Goods & Services Tax (GST) in IndiaTaxGST Penalty Quashed for Breach of Natural Justice

The Gujarat High Court, in Tractors and Farm Equipment Ltd. & Anr. v. Union of India & Ors. , Special Civil Application No. 22073 of 2019, decided on 03.07.2025, quashed the penalty imposed under Section 129 of the Goods and Services Tax (hereinafter referred to as “GST”) Act, 2017, on the ground that the authorities acted in breach of natural justice by passing orders in undue haste without granting the petitioner a reasonable opportunity to be heard.

FACTS

Tractors and Farm Equipment Ltd. (hereinafter referred to as “the Petitioners”) are engaged in the manufacture and sale of tractors across India. Their head office is in Chennai, Tamil Nadu, and they also operate depots in other states, including Gujarat. The present case arose from the transportation of tractors from their Gujarat depot to a customer located in Bhavnagar.

On 3 October 2018, the Petitioners arranged to transport two tractors from their depot at Gujarat. Tax invoices were generated through their SAP software system. An e-way bill was also created in compliance with the GST rules, but only Part A of the e-way bill was completed. Part B of the e-way bill, which requires details of the vehicle in which the goods are transported, was not filled in. According to the Petitioners, their transporter was instructed to generate Part B, but due to technical glitches on the GST portal, the information could not be uploaded before the commencement of movement.

Late on the evening of October 3, 2018, the products, along with the invoices and the e-way bill that contained Part A, left the depot. The Union of India & Ors. (hereinafter referred to as “the Respondents”) intercepted the vehicle in the early hours of October 4, 2018. Following an examination, the Respondents concluded that the cargo was being transported without proper documentation since the e-way bill did not contain Part B.

The Respondents followed the prescribed procedure under Rule 138 of the Central State Goods & Service Tax Act, 2017. A statement of the driver was recorded, and inspection memos were prepared in the requisite forms. On the same day, an order of detention was issued.

Following that, the driver received a show-cause notice, which required the Petitioners to appear at the hearing on October 4, 2018. Ex parte proceedings were taken by the Respondents, who issued an order directing the payment of tax and an equivalent penalty under Section 129(1) of the GST Act without providing any more time.

Faced with urgency to secure release of the detained tractors, the Petitioners deposited the amount of tax and penalty on 6 October 2018. Upon payment, the goods were released.

After that, the Petitioners challenged the detention and punishment order in an appeal filed with the First Appellate Authority. They insisted that there was no intention to evade paying taxes, that Part B of the e-way bill could not be generated due to technical difficulties, and that paying the tax and a 100% penalty for releasing the products was not justified.

They also submitted that all substantive documents, including invoices, were in order. Despite these submissions, the appellate authority dismissed the appeal on 2 August 2019, holding that an incomplete e-way bill amounted to non-compliance, thereby attracting Section 129 of the GST Act.

Aggrieved by this decision, the Petitioners approached the Hon’ble Gujarat High Court, challenging the orders passed by the Respondents as well as by the appellate authority.

ISSUES 

1. Whether the Respondents have passed the impugned order under Sec. 129(3) of the GST Act in flagrant breach of the principles of undefined natural justice?

CONTENTIONS OF THE PARTIES

The Petitioners argued that the entire process adopted by the Respondents was fundamentally flawed. The detention order, the show cause notice, and the penalty order were all issued in quick succession. It was submitted that no effective opportunity was granted to explain the circumstances or to respond to the notice, which amounted to a breach of the principles of natural justice.

It was further contended that there was no attempt at tax evasion. The tractors were accompanied by valid tax invoices, and Part A of the e-way bill had already been generated. The absence of Part B, according to the Petitioners, was not deliberate but the result of technical glitches on the GST portal. They also highlighted that Part B was updated later in the morning of the same day while the goods were still under detention, which showed that there was no mala fide intention to evade paying tax.

The Petitioners also emphasized that the appellate authority had failed to appreciate the violation of natural justice. Instead of addressing this core issue, the Respondents upheld the penalty on the ground that Part B of the e-way bill was mandatory. Thus, the Petitioners claimed, the Respondents ignored the broader principles of fairness that the law demands.

In support of their stand, the Petitioners relied on judicial precedents where courts had set aside similar penalties in cases of procedural lapses. They referred to the Gujarat High Court’s decision in Landmark Cars Pvt. Ltd. v. Union of India, C/SCA/1487/2020, and also cited Circular No. 64/38/2018 dated 14.09.2018. The circular, they argued, recognizes that minor mistakes in e-way bills should attract only nominal penalties under Section 125 and not the harsh consequences under Section 129 of the Act. Based on these submissions, the Petitioners maintained that the detention of goods and imposition of penalty were wholly unsustainable and required to be quashed.

On the contrary, the Respondents contended that the facts themselves were not in dispute. At the time of interception, the goods were accompanied only by Part A of the e-way bill and lacked Part B, which rendered the document invalid under Rule 138. Once such a violation was established, the Respondents had no discretion and were bound to act under Section 129 of the Act.

The Respondents further submitted that the Petitioners had been granted an opportunity to explain not having the valid e-way bill, but they failed to appear for the same. Instead, the Petitioners voluntarily deposited the entire amount of tax and penalty on 06.10.2018 to secure release of the goods. Having chosen to pay without protest, the Petitioners could not later challenge the validity of the order.

It was also argued that the prescribed legal procedure had been followed. The Respondents therefore maintained that the proceedings were conducted strictly in accordance with the rules and could not be termed arbitrary.

Lastly, the Respondents contended that the Petitioners’ reliance on judicial precedents and the circular was misplaced. According to them, the circular applies only to minor clerical or typographical errors, whereas in the present case, there was a complete absence of Part B, which invalidated the e-way bill itself. Therefore, levying a penalty on this basis was completely justified.

DECISION AND FINDINGS

The Hon’ble Gujarat High Court observed that the Respondents had acted in clear breach of the principles of natural justice. The detention, issuance of the show cause notice, and passing of the penalty order all occurred on 04.10.2018, leaving no reasonable opportunity for the Petitioners to respond. The Gujarat High Court noted that Section 129 of the Act itself provides a seven-day period for adjudication, which was disregarded by the Respondents.

The Gujarat High Court held that such undue haste rendered the proceedings unsustainable in law. Without going into the merits of whether the penalty itself was justified, the Gujarat High Court quashed the order solely on the ground that it violated natural justice. It emphasized that fairness of procedure is a foundational requirement that cannot be sacrificed even in cases of technical lapses.

The Gujarat High Court also noted that this important matter had not been taken into consideration by the appeal body. The appellate authority had made a similar mistake by sustaining the order without addressing the violation of natural justice. The Gujarat High Court ruled that since the error was evident from the record, there was no need to remand the case.

Consequently, the Gujarat High Court invalidated and revoked the Petitioner’s fine. However, it made clear that every other matter brought up by the Petitioners on its merits was left for resolution in a suitable case. As a result, the petition was granted, and the regulation became final without a cost order.

AMLEGALS REMARKS

The idea that procedural fairness is essential to tax adjudication under the GST framework is reaffirmed by this ruling. Even where technical lapses occur, such as an incomplete e-way bill, the authorities must act within the safeguards prescribed by law and provide a genuine opportunity to be heard.

The decision also highlights that Section 129 of the Act cannot be applied mechanically. The Gujarat High Court has clarified that the time frame given in the statute is meaningful, and any action taken in undue haste will be struck down irrespective of the merits and that taxpayers will not be penalized without due process.

At the same time, the ruling does not dilute the mandatory nature of e-way bill compliance. The Gujarat High Court left the substantive issues open, making it clear that taxpayers must remain vigilant in meeting documentary requirements. What the Gujarat High Court has done is to strike a balance by reminding the authorities that enforcement must be tempered with fairness.

In the larger picture, this judgment aligns with earlier precedents and circulars that distinguish between genuine procedural lapses and deliberate evasion. It will serve as guidance for both taxpayers and authorities in approaching cases of e-way bill irregularities with a measured and just perspective.

– Team AMLEGALS assisted by Ms. Tanisha Khandelwal (Intern)

For any queries or feedback, feel free to reach out to laksha.bhavnani@amlegals.com or hiteashi.desai@amlegals.com