Detention of Goods u/s 129 for Misclassification: How to Draft Reply Notice towards Detention Order [Find Format Here]

Detention of Goods under Section 129 of the Central Goods and Services Tax ( CGST ) Act, 2017 is one of the components of the Goods and Services Tax ( GST ) regime. Section 129 of the CGST Act, 2017 deals with Detention, seizure and release of goods and conveyances in transit. This Section can be invoked by tax authorities upon reasonable apprehension of suspected tax evasion or lack of statutory compliance by persons transporting goods.    

1. Detention of Goods u/s 129 of the CGST Act, 2017

Prevention of access of goods in transit to its owner by means of a legal order or notice is known as detention under the law. Detention does not vitiate the ownership rights exercised over the goods by its owner, but temporarily ceases the owner’s access over the goods on the basis of any suspected statutory violations, eg: tax evasion, lack of proper documentation or any procedural lapse.

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• Scope of Section 129 –  Extent of the term “Contravention with the provisions of this Act”

Section 129 of the CGST Act, 2017 permits a proper officer of the concerned Tax Authority to detain any vehicle used for transportation of goods, if the Officer has sufficient reasons or evidence to believe that the Goods are being transported in violation of the Statutory Provisions.

The term “Contravention with the provisions of this Act” encompassess a multitude of situations that can be applicable in a case of Detention of Goods under Section 129 of the CGST Act, 2017.

The most commonly seen errors or omissions that lead to proceedings under section 129 of the CGST Act, 2017 is the inability to produce proper documentation regarding the goods transported, when called for by the Tax Authorities, often during on-road checks.

Some of the common circumstances regarding improper documentation following which proceedings under Section 129 of the CGST Act, 2017 are initiated are given below:

• An e-way bill is required for transportation of a consignment of goods whose value exceeds fifty thousand rupees according to Section 68 of the GST Act, 2017 read with Rule 138 of the allied Rules. Apparent mismatch between the details on the e-way bill pertaining to the journey, or expiry of its validity during the course of the transport are grounds for proceedings under Section 129.

• Lack of or incorrect details in the ‘Delivery Challan’ issued for the transport of goods from one place to another for any purpose whatsoever. Delivery Challans add an extra layer of tracking and verification of goods when they are transported between places.

• A Tax Invoice also provides evidence of supply of goods between two entities engaging in business with each other. GST, being a tax charged at the time of Supply of Goods or Services

A registered individual supplying taxable goods must issue a tax invoice, either before or at the time of the removal of goods (if the supply involves their movement), or upon delivery to the recipient.

This invoice must detail the description, quantity, and value of the goods, the applicable tax charged, along with other prescribed particulars in accordance with the CGST Rules.

Read More: GST CASE DIGEST: Inspection, Search, Seizure and Arrest

• What constitutes ‘Misclassification’ of Goods

Misclassification of Goods refers to the Incorrect classification of Goods that are supplied by the Consignors under the GST Rate Schedules. The GST Rate Schedules released and often revised by the Ministry of Finance are to be correctly identified and utilized by the Consignors depending on the Goods that they supply.

An incorrect classification of a Good, whether intentional or not, can lead to proceedings under Section 129 of the CGST Act, 2017 upon inspection.

Misclassification can occur in the following ways:

• Wrong application of Harmonized System of Nomenclature (HSN) codes
• Declaring goods under an incorrect tax slab to reduce GST liability
• Claiming exemptions for goods that are taxable

Authorities are vigilant regarding misclassification as it leads to revenue loss for the government, hence it is vital to correctly identify and classify the Goods supplied under the GST regime.

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• Due Process under apprehension of Misclassification

1. Inspection and Detention: Authorities conduct checks on the Goods being transported and the accompanying documents produced by the transporter. Upon inspection of the documents such as e-way bill and tax invoice, if there is suspicion of misclassification of the Goods, the goods may be detained by the Authorities.

• Issuance of Detention Order: The authorities issue a detention order under Section 129, citing the reasons and statutory provisions under which the Goods in transit have been detained.

• Opportunity to Respond: Subsequent to the Detention of the GOODS , the transporter shall be served with a show-cause notice detailing the alleged misclassification and allied statutory provisions. The Show-Cause Notice further provides the Transporter an opportunity for providing an explanation or adducing other proof to explain why such misclassification may not be made.

• Reply and Hearing: The transporter must submit a reply to the show cause notice within the stipulated time period. An opportunity for a personal hearing may also be given to the Transporter.

• Final Order: Based on the transporter’s reply and other evidence adduced, a final order may be passed, which could include the release of goods or imposition of penalties or any other proceedings.

• Provisional Release and Final Order

Under Section 129(2) of the CGST Act, 2017, goods and conveyances may be provisionally released upon the execution of a bond and the furnishing of security in the event of any dispute between the tax demanded and/or the penalty amounts. Section 122 of the CGST Act, 2017 provides for the Penalties leviable for certain offences.

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For instance, if the transporter contests the tax and penalty amounts and provides security equivalent to the disputed sum, the goods and conveyance may be released by the tax authorities on a provisional basis until a further decision is made on the same.

Read More: Confiscation before Seizure can’t be Ordered on Mere Suspicion: Gujarat HC

• Case Laws

The Kerala High Court held in the case of Daily Fresh Fruits India (P.) Ltd vs Assistant State Tax Officer (2020) that in case of a classification dispute, the inspecting officer can detain goods only to transmit the matter to the jurisdictional assessing officer.

Additionally, in N.V.K. Mohammed Sultan Rawther and Sons vs Union of India (2018), the Kerala High Court held that Goods may not be detained on the basis of disputed classification but should rather be referred to the jurisdictional assessing officer to take a decision on the same.

Read More: High Court can’t be approached in Goods Detention cases if effective alternative remedies of provisional clearance are available: Kerala High Court

• Key things to keep in Mind while Drafting Reply towards Detention Order

• Carefully review the detention order to understand the reasons for detention and the grounds on which the misclassification has been alleged by the Authorities.

• Clearly explain how the classification was arrived at by the Consignor, and highlight any ambiguities or genuine mistakes that led to the misclassification.

• Attach supporting documents such as invoices, e-way bills, expert opinions on classification, and previous rulings that support your case.

• Refer and cite case laws that might be applicable to your case, emphasizing the absence of intent to evade taxes.

• If the misclassification was an unintentional mistake, propose rectification measures, such as the payment of any shortfall in taxes or revised classification of goods. These rectification measures may be considered by the Authorities providing scope for additional leeway to the Consignor.

• Ensure that the Reply is respectful, fact-oriented and based on accurate legal provisions.

• Draft Format

Access the Draft Reply Format towards a Detention Order by clicking the blue button below.

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