Section 129 Penalty Cannot Be Imposed Merely for Misclassification of Goods: A Landmark Judgment

Case: Tirupati Agro Commodities vs State of U.P.

Court: Allahabad High Court
Order Date: 10th July 2025
Writ No.: Writ Tax No. - 2596 of 2025

Case Summary:

The case involves a penalty imposed on the petitioner under Section 129(3) of the U.P. Goods and Services Tax Act, 2017. The penalty was levied solely on the grounds of misclassification of goods, even though all necessary documents-invoice and e-way bill-were duly furnished.

Key Legal Provisions Involved:

Section 129 of the CGST/SGST Act:

• Deals with: Detention, seizure, and release of goods and conveyances in transit.

Section 129 of the CGST/SGST Act deals with the detention and seizure of goods and conveyances in transit when there is a contravention of the provisions of the Act or the rules made thereunder. This section empowers the proper officer to intercept a vehicle, detain the goods and the conveyance, and initiate proceedings if documents such as the tax invoice or e-way bill are absent, invalid, or incorrect. Once such irregularity is identified, the officer may seize the goods and vehicle and demand payment of applicable tax and penalty before releasing them. However, it is crucial to note that mere procedural lapses or classification disputes, in the absence of intent to evade tax or fraud, do not justify detention or seizure. Any unwarranted use of Section 129 must be viewed as an abuse of power, especially when furnished all the necessary documentation.

• Sub-section (3): Provides for penalty imposition where there is contravention of the provisions.

Sub-section (3) of Section 129 of the Central Goods and Services Tax (CGST) Act, 2017, provides the mechanism for imposing penalties when goods and conveyances are detained for contravention of provisions related to transportation or transit of goods. If, upon inspection, the proper officer determines that there has been a violation-such as transporting goods without a valid e-way bill, invoice, or with incorrect details-he shall issue a notice specifying the tax and penalty payable. This is followed by an order for payment, and the goods can be released only after such tax and penalty amounts are paid in full. Importantly, the penalty structure under this sub-section is stringent: in the case of taxable goods, a penalty equal to 100% of the tax payable is imposed (if the owner comes forward), or 50% of the value of the goods (if the owner does not come forward). However, courts have clarified that this provision is not applicable to classification disputes, which are should be adjudicated under Sections 73 or 74 of the Act. Misuse of Section 129(3) to impose penalties without proper legal grounds has been repeatedly struck down by High Courts to prevent harassment of genuine taxpayers.

Sections 73 & 74 of CGST/SGST Act:

• Section 73: Deals with demand and recovery of tax not paid/short paid without fraud.

Section 73 of the CGST Act, 2017 deals with the demand and recovery of tax in cases where tax has not been paid or has been short-paid, or input tax credit (ITC) has been wrongly availed or utilized, without any element of fraud, willful misstatement, or suppression of facts. This is a civil recovery provision aimed at rectifying genuine or inadvertent tax defaults. The process begins when the proper officer issues a show cause notice (SCN) under Section 73(1), informing the taxpayer of the shortfall and seeking explanation. If the taxpayer accepts the liability, they can voluntarily pay the tax along with interest under Section 50 before or within 30 days of the SCN, and the proceedings are deemed concluded under Section 73(5) or 73(6).

If the taxpayer does not agree, they may file a reply and a personal hearing will be granted before passing the adjudication order under Section 73(9). Importantly, this provision allows for recovery of tax along with interest and a penalty of 10% of the tax amount or ₹10,000, whichever is higher, only when payment is not made voluntarily. The timelines are strictly laid down-the SCN must be issued at least 3 months prior to the time limit of 3 years from the due date for filing annual returns.

This section serves to separate bonafide tax errors from cases involving intent to evade, which are dealt under Section 74. Courts have often emphasized the use of Section 73 over penal provisions like Section 129, especially in cases involving misclassification or valuation disputes, reiterating the principle that punitive actions must align with the nature of the default

• Section 74: Deals with demand and recovery of tax not paid/short paid due to fraud or willful misstatement.

Section 74 of the CGST Act, 2017 governs the demand and recovery of tax not paid or short paid, or input tax credit (ITC) wrongly availed or utilized, due to fraud, willful misstatement, or suppression of facts with intent to evade tax. This is a penal provision designed for serious offenses where there is a deliberate attempt to defraud the government. The process begins when the proper officer issues a Show Cause Notice (SCN) under Section 74(1), alleging that the tax default involved fraudulent intent.

Before the SCN is issued, the taxpayer is given an opportunity to pay the amount of tax along with applicable interest and a penalty of 15% of the tax under Section 74(5). If such payment is made, no SCN is issued and the case is closed. If payment is made within 30 days from the issue of SCN, a penalty of 25% is levied and the proceedings conclude under Section 74(8).

However, if the taxpayer neither agrees to the liability nor pays the dues, the matter proceeds to adjudication, where the officer may pass an order under Section 74(9). In such cases, the taxpayer is liable to pay the full amount of tax, interest, and a penalty equivalent to 100% of the tax amount. If the taxpayer pays the dues within 30 days of service of the adjudication order, the penalty is reduced to 50% of the tax.

Key events under Section 74 include:

• Detection of fraud/willful misstatement/suppression;
• Issuance of SCN under Section 74(1);
• Opportunity to pay tax + interest + 15%/25%/50% penalty depending on stage;
• Adjudication if payment is not made;
• Recovery proceedings under Section 79 if dues remain unpaid.

This section is frequently invoked in cases involving bogus billing, fictitious ITC, non-existent firms, or misuse of exemptions, and has been upheld in several judicial pronouncements as a valid tool for addressing tax evasion, provided due process is followed.

Who Can Issue Notices Under Section 129, Section 73, and Section 74 of the CGST Act, 2017?

Section 129 - Detention, Seizure, and Penalty for Goods in Transit

• A Proper Officer as defined under Section 2(91) of the CGST Act.
• Typically, this is a Superintendent of CGST/SGST, Assistant Commissioner, or any officer authorized by the Commissioner.
• The officer must be empowered under Section 129 read with Rule 138C of the CGST Rules.

Context:

• The notice under Section 129(3) is issued when goods or conveyances are detained/seized in transit due to contravention of GST provisions (e.g., no e-way bill, improper documents).

Section 73 - Demand of Tax (No Fraud)

• A Proper Officer, typically a Superintendent or Assistant Commissioner, authorized by the Commissioner under Section 5 of the CGST Act.
• Delegation of powers is generally notified via internal circulars or orders.

Context:

• Notice under Section 73(1) is issued where tax is not paid or short paid, or ITC is wrongly availed or utilized or undervaluation,  not due to fraud or willful misstatement.
• Time limit: SCN must be issued at least 3 months before the expiry of 3 years from the due date of annual return.

Section 74 - Demand of Tax (With Fraud/Willful Misstatement)

• Again, a Proper Officer designated by the Commissioner, often an Assistant Commissioner or above, depending on the monetary limit and departmental delegation orders.

Context:

• Section 74(1) notice is issued where tax has not been paid/short paid or undervaluation,  due to fraud, willful misstatement, or suppression of facts.
• Time limit: SCN must be issued at least 6 months before the expiry of 5 years from the due date of annual return.

Definition of "Proper Officer"

Under Section 2(91) of CGST Act:

“Proper Officer” in relation to any function to be performed under this Act, means the Commissioner or the officer of the central tax who is assigned that function by the Commissioner in the Board.

• CBIC has issued various notifications (e.g., Notification No. 14/2017-CT) assigning powers to officers under the Act.

Facts of the Case:

• Goods were transported with valid documents (invoice and e-way bill).
• Dispute arose only on misclassification of the goods (HSN issue).
• Authorities invoked Section 129(3) and imposed penalty.

Court’s Observations & Ruling:

1. Misclassification Detention-worthy Offense under Section 129.
2. No Any other disputes and required documents are present, the proper recourse for authorities is through adjudication under Sections 73 or 74, not penal detention under Section 129.
3. The Court relied on its own previous decision in:

Shamhu Saran Agarwal & Co. vs Additional Commissioner (2024) 160 Taxmann.com 151 (Allahabad)
Where it was held that "penalty under Section 129 cannot be imposed on mere suspicion or misclassification".

1. The Court held that the detention and penalty order dated 08.05.2025 was illegal, and directed refund of the penalty within 8 weeks.

Important Takeaways for Taxpayers and Practitioners:

When Section 129 Should Be Invoked:

• Where goods are transported without documents, or with invalid/expired e-way bill.
• Where there is evasion of tax or fraudulent intent is evident during transit.

When Section 129 Should NOT Be Invoked:

• Mere misclassification of goods (e.g., difference in HSN code) when:
  • Invoice and e-way bill are furnished,

Misclassification is a Classification Dispute, Not a Ground for Detention Under Section 129. Appropriate procedure is adjudication under Sec 73/74.

The issue of misclassification of goods is fundamentally a classification dispute and does not constitute a valid ground for detention or seizure under Section 129 of the CGST/SGST Act, 2017. In such cases, where the valid documents like invoice and e-way bill are available, the proper course of action is adjudication under Section 73 (for non-fraudulent cases) or Section 74 (for fraudulent or willful misstatement cases).

This legal position has been reaffirmed by the Kerala High Court in multiple judgments, including M/s Indus Towers Ltd. v. Assistant State Tax Officer [2020 (33) G.S.T.L. 104 (Ker.)], where the Court held that mere misclassification does not empower the officer to detain goods under Section 129. The court emphasized that classification-related disputes are to be adjudicated, not resolved by penal provisions applicable to evasion or non-compliance during transportation.

Further, the Kerala GST Department has clarified this through Circular No. 04/2022 dated 14.07.2022, which directs the enforcement officers to refrain from detaining goods solely on grounds of misclassification and instead forward such cases along with the relevant invoice, e-way bill, and other documents to the proper adjudicating authority for proceedings under Section 73 or 74 of the Act.

Hence, enforcement officers must act within the limits of their powers, ensuring that detention under Section 129 is only invoked in genuine cases of evasion, fraud, or gross non-compliance, and not in interpretational disputes like classification issues. Misuse of this section for classification differences results in unlawful penalty, as clarified by the Kerala High Court and the GST Commissioner’s Circulars.

Other Relevant Judgments:

1. M/s Godrej & Boyce Mfg. Co. Ltd. vs Union of India [2021] (Gujarat HC)
   Held: Wrong classification cannot lead to confiscation of goods unless it’s proven intentional or fraudulent.
2. K. P. Sugandh Ltd. vs Union of India [2022] (Allahabad HC)
   Stated: Section 129 is not meant for technical breaches where tax liability is not evaded.

Notifications and Circulars:

• Circular No. 41/15/2018-GST dated 13.04.2018:
  Clarifies that minor errors in documents (like minor HSN mismatch) should not attract detention under Section 129.
• CBIC FAQs & Guidance Notes:
  Emphasize on the principle of proportionality and intent while imposing penalties.

Conclusion:

This judgment is a relief for honest taxpayers and businesses. It reinforces that misclassification is not a criminal offense but a subjective issue requiring adjudication. Officers must exercise judicial prudence, and taxpayers should be aware of their rights.

Advice for Taxpayers. 

• Always ensure valid invoices, e-way bills, and correct HSN codes.
• If penalty under Section 129 is levied, consider challenging the order.
• Maintain robust documentation and consult a GST expert when in doubt.