GST Goods Detention: Court Grants 14-Day Window Before Bank Guarantee Encashment

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Case Name

VE Commercial Vehicles Ltd. v. Union of India & Others

(Against the Order dated 29-05-2019 in WP© No. 14719/2019)

Court Name: High Court of Kerala at Ernakulam

Case No.: W.A. No. 1703 of 2019

Decided on: 2nd August, 2019

Coram: Hon’ble Mr. Justice C.K. Abdul Rehim & Hon’ble Mr. Justice R. Narayana Pisharadi

Key Takeaways

1. Section 129 of the CGST Act, 2017 — which deals with detention, seizure, and release of goods and conveyances in transit — was challenged as being unconstitutional when applied to mere technical violations without any tax evasion.

2. Once goods are released on a Bank Guarantee, the court will not ordinarily restrain encashment of that guarantee before the adjudication is completed — because the guarantee itself was the condition for release.

3. Anticipatory restraint on encashment of a Bank Guarantee (i.e., stopping it before any penalty order is even passed) is generally not granted, as it would defeat the purpose of the security mechanism under Section 129.

4. The 14-day rule: The court balanced the interests of both parties by directing that the Bank Guarantee shall not be encashed for 14 days after the adjudication order is served on the appellant. This gives the company time to challenge the penalty order.

5. The appellant retains the right to challenge any penalty order passed against them, either in the existing writ petition or in fresh proceedings, and can also seek interim relief at that stage.

Issue

Can the court restrain the GST authorities from encashing a Bank Guarantee (furnished as a condition for release of detained goods under Section 129 of the CGST Act, 2017), while the constitutional validity of Section 129 itself is under challenge — especially when no penalty order has yet been passed?

In simpler terms: Should the court stop the government from touching the Bank Guarantee before any penalty is even imposed, just because the company is challenging the law itself?

Facts

• VE Commercial Vehicles Ltd., a company registered in Bengaluru, Karnataka, was transporting goods through Kerala.

• The State Tax Officer (Intelligence), Surveillance Squad, State GST Department, Wayanad (Respondent No. 4) and the Assistant State Tax Officer, Surveillance Squad No. IV, State GST Department, Wayanad (Respondent No. 5) intercepted and detained the goods during transit.

• The company received Ext.P4 notice demanding a security deposit for the release of the detained goods.

• To get their goods back, the company furnished a Bank Guarantee as required under Section 129 of the CGST Act, 2017, and the goods were released vide Ext.P8 order.

• Subsequently, the company received Ext.P11 notice asking them to appear for adjudication proceedings under Section 129(1) of the CGST Act.

• The company then filed WP© No. 14719/2019 before the Kerala High Court, challenging:
• The constitutional validity of Section 129 of the CGST Act (arguing it violates Article 14 and Article 300A of the Constitution of India when applied to technical violations without tax evasion), and
• Seeking an interim order to prevent the respondents from encashing the Bank Guarantee.

• The learned Single Judge refused to grant the interim relief, observing that the goods had already been released on the Bank Guarantee, and granting such relief would defeat the conditions of release. The Single Judge also noted that the company had statutory remedies available after the adjudication order.

• The company then filed this Writ Appeal (W.A. No. 1703/2019) challenging the Single Judge’s interim order.

Arguments

Appellant’s Arguments (VE Commercial Vehicles Ltd.)

1. Section 129 is unconstitutional to the extent it imposes tax and penalty for mere technical breaches where there is no actual tax evasion — this violates Article 14 (Right to Equality) and Article 300A (Right to Property) of the Constitution of India.

2. Since the very power to impose penalty under Section 129 is under constitutional challenge, it was only fair and just that the Single Judge should have restrained the respondents from encashing the Bank Guarantee until the writ petition is decided.

3. The appellant pointed out that in an identical case, another learned Judge of the same court had passed Ext.P12 order restraining encashment of the Bank Guarantee till disposal of the writ petition — so the Single Judge should have followed that precedent.

4. Allowing encashment of the Bank Guarantee based on a penalty order (if passed) would defeat the very purpose of the writ petition challenging the penalty power.

Respondents’ Arguments (Union of India, State of Kerala & GST Authorities)

1. The goods were already released on the basis of the Bank Guarantee furnished in compliance with Section 129 of the CGST Act.

2. The Bank Guarantee was furnished as security to cover the probable tax/penalty amount that may be determined after adjudication. Restraining its encashment would defeat the purpose of the security mechanism.

3. The appellant has adequate statutory remedies available — they can challenge any penalty order passed against them through appropriate legal proceedings.

4. Granting the interim relief would amount to deviating from the conditions under which the goods were released (Ext.P8 order).

Key Legal Precedents & Provisions

The judgment references the following key legal provisions:

1. Section 129 of the Central Goods and Services Tax Act, 2017 (CGST Act)

• This is the central provision in dispute. It deals with detention, seizure, and release of goods and conveyances in transit.
• Section 129(1) specifically deals with the initiation of adjudication proceedings when goods are intercepted.
• The appellant challenged this provision as unconstitutional when applied to technical violations without tax evasion.

2. Article 14 of the Constitution of India

• The Right to Equality — the appellant argued that imposing penalty under Section 129 for mere technical violations (without tax evasion) is arbitrary and violates the right to equality.

3. Article 300A of the Constitution of India

• The Right to Property — no person shall be deprived of their property save by authority of law. The appellant argued that the penalty mechanism under Section 129 violates this right.

4. Ext.P12 Order (referred to by the Appellant)

• The appellant cited an order passed by another Single Judge of the Kerala High Court in an identical case, where encashment of the Bank Guarantee was restrained till disposal of the writ petition. The appellant argued the Single Judge should have followed this order. However, the Division Bench did not find this argument sufficient to overturn the Single Judge’s order.

Note: The judgment does not cite any specific Supreme Court or High Court case law by name. The legal reasoning is based primarily on the statutory provisions and constitutional articles mentioned above.

Judgment

The Respondents (GST Authorities) largely prevailed — the Division Bench upheld the Single Judge’s order refusing to grant a blanket interim stay on encashment of the Bank Guarantee.

Legal Reasoning:

The Division Bench reasoned as follows:

1. The writ petition was filed after the goods had already been released on the Bank Guarantee. The release itself was in compliance with Section 129 of the CGST Act.

2. Granting an interim order restraining encashment of the Bank Guarantee at this stage would amount to an anticipatory order — essentially assuming that the adjudication will result in a penalty, and pre-emptively blocking it. This is not appropriate.

3. Such a restraint would defeat the interest of the respondents who ordered release of the goods only after securing the probable amount through the Bank Guarantee.

4. The court found no illegality, error, or impropriety in the Single Judge’s judgment.

The Balancing Act — The 14-Day Direction:

However, in the interest of justice and equity, the Division Bench issued the following direction:

“The respondents are directed not to encash the Bank Guarantee furnished by the appellant, if ultimately the adjudication goes against them and if penalty is imposed in such proceedings, until the expiry of 14 days from the date of service of order on such adjudication.”

This means:

• The adjudication can proceed normally.
• If a penalty is imposed, the authorities must wait 14 days before encashing the Bank Guarantee.
• During those 14 days, the appellant can challenge the penalty order and seek a fresh interim stay.
• The appellant is free to challenge any penalty order in the existing writ petition or in fresh proceedings.

FAQs

Q1: What is Section 129 of the CGST Act, and why is it controversial here?

Section 129 allows GST authorities to detain goods being transported and demand tax + penalty for violations. The company argued it’s unfair to impose heavy penalties for technical paperwork errors when there’s no actual attempt to evade tax.

Q2: Why did the company furnish a Bank Guarantee?

To get their detained goods released quickly, the company had to provide a Bank Guarantee as security — essentially a promise backed by a bank that they’ll pay whatever amount is determined after adjudication.

Q3: Why didn’t the court stop the Bank Guarantee from being encashed entirely?

Because the Bank Guarantee was the very condition on which the goods were released. Blocking it entirely before any penalty is even imposed would defeat the purpose of the security mechanism and would be an “anticipatory” order — which courts generally avoid.

Q4: What is the significance of the 14-day window granted by the court?

It’s a practical protection for the company. If a penalty is imposed, they get 14 days to go back to court and challenge it before the Bank Guarantee is encashed. Without this, the authorities could encash it immediately after passing the order.

Q5: Can the company still challenge Section 129 as unconstitutional?

Absolutely! The writ petition challenging the constitutional validity of Section 129 is still pending. The court only decided the interim relief question — the main constitutional challenge is yet to be heard and decided.

Q6: What happens if the adjudication goes in the company’s favour?

If the adjudication finds no violation or no penalty is imposed, the Bank Guarantee would not be encashed at all, and the company would get it back.

Q7: Why didn’t the court follow the Ext.P12 order passed in a similar case?The Division Bench found that the reasoning of the Single Judge was legally sound and there was no illegality or impropriety in not following the other order. Courts have discretion in granting interim relief, and the facts and circumstances of each case matter.

Q8: What should the company do next?

The company should:

1. Participate in the adjudication proceedings.
2. If a penalty is imposed, immediately challenge it within the 14-day window.
3. Seek a fresh interim stay on encashment of the Bank Guarantee at that stage.
4. Continue pursuing the constitutional challenge to Section 129 in the main writ petition.

The petitioner in W.P (C) No.14719/2019 is challenging the interim order passed by the Single Judge, dated 29th May, 2019. The respondents herein are the respondents in the writ petition.

2. The appellant challenged validity of Section 129 of the

Central Goods and Services Tax Act, 2017 (CGST Act for short),

to the extent it provides imposition of tax and penalty in the

manner as set out therein, in cases where there are only mere

technical breaches or contraventions of the provisions of the Act

and where there is no evasion of tax, the above said provision

was challenged as illegal and violative of Article 14 and 300 A of

the Constitution of India. Inter alia, the appellant challenged

Ext.P11 notice issued requiring them to appear for an

adjudication proceedings initiated under Section 129 (1) of the

CGST Act based on interception of goods transported and Ext.P4

notice issued. Evidently, the appellant sought for an interim

relief in the writ petition to direct the respondents not to encash

the Bank Guarantee furnished by the petitioner at the time of

release of the intercepted goods. The learned Single Judge had

passed the impugned order by observing that, the appellant can

work out their remedies under law against any order which may

be passed against pursuant to Ext.P11 and will be entitled to

obtain orders from the appropriate forum. It was observed that,

the appellant had already obtained release of the detained goods

by complying with the requirement contemplated under Section

129 of the CGST Act. Since the appellant had already chosen to

get release of the detained goods by complying with that

procedure, granting of any interim order as prayed for would

amount to deviate from the order of release made under Ext.P8,

which is in compliance with Section 129. It was found that, even

if an order is passed on completion of the adjudication, the

appellant has got remedy under the statute. On the other hand,

the learned Judge observed that, putting any restrainment on

encashment of Bank Guarantee may result in deviating the

conditions under which the release was already ordered.

3. Assailing the impugned order, learned counsel for the

appellant contended that, encashment of the Bank Guarantee on

the basis of order if any passed to the extent of imposing penalty,

will in turn defeat the purpose of the writ petition itself. Since

the power conferred by virtue of Section 129 to impose penalty

for technical violation itself is under challenge in the writ

petition, it was only just and proper in the interest of justice that

the Single Judge ought to have restrained the respondents from

encashing the Bank Guarantee, till the writ petition is disposed

of. It is pointed out that in an identical case another learned

Judge of this court had passed Ext.P12 order restraining

encashment of the Bank Guarantee till the disposal of the writ

petition. According to learned counsel, it was improper on the

part of the learned Single Judge in not following the order

passed in a similar case.

4. While appreciating the above said contentions, we take

note of the fact that the writ petition was filed at a stage after

release of the goods on the appellant furnishing the Bank

Guarantee with respect to the security deposit demanded

through Ext.P4 notice. As observed by the learned Single Judge,

release of the goods was effected on the basis of the Bank

Guarantee furnished, in compliance with the requirement under

Section 129 of the CGST Act. Now the adjudication proceedings

is pursued. The interim relief sought for in the writ petition is to

restrain encashment of the Bank Guarantee. If it is granted, it

will amount to an order in anticipation that the adjudication will

culminate in imposition of penalty. If such an anticipatory

restrainment is put on the respondents, as observed by the

learned Single Judge, that will be in a manner defeating the

interest of the respondents who ordered release of the goods by

securing the probable amount which may be due after the

adjudication, in accordance with the provisions contained in

Section 129 of the Act. Therefore we do not find any illegality,

error or impropriety in the judgment of the learned Single Judge.

5. However, we make it clear that, the appellant will be at

liberty to take appropriate challenges against the order imposing

penalty, if any passed against them, either in the writ petition or

in any other appropriate proceedings. The appellant will also be

entitled to seek appropriate interim relief in any such

proceedings, if the order imposing penalty is challenged as

mentioned above, for restraining encashment of the Bank

Guarantee, pending such challenge.

6. We are of the considered opinion that the interest of

justice on equitable basis can be achieved by issuing a direction

to the respondents not to encash the Bank Guarantee furnished

by the appellant, if ultimately the adjudication goes against them

and if penalty is imposed in such proceedings, until the expiry of

14 days from the date of service of order on such adjudication.

Sd/-

C.K.ABDUL REHIM

JUDGE

Sd/-

R. NARAYANA PISHARADI

JUDGE