Delhi HC Flags Incongruity in Provisional Release Provisions under GST, Refers Issue to GST Council to Decide Policy [Read Order]

The Delhi High Court raises the GST policy gap with regards to the issue of the manner of provisional release of goods seized on suspected GST ( Goods and Services Tax ) evasion and also the not quantified. The court said that the issue requires policy decisions, therefore the same was referred to the GST council.

The bench of Justices Prathiba M. Singh and Shail Jain observed that “.. this incongruity deserves to be resolved by taking a policy decision on the manner in which provisional release can be considered even when the seizures are effected on alleged suspicion of evasion of GST.”

PHX Electronics Pvt. Ltd., the petitioner approached the High Court challenging a Show Cause Notice (SCN) issued under Section 130 of the CGST Act.

The notice proposed confiscation of alleged excess stock of televisions and motherboards valued at approximately ₹1.34 crore. The goods were seized following a search conducted by the DGGI on the ground that the physical stock exceeded the recorded inventory.

The peculiar situation of this case is that, at first, SCN was initially made answerable to one GST division, while another division later claimed jurisdiction. This led to lengthy adjudication. Later, the counsel for the respondent submitted that Laxmi Nagar Division of the CGST Department is willing to adjudicate the SCN.

Another issue raised before the court is the inconsistency in the Section 67(6) of CGST Act and Rule 140(1) of GST Rules. The Section 67(6) allows provisional release of seized goods upon execution of a bond and furnishing of security, or upon payment of applicable tax, interest, and penalty.

However, Rule 140 of the CGST Rules limits this option by requiring a bank guarantee equivalent to the entire tax, interest, and penalty, even when the demand is unquantified or disputed.

The bench noted the submission that unlike other fiscal statutes where flexibility such as bank guarantees, corporate guarantees, or alternative securities are permitted, the GST does not not provide discretionary options for provisional release.

The bench observed that although the SCN itself mentioned the availability of provisional release, no amount was quantified and no conditions were specified. It was also noted the fact that the seized goods were imported nearly six years earlier and were likely to have lost commercial value.

The main problem resulting from this oddity is that goods are seized at an early stage during instances of suspected GST evasion, and if the pre-adjudication process takes an extended period of time, granting interim release becomes essential to prevent excessive hardship.

Rule 140 of the CGST Rules takes a strict stand by mandating security connected to the total tax, interest, and penalty, but Section 67(6) of the CGST Act is written to provide flexibility at this stage. Also it restricts security to ‘bank guarantee only’, however the Section 67(6) did not specify the same.

Practically speaking, this kind of computation is frequently not feasible right away because the assessment of tax liability itself necessitates thorough investigation. According to the department, no other measures were also given in the rule which favours the seizure of goods on suspected evasions.

According to the court, the issue needed to be addressed from the policy level. In its judgment, it was directed that the matter be placed before the GST Council for examining suitable mechanisms for provisional release of seized goods, even in cases involving alleged evasion.

With regards to the present case, the court said it did not delve into the merits. The petitioner was directed to submit the reply. Also, the standing counsel was ordered to share the copy of the order to the CBIC.

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