The Allahabad High Court has ruled that GST authorities in a transit State cannot detain goods or impose penalties under Section 129 of the GST Acts merely because the goods pass through that State, provided the transaction originates in one State and is destined for another without any tax implication in the transit State. 

The Bench of Justice Saumitra Dayal Singh and Justice Swarupama Chaturvedi has observed that Section 6 of the CGST Act and Section 4 of the IGST Act merely enable cross-empowerment between Central and State GST authorities operating within the same State. These provisions do not authorise GST officers of one State to exercise enforcement jurisdiction over transactions exclusively connected with two other States.

The lead case concerned M/s Maruti Enterprises, a Delhi-registered GST dealer that purchased 30,100 kilograms of dried areca nuts from a supplier registered in West Bengal. The goods were dispatched under a tax invoice and a valid e-way bill and were being transported by road from Falakata, West Bengal, to New Delhi.

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When the consignment reached Gautam Buddh Nagar in Uttar Pradesh, close to the Delhi border, it was intercepted by Uttar Pradesh GST authorities for verification. Although the goods were accompanied by a physical tax invoice and a valid e-way bill, the officers found that the supplier had not generated an electronic tax invoice (e-invoice), allegedly required under Rule 48(4) of the CGST Rules due to the supplier’s turnover exceeding the prescribed threshold. Based on this alleged violation, the authorities detained the goods and imposed a penalty exceeding ₹33 lakh under Section 129 of the GST Act. 

The High Court framed two principal issues for determination.

First, whether Uttar Pradesh GST authorities possessed jurisdiction to detain goods and levy penalties in respect of an inter-State transaction where the goods neither originated nor were destined for Uttar Pradesh but merely passed through the State.

Second, whether the provisions relating to inspection, detention, cross-empowerment and transportation of goods under the CGST Act, SGST Act, IGST Act and GST Rules conferred such jurisdiction upon the authorities of the transit State. 

The petitioners argued that Article 301 of the Constitution guarantees freedom of inter-State trade and commerce. According to them, while regulatory inspections are permissible, neither the GST statutes nor the Constitution authorise a transit State to penalise transactions that have no taxable nexus with that State.

They further contended that the alleged deficiency concerning the supplier’s failure to generate an e-invoice could only be examined by the GST authorities having jurisdiction over the supplier or the recipient, namely those in West Bengal or Delhi, and not by Uttar Pradesh authorities. 

The State defended the penalties by relying upon Sections 68 and 129 of the GST Acts along with Rules 138A, 138B and 138C of the GST Rules. It argued that the GST framework incorporates the principle of cross-empowerment, enabling State GST officers to enforce provisions under the CGST and IGST Acts.

The authorities further submitted that the supplier had failed to issue a mandatory e-invoice despite being liable to do so, and therefore the goods were not accompanied by valid statutory documents. They also highlighted that the supplier had purchased goods from entities whose GST registrations had been suspended or cancelled and that the recipient’s registration was later suspended. 

Rejecting the State’s interpretation, the High Court made a significant distinction regarding the concept of cross-empowerment.

The Court held that no cross-empowerment exists between GST authorities of different States for transactions having no tax nexus with the transit State. 

The Court acknowledged that transit-State officers are empowered to stop vehicles, inspect goods and verify documents as part of regulatory enforcement.

However, it drew a clear distinction between verification and adjudication.

According to the Bench, once it is undisputed that the goods originated outside Uttar Pradesh, were destined outside Uttar Pradesh, and were covered by a valid tax invoice and e-way bill, the State’s jurisdiction ended after verification. If any discrepancy such as the absence of an e-invoice was noticed, the appropriate course was to communicate that deficiency to the competent GST authorities in the originating or destination State rather than detaining the goods or imposing penalties. 

The Court emphasised that penalties under Section 129 are intrinsically linked to the existence of tax liability.

Since the goods neither originated nor terminated in Uttar Pradesh and no IGST, CGST or SGST liability arose within the State, there was no legal basis for imposing a penalty under the GST framework.

The Court also observed that allowing every transit State to levy penalties on inter-State consignments would expose goods moving across the country to repeated enforcement actions, defeating the constitutional guarantee of free trade under Article 301. 

Another significant observation made by the Bench concerned the obligation to generate an e-invoice.

The Court noted that issuance of an e-invoice depends upon the supplier’s turnover, a fact uniquely within the supplier’s knowledge. The purchaser ordinarily has no means to verify whether the supplier has crossed the statutory turnover threshold before entering into a transaction.

Consequently, the recipient cannot be penalised merely because the supplier failed to comply with the e-invoicing requirement, especially where the physical tax invoice itself is genuine and undisputed. 

The State had relied upon the Supreme Court decisions in Armour Security (India) Ltd. and ASP Traders.

The High Court held that those judgments dealt with different issues. Armour Security primarily concerned the scope of cross-empowerment between Central and State tax administrations in intelligence-based enforcement, while ASP Traders involved discrepancies in the quantity of goods and doubts regarding the genuineness of the consignor and consignee.

Since the present cases involved no dispute regarding the origin, destination or identity of the goods, the Court found those precedents inapplicable. 

Allowing all the writ petitions, the Allahabad High Court held that Uttar Pradesh GST authorities lacked jurisdiction to impose penalties where the goods originated outside Uttar Pradesh; the goods were destined for another State; the transportation was supported by a valid e-way bill and physical tax invoice; there was no allegation that the goods differed from the accompanying documents; and no tax liability arose within Uttar Pradesh.

The Court directed the immediate release of the detained goods and vehicles and quashed all the impugned penalty orders. It clarified that any deficiency noticed during transit, including non-generation of an e-invoice, may only be reported to the competent authorities of the originating or destination State for appropriate action. 

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