read with paragraph 5(e) of Schedule II, which deals with agreeing to the obligation to refrain from an act, to tolerate an act or situation, or to do an act.
The Court considered paragraph 5(e) of Schedule II in the context of a supply of services. It observed that, in the present case, the penalty imposed upon the respondent related to an alleged shortage of stock while he was discharging his duties as an employee of the appellant. The relationship between TASMAC and the respondent was therefore one of employer and employee and not one of supplier and recipient of goods or services.
The Court accordingly held that imposition of a penalty upon the respondent for the alleged shortage of stock could not, by itself, be construed as a supply of service attracting Section 7 of the CGST Act read with paragraph 5(e) of Schedule II. The provision could not be invoked merely for collecting GST on a penalty imposed upon an employee in the course of an employer-employee relationship.
Finding no error or infirmity in the order of the learned Single Judge warranting interference, the Division Bench dismissed W.A.(MD) No.679 of 2021. There was no order as to costs.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
1. This Intra-Court Appeal has been filed challenging the order dated 18.12.2020 passed by this Court in W.P.(MD) No.10355 of 2020.
2. The private respondent was working as a Supervisor at TASMAC Shop No.6547, Kiranur, Pudukkottai District. On account of the shortage of liquor stock found in the said shop, a penalty of Rs.1,41,435/- was imposed on the private respondent, along with GST and interest. Challenging the same, the private respondent filed W.P.(MD) No.10355 of 2020 before this Court. The learned Single Judge, by order dated 18.12.2020, allowed the writ petition and directed the appellants to conduct a de novo enquiry in respect of the collection of GST on the penalty imposed on the private respondent. Aggrieved by the said order, the present Intra-Court Appeal has been filed.
3. The learned counsel appearing for the appellants would submit that the private respondent was working as a Supervisor at TASMAC Shop No.6547, Kiranur, Pudukkottai District. On 24.03.2020, the Government of India announced a nationwide lockdown with effect from 6.00 p.m. on account of the spread of the novel coronavirus. The private respondent received instructions from the District Manager to close the shop at 6.00 p.m. Normally, the shop would be closed at the prescribed closing time, and thereafter, the Supervisor would take some time to complete the closing formalities, including verification of the stock available, preparation of the day’s accounts and remittance of the sale proceeds on the next working day. It is further submitted that, due to the sudden lockdown announced on 24.03.2020, the private respondent was compelled to close the shop at 6.00 p.m. and was unable to complete the closing formalities in the usual manner. It is stated that the day’s accounts could not be closed and the total sale amount could not be verified and intimated to the concerned District Manager through SMS. Therefore, the private respondent kept the sale proceeds received between 4.00 p.m. and 6.00 p.m. in the locker available in the shop. Subsequently, an inspection was conducted and a shortage of stock was found. A show-cause notice was therefore issued to the private respondent as to why a penalty of Rs. 1,41,435/- should not be imposed along with interest and GST in respect of the shortage of stock, in accordance with the applicable provisions relating to prevention and detection of fraudulent acts in TASMAC. Thereafter, an order dated 28.07.2020 was passed imposing the penalty along with GST. Challenging the same, the private respondent approached this Court by filing the aforesaid writ petition.
4. The learned counsel appearing for the appellants would further submit that, though the private respondent had paid the entire amount, including GST, the learned Single Judge had set aside the collection of GST along with the penalty amount and directed a de novo enquiry in that regard. According to the learned counsel, such a direction is not sustainable, since Section 7 of the Central Goods and Services Tax Act, 2017, read with the relevant provisions of Schedule II, enables the appellants to collect GST along with the penalty imposed on the employee.
5. This Court posed a specific question to the learned counsel appearing for the appellants as to whether the provisions of the GST Act authorise the appellants to collect GST on the penalty imposed upon the employee for the shortage of stock.
6. The learned counsel appearing for the appellants placed reliance upon Section 7 of the Central Goods and Services Tax Act, 2017, read with paragraph 5(e) of Schedule II, which deals with agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act.
7. We have carefully considered the said provision. Paragraph 5(e) of Schedule II contemplates an agreement involving an obligation to refrain from an act, to tolerate an act or situation, or to do an act. The provision has to be understood in the context of a supply of services. In the present case, 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.
8. Therefore, 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.
9. In such circumstances, we do not find any error or infirmity in the order passed by the learned Single Judge warranting interference by this Court in the present Intra-Court Appeal.
10. Accordingly, this Intra-Court Appeal is dismissed. There shall be no order as to costs.
