No Penalty on Zero-Rated Supply for E-way Bill Expiry: Gujarat HC

No penalty can be levied on a zero-rated supply where no tax is payable, merely due to expiry of e-way bill: Gujarat High Court

The Gujarat High Court, in the case of Marcowagon Retail (P.) Ltd. v. Union of India, ruled that a penalty cannot be imposed on zero-rated supplies solely due to an expired e-way bill when no tax is payable. Marcowagon Retail, an exporter of sports apparel, had its consignment detained by tax authorities after the e-way bill expired before the goods commenced movement to Mundra Port. Despite clearly indicating export status and zero-rated supply, a penalty of 200% of the alleged tax was levied. Marcowagon challenged this, arguing that zero-rated supplies, though leviable, attract nil tax, making the condition precedent for penalty under Section 129(1)(a) of the CGST Act inapplicable. The court observed that Section 129(1)(a) requires “tax payable,” which isn’t met with zero-rated supplies. It distinguished zero-rated from exempt supplies, noting that while tax is leviable, it’s not payable on zero-rated exports. Consequently, the court held that a procedural contravention of e-way bill rules, without tax evasion intent, doesn’t warrant such a penalty. The penalty was modified to INR 25,000, and the bank guarantee furnished under protest was ordered to be released.

Facts:

Marcowagon Retail (P.) Ltd. (“the Petitioner”) exported sports-related apparel and accessories to a buyer in the UAE. The goods were procured through its sister concern from a vendor in Gurugram and dispatched on October 29, 2024 to Mundra Port. E-invoice and e-way bill were generated, clearly indicating export status. However, the e-way bill expired on 04.11.2024, and the vehicle began movement only on November 07, 2024. The consignment was intercepted by Respondent No. 3, the State Tax Officer, on November 8, 2024, and the goods were detained under Section 129(1) of the CGST Act.

A notice in Form GST MOV-7 was issued, followed by an order in Form MOV-9 dated 19.11.2024, imposing a penalty of 200% of the tax allegedly payable on the goods. The Petitioner submitted a reply and requested a hearing, stating that the goods were zero-rated exports and hence not liable to tax. Nevertheless, to avoid delay in fulfilling export obligations, the Petitioner furnished a bank guarantee under protest and exported the goods on November 28, 2024.

The Petitioner challenged the penalty on the ground that zero-rated supplies are not taxable and hence no penalty under Section 129(1)(a) was warranted.

The Respondent contended that since the e-way bill had expired and movement was initiated post-expiry, the contravention of Rule 138 was willful. It was also submitted that the invoices carried HSN-based tax values, and therefore, penalty was rightly imposed

Issue:

Whether penalty under Section 129(1)(a) of the CGST Act can be levied on a zero-rated supply where no tax is payable, merely due to expiry of e-way bill?

Held:

The Hon’ble Gujarat High Court in R/Special Civil Application Nos. 2234 & 2236/2025 held as under:

• Observed that, Section 129(1)(a) authorizes penalty on payment of applicable tax and 100% penalty thereon, or in case of exempted goods, a reduced penalty. Since zero-rated supply under Section 16 of the IGST Act attracts nil tax, the condition precedent of “tax payable” is not met.
• Noted that, the goods were indisputably meant for export outside India and thus constituted zero-rated supply as defined in Section 2(23) read with Section 16(1)(a) of the IGST Act. No tax was payable under Section 5 of the IGST Act on such zero-rated supply.
• Further noted that, zero-rated supplies are distinct from exempt supplies, in that they permit input tax credit, and tax, though leviable, is not payable. Thus, in absence of tax liability, penalty computation under Section 129(1)(a) fails.
• Held that, procedural contravention of Rule 138 (relating to e-way bill validity) alone, without intention to evade tax, does not justify a 200% penalty when tax is not payable and modified the impugned order dated November 19, 2024, reducing penalty to INR 25,000 and directed release of the bank guarantee.

*****

(Author can be reached at info@a2ztaxcorp.com)