LATENT ISSUES UNDER GST LAW ON INTERCEPTION, DETENTION, INSPECTION & CONFISCATION OF GOODS IN TRANSIT

It is a settled principle of law that the statutory power to levy tax includes all powers to prevent the evasion of such tax. The power to intercept the goods conveyance in transit and to detain, or seize, or confiscate the goods in the eventuality of evasion of tax, and the power to levy penalty, or fine, or forfeiture of goods, is meant to check tax evasion and is intended to operate as a deterrent against tax evaders and is therefore ancillary or incidental to the power to levy tax. The GST Law is an economic legislation which encompasses the fiscal transactions and activities, therefore it is essential to specifically and explicitly empower through plenary legislation the officers engaged in its administration with certain powers like inspection, search, seizure, confiscation, etc., to protect the interest of the Revenue.

Chapters XIV and XIX of the CGST Act, 2017 enumerate the governing statutory provisions as regards inspection, search, seizure and arrest from section 67 to 72, and offences and penalties from section 122 to 138, respectively. Section 68 of Chapter XIV more particularly provides for the requirement of certain documents including E-way bill to be carried by the person in charge of the conveyance while the goods are in movement. Further, Chapters XVI and XVIII of the CGST Rules, 2017 contain Rules as regards E-way bills from Rule 138 to 138E and Rules as regards demand and recovery from Rule 142 to 161. In addition, in order to regulate the activities related to road checks, interception, inspection, detention, etc., of the goods during their movement and also to keep a watch on the potential tax evasion at a micro level, CBIC has for the very first time exercised its executive powers u/s 168(1) and issued a Circular which could also be termed as Master Circular No. 41/15/2018 dated 13th April, 2018 with subsequent follow-up updates and amendments in Circular 49/23/2018 dated 21st June, 2018, 64/38/2018 dated 14th September, 2018 and 88/07/2019 dated 1st February, 2019. Hence, it can be stated that the entire set of provisions and procedures concerning road checks, inspection, etc., of goods in movement is intertwined and contained in the Act, Rules and Circulars as referred above.

However, it may be noted that the said Master Circular 41/2018 of CBIC issued u/s 168(1) was per se required only for the purpose of providing further clarification and guidance to the department officers as enablers in the implementation of the Act and Rules but it is baffling to note that this Circular actually muscled its way into matters beyond its statutory competence by providing substantive provisions and procedures as regards road checks, detention, inspection, etc., and so it is ‘required’ to be adhered to not only by the tax department but also by taxpayers.

In the context of goods in transit on a conveyance, the powers as regards interception, detention, inspection and confiscation are intrusive and invasive in nature and therefore it is incumbent on the part of officers to wield these powers with extreme care and caution with strict adherence to statutory provisions, rules and internal circulars as the improper exercise of such powers could lead to contravention of provisions of the very statute they are governed by and may also result in the violation of Articles 301 or 265, or 14, or 19(1)(g), as the case may be, of the Constitution of India.

Through this article, the author has endeavoured to decipher some of the latent legal issues in the gamut of provisions of the GST law as relevant in the chain of activities right from the stage of interception of conveyance and ending with the eventual confiscation of the goods / conveyance.

1) POWER OF INTERCEPTION OF CONVEYANCE U/S 68(3)

Although the heading of section 68 of the CGST Act, 2017 suggests that it is in relation to inspection of goods in movement, however, this section as a whole does not substantively deal with all the operating aspects in relation to the entire process which inter alia includes the fixation of powers of interception of the conveyance on the officers and also powers of performing subsequent detention by the officers if the situation so warrants in accordance with the law. The section as it reads provides for the need of carrying of E-way bill subject to threshold and also other documents like tax invoice, bill of supply, delivery challan, etc., along with the goods while they are in movement and also casts a duty on the person in charge of the conveyance to co-operate and produce the prescribed documents before the officer for verification and to allow the officer to inspect the goods. Although the requirement on the part of the person in charge of the conveyance is to stop the conveyance on interception and to co-operate with the officer as has been clearly spelt out in sub-clause 3, it is, however, bereft of any specific and explicit authority or power being conferred on the officer concerned to actually wield this power for interception and subsequently perform detention for the reasons explained below. The following is the extract of this section:

i) 68. Inspection of goods in movement.
(1) The Government may require the person in charge of a conveyance carrying any consignment of goods of value exceeding such amount as may be specified to carry with him such documents and such devices as may be prescribed.
(2) The details of documents required to be carried under sub-section (1) shall be validated in such manner as may be prescribed.
(3) Where any conveyance referred to in sub-section (1) is intercepted by the proper officer at any place, he may require the person in charge of the said conveyance to produce the documents prescribed under the said sub-section and devices for verification and the said person shall be liable to produce the documents and devices and also allow the inspection of goods.

The expression ‘is intercepted by the proper officer’ is used in sub-clause 3 in the past tense which pre-supposes that the proper officer is already in possession of the necessary authority or power to intercept the conveyance and perform inspection. However, it is imperative to note that the statute as it stands today does not in any explicit, clear or specific words confer any such power or authority on the proper officer for interception of conveyance and inspection of goods. The anti-evasion tax provisions of an intrusive character of any fiscal legislation would generally confer express powers in clear and explicit terms on the specific officers to perform specific functions without leaving any room for ambiguity or doubt as regards the jurisdiction of such officers to perform those functions. For instance, section 106 of the Customs Act, 1962, power to stop and search conveyances, where the powers of the proper officer are clearly delineated to stop the conveyance during the movement and perform a search of the same. Also, as per section 67 of the CGST Act, 2017, the power of inspection, search and seizure is clearly and specifically conferred on a proper officer not below the rank of Joint Commissioner either to exercise those powers or to authorise any other officer to exercise those powers. Hence, it may be stated that any action taken or purported to be taken by Revenue under GST Law without proper statutory jurisdiction would fall foul of the GST Law and would not be sustained on challenge in a court of law. The provisions of the tax statutes are subject to strict construction by the courts in the light of what is clearly expressed; it cannot imply or presume anything which is not expressed, or it cannot look into the purpose or object of the Legislature while construing the provisions.

One possible argument could be that the proper officer having the power of inspection, search and seizure u/s 67 would also have power of interception u/s 68(3); however, this argument may sound far-fetched as section 67 is qua a specific taxable person or any person on the plank of articulation of reason to believe by the proper officer where no such pre-conditions are required to be fulfilled by the proper officer for interception as per section 68(3). With the evolution of time and with the development of jurisprudence on this law, this haze should also be cleared. Be that as it may, the expression ‘is intercepted by the proper officer’ does not seem to confer or assign any express or specific power of interception on the officer but it only seems to make an assumption or presumption about the currency of such powers. In the absence of any such powers being conferred through any other provisions, applying the strict principle of construction it may be construed that the powers of interception by the officer are completely absent in section 68(3).

In contrast, it is ironic to observe that Rule 138B(1) of the CGST Rules, 2017 by which the Commissioner or an officer empowered by him in this behalf, may delegate the authority of interception and inspection on to other proper officers. As pointed out in the previous paragraph, in the absence of specific and explicit powers having been conferred on the Commissioner or proper officer in the statute to perform the interception, detention, etc., it is difficult to comprehend how through the route of Rule 138B(1) (which is a delegated legislation) one can delegate or assign, and such powers could be delegated by the Commissioner or authorised officer to other subordinate officers. If some rules are to be framed, such rules must necessarily inherit the powers from its plenary legislation; however, this is not true here.

Be that as it may, in order to delegate powers by the Commissioner or other authorised officer, specific statutory provisions are already present u/s 5(2) or u/s 5(3) of the CGST Act, 2017. Where the specific mode of delegation of powers by the Commissioner has been already provided under plenary statutory legislation, there is no reason whatsoever for the Government to also use the route of issuing Rule 138B(1) to perform the very same delegation by the Commissioner which may render the said Rule otiose or infructuous. Further, through Circular No. 3/3/2017-GST issued u/s 2(91) and 5(3) dated 5th July, 2017, the Commissioner has already delegated the said powers of interception and u/s 68(3) to the ‘Inspector of Central Tax’. It is beyond comprehension how the Commissioner could delegate the power of interception when he himself does not possess that power under the statute. As rule 138B(1) is not in congruity with the overall scheme of the GST Law, it should be rendered otiose / meaningless.

2) POWER OF INSPECTION OF GOODS U/S 68(3)

The expression ‘and also allow the inspection of goods’ as used in sub-clause 3 of section 68 (Supra) is to be construed from the perspective of the person in charge of the conveyance who is required to render co-operation and allow the proper officer to perform inspection of the goods after the same are intercepted and detained. However, this provision again does not, in clear, specific and explicit words or expressions empower the proper officer to perform the activity of inspection of goods in transit. In contrast, this sub-clause gives power to the proper officer only to verify the prescribed documents under Rule 138A and the RFID device but does not in any way confer any power on the proper officer to inspect the goods in the conveyance. Again, applying the same analogy from the earlier discussion in the context of interception discussed above, the function of inspection also is of an intrusive nature where the properties of the citizens could be subjected to verification, causing prejudice; therefore, the officer concerned should have specific, explicit, unambiguous and clear power to perform the inspection of the goods in the conveyance. Without specific and explicit powers conferred on the proper officer under the statute for conducting inspection of goods in the conveyance, the delegated legislation has overstretched itself and framed Rule 138B(3) which is pari materia with Rule 138C and purports to provide that the powers of inspection of documents, conveyance and goods are residing with the proper officer and to also follow certain reporting requirements in Form EWB-03 on the GST Portal. Hence, these Rules operate contrary to the provisions of the statute and should be rendered otiose / meaningless.

Apart from the absence of the power of inspection of goods with the proper officer, section 68 is also silent on providing the machinery provisions as regards the time and manner in which the inspection of goods is to be conducted; nor does this section delegate powers to the Government to prescribe necessary enabling rules. In a way, although the Legislature may not have intended so, this provision is seemingly an open-ended ambiguous section without a clear path having been laid down as regards conferment of powers on officers to conduct inspection of goods, not providing for machinery procedures to be followed for inspection and to deal with other related collateral matters. It is imperative for the Legislature to be mindful of the eventuality wherein in the absence of clearly laying down through statute or rules the powers for inspection of goods and concomitant procedures as required to be followed, the mobile squad officers of the Government who are currently in operation may run amok causing unwarranted harassment to genuine taxpayers in the guise of Departmental Circulars, orders or instructions which are anyway not binding on the taxpayers.

Further, after the order of inspection being issued in MOV-02, the time and manner of conducting inspection of the goods in the conveyance is done completely in adherence with the said Circular and where after the completion of the inspection, Form MOV-04 is issued to the taxpayer giving quantitative details of the physical inspection. As there are no Rules prescribed for the inspection of the detained goods, in reality it has been left to the total prerogative and discretion of the Government to define the modus operandi to be followed for physical verification of goods detained via issue of Circulars.

3) VALIDITY OF CIRCULAR 41/2018 AND MOV FORMS
Before adverting to the validity of Circular 41/2018 and MOV Forms covered in the same Circular, it is imperative to read section 168(1) of the CGST Act, 2017 which is as follows:

168. Power to issue instructions or directions.
(1) The Board may, if it considers it necessary or expedient so to do for the purpose of uniformity in the implementation of this Act, issue such orders, instructions or directions to the central tax officers as it may deem fit, and thereupon all such officers and all other persons employed in the implementation of this Act shall observe and follow such orders, instructions or directions.

From the above extract of the provision, two analogies can be drawn:

a) The Circulars are issued by Government only for the purpose of ensuring that there is uniformity of procedure in the implementation of the Act across the country. So the Circulars are a natural concomitant of the existing Act or Rules framed under the Act and therefore the Circulars could not be issued in isolation or independent of the Act or Rules, but they are issued in extension of the existing Act and Rules which are under the domain of control of the Legislature. Further, the Circulars are issued only as supplementary documents and only to provide guidance / aid on the interpretation of certain provisions to be used by the executive wing of the Government responsible for the implementation of provisions of the Act and Rules to avoid the possibility of officers of field formations across the country taking different views on the very same provisions of the statute. Therefore, the Government cannot issue Circulars to prescribe new procedures, processes, methods, forms, applications, etc., not originally envisaged or contemplated in the statute or rules prescribed thereunder which would metaphorically mean ‘placing the cart before the horse’. Even when some provisions are missing in the Act or Rules, maybe for bona fide reasons, the Government even in such situations cannot usurp power u/s 168(1) and seek to fill those identified gaps by issuing Circulars not warranted by powers granted under this section. Wherefore the Government could not perforce enter into the shoes of the Legislature to make the laws through the route of Circulars as has happened in the case of this Circular 41/2018.

b) The officers and all other persons employed in the implementation of the law are required to observe and follow such Circulars, and not the taxpayers. Hence it can be inferred from the text of the provision that these Circulars are only meant to be followed by the internal staff of the tax Department administering the law and are in no way binding on the taxpayers, unless such a Circular has the effect of providing certain benefits or relaxations to the taxpayers. Therefore, the power of issuing Circulars under this section could not have been used by the Government as carte blanche to hold the taxpayers responsible or subject to any obligations under the Circular.

As the GST Law stands today, the Legislature virtually does not exercise any control on procedural matters related to verification of goods in transit which would include powers of officers qua procedures for interception, detention of goods, inspection of goods, post-inspection release of goods, confiscation of goods and adjudication of matters of contravention of provisions of the Act or Rules. The power of laying down the entire gamut of procedures right from the stage of interception of conveyance to eventual confiscation of goods has been completely usurped by the Government and is being controlled through CBIC Circular 41/2018 issued in conjunction with subsequent updated Circulars. Although by enactment of sections 68, 129, 130 and notification of rules 138, 138A, 138B, 138C and 138D the Legislature had retained with itself a few aspects related to these provisions, ironically, a substantial part of the procedures contained in Circular 41/2018 were not contemplated under the provisions of section 168 as explained above. The true fact or practical reality is that all the officers of the tax Department have been following these Circulars in the matter of interception, inspection, etc. That apart, the real tyranny is that even the taxpayers who are not bound by Circulars have been obliged to comply with certain requirements as contained in this Circular, like providing undertakings, signing, etc., in the MOV Forms as specified in the said Circular.

Coming to the various MOV Forms which are as specified in Circular 41/2018, in a metaphorical sense this Circular is the genus and all the MOV Forms coming out from it are its species. As for the justifications as discussed above, if the Circular is held bad in law and it is trumped, as a natural concomitant all the related MOV Forms would also fall. It is through these MOV Forms that the tax Department is bringing accountability and ownership on the part of the taxpayers by furnishing and taking necessary acknowledgements / signatures on these Forms which may become criminating evidence against the taxpayers in any subsequent legal proceedings. It is relevant to advert to section 160(2) of the CGST Act, 2017 where the taxpayer has been disabled or forbidden to assail the validity of the MOV Forms that he has received, or to raise any negative contentions or objections on them, upon which he has subsequently acted and participated in the adjudication process. So it may be imperative for taxpayers to raise objections or raise a dispute on the validity of MOV Forms or claims contained in the said Forms at the earliest opportunity on the ground that these MOV Forms are issued by exercising extra-legislative actions or filing a dispute on the contents of these Forms.

In terms of section 166 of the CGST Act, 2017, every notification, rule, regulation issued or made by the Government is required to be laid on the table of the House for 30 days for the purpose of examination, BUT no such requirement is envisaged for Circulars or Forms issued under Circulars for ensuring accountability as the overarching principle for issuing Circulars is only to regulate and enable the internal administration function of the Government. Specifying these MOV Forms through the route of Circulars can be depicted as an attempt to usurp power by the Government. As long as these MOV Forms do not create any obligation or liability on the persons or taxpayers who are the external parties to the Government, the validity of these forms cannot be called in question, as such forms are issued only to convey certain information without warranting any action from the recipients.

As already indicated earlier, strict interpretation or construction is applied to tax laws and as per the cardinal rule of law that we are governed under, the same level of moral rectitude is sought from the tax Department as it is sought from the taxpayers. The MOV Forms contained in Circular 41/2018, in the author’s view, do not hold any legal ground and are liable to be set aside. Recently, the Sales Tax Bar Association, Delhi has, under Article 226 of the Constitution, challenged before the Delhi High Court the statutory validity of these MOV Forms and prayed that the Court set these aside. It appears as though this is the first time someone has challenged the validity of the MOV Forms. The matter is pending disposal.

Be that as it may, as regards the Circular 41/2018 the procedures as specified in it have pain areas being encountered on a day-to-day basis by the taxpayers which result in undue harassment to them and loss of intrinsic value of the goods being detained or confiscated for an inordinate time. These are as follows:

a) Although section 68(1) read with Rule 138A requires the person in charge of the conveyance to only carry certain definite documents, in reality the conveyances are intercepted and unwarranted documents are sought to be produced for verification by the mobile squad and also unwarranted objections or infirmities in the documents are raised by the mobile squad.

b) The expression ‘prima facie, no discrepancies are found’ as mentioned in para (b) of Circular 41/2018 is a very broad and latent expression and the same could be subject to different interpretations in identical situations by officers of the Department. The basic purpose of the Circular is to clarify and clear the ambiguities if there are any; however, not expounding such ambiguous expressions quoted above and contained in the same Circular itself, would work contrary to the very purpose of the Circulars issued.

c) The expression ‘or where proper officer intends to undertake an inspection’ as mentioned in para (d) of Circular 41/2018 is again so loosely worded as to give full liberty to the officers concerned to decide whether or not to undertake an inspection. There are no fetters attached or conditions precedent defined for arriving at or having an intention to undertake inspection. The undertaking of inspection is of an intrusive character and the same should be ideally undertaken only based on hard evidence indicating tax evasion and not merely on conjecture, surmises, assumptions and presumptions of the officer concerned.

4) POWER OF DETENTION AND CONFISCATION U/S 129 AND U/S 130:
Just like the issue of officers without statutory powers intercepting and inspecting as discussed above, even the powers for detention and subsequent confiscation if required by officers are not contained in the plenary GST legislation, that is, the CGST Act, 2017. Although sections 129 and 130 do make references to proper officers, but these references are restricted only for the limited purpose of adjudication of the demand by following the principle of natural justice on the proposed action of either detention or confiscation, a decision about which has already been made by the officer concerned based on the per se formation of opinion as per Circular 41/2018. Sections 129 and 130 also serve for the quantification of amounts payable by the taxpayers and to perform other incidental procedures qua the proposed detention or confiscation.

Based on the outcome of physical inspection of the goods by the officers as reported in MOV-04, in case any discrepancy is found or where the proper officer opines that any contravention of the Act or Rules is committed by the taxpayer, then u/s 129 the goods and conveyance are detained or seized by issuing MOV-06 – the order of detention along with MOV-07 – SCN with DRC-01 notified electronically.

Thereafter, the adjudication procedures would follow in accordance with Rule 142 and also in accordance with instructions contained in the Circular 41/2018 along with certain specific MOV Forms in manual mode as specified in the Circular. Therefore, the said Rule 142 on its own does not prescribe the entire adjudication procedure that is required to be followed but the entire process has been unnecessarily parted between Rule 142 and the manual MOV Forms specified in the said Circular which would only increase the compliance burden as well as complexity in compliance by the taxpayers not envisaged by the Central Government.

To issue Form MOV-06 – SCN for detention, or MOV-10 – SCN for confiscation [as per para (l) of Circular 41/2018], very wide carte blanche powers are conferred on the officers to initiate either or both these proceedings. Para (f) of the same Circular empowering the officer to initiate detention proceedings adverts to the expressions ‘Where the proper officer is of the opinion that the goods and conveyance need to be detained under section 129’ or para (l) empowering the officer to initiate confiscation proceedings, adverts to the expressions ‘Where the proper officer is of the opinion that such movement of goods is being effected to evade payment of tax, he may directly invoke Section 130’. In both these cases, the said empowerments are bereft of any guideline or threshold or condition precedent or sine qua non for the formation of such adverse opinion by the officer having the effect of initiating proceedings u/s 129 or 130 for detention or confiscation of goods, respectively. These wide powers qua the formation of opinion by the officers as referred to in the above-referred paras appear to be an attempt of the Government to have a parallel law through administrative Circulars which should go to the root of questioning the sanctity and the very purpose and meaning of the Circulars and why they are issued. This Circular does not seek to instil any checks and balances on the wide discretionary actions of the officers as contemplated in the Circular to hold them accountable, especially where such wide discretionary powers on the opinion formation are likely to trigger proceedings of detention or confiscation of the goods u/s 129 or 130, respectively.

It is pertinent to note that the invocation of detention u/s 129 and confiscation u/s 130 do not happen automatically but are a natural consequence of formation of adverse opinion by the officer under the highlighted paras of the said Circular.

To sum up the issue, Circular 41/2018 ought to have been used only to clarify and help in implementation of substantial or procedural provisions of the Act / Rules, but in actual fact it has taken primacy and it is purportedly operating like a plenary Act in the matter of detention and confiscation of goods, and sections 129 and 130 of the Act are virtually reduced to a machinery provision, or merely as a referencing placeholder for quantification of the amount of tax, penalty, fine, etc.

5) OTHER ISSUES

a) Whether sections 129 and 130 operate coterminous with each other?
Subject to section 118 of the Finance Act, 2021 not yet notified, both the said sections 129 and 130 are mutually exclusive, independent and operate in separate spheres for the simple reason that both start with the non-obstante clause at the beginning with the expression ‘Notwithstanding anything contained in this Act’. The High Court of Gujarat had occasion to deal with several petitions in a group matter in Synergy Fertichem Pvt. Ltd. vs. State of Gujarat (order dated 23rd December, 2019), where the confiscation proceedings u/s 130 were initiated without concluding the existing on-going adjudication proceedings u/s 129. The Court held that both the sections 129 and 130 are not coterminous with each other, and hence are independent, in the following words:

‘(i) Section 129 of the Act talks about detention, seizure and release of goods and conveyances in transit. On the other hand, section 130 talks about confiscation of goods or conveyance and levy of tax, penalty and fine thereof. Although both the sections start with a non-obstante clause, yet, the harmonious reading of the two sections, keeping in mind the object and purpose behind the enactment thereof, would indicate that they are independent of each other. Section 130 of the Act, which provides for confiscation of the goods or conveyance, is not, in any manner, dependent or subject to section 129 of the Act. Both the sections are mutually exclusive.’

b) Detention on the ground of rate of tax, classification, etc.

An officer intercepting goods in transit cannot go into the unwarranted issues of valuation, classification of goods, rate of tax and so on and cannot high-handedly detain the goods for more than a few hours (up to six hours). However, the officer should collect relevant data during such short detention and transmit the same to the jurisdictional proper officer for initiating necessary assessment proceedings in relation to that supply by the taxpayer. Again, in Synergy Fertichem Pvt. Ltd. (Supra), the Gujarat High Court held as under:

‘160. We are in full agreement with the aforesaid enunciation of law laid down by the Kerala High Court. Thus, in a case of a bona fide dispute with regard to the classification between the transporter of the goods and the Squad Officer, the Squad Officer may intercept the goods, detain them for the purpose of preparing the relevant papers for effective transmission to the jurisdictional Assessing Officer. It is not open to the Squad Officer to detain the goods beyond a reasonable period. The process can, at best, take a few hours. It goes without saying that the person, who is in charge of transportation, will have to necessarily co-operate with the Squad Officer for preparing the relevant papers. [See Jeyyam Global Foods (P) Ltd. vs. Union of India & Ors., (2019) 64 GSTR 129 (Mad).]

CONCLUSION

In the author’s view, the formation of opinion as contained in Circular 41/2018 which is so critical, foundational and is of a substantive character, has the effect of affecting the rights or liabilities or obligations of the parties qua interception, detention, inspection or confiscation by their very intrusive or invasive nature; though meant to arrest tax evasions, these should never have formed part of the Rules and Circulars. Instead, these provisions which seek to check tax evasion incidents should have ideally been part of the plenary legislation espousing the principles of natural justice, equity, good conscience and fairness, analogous to instances of section 67 in the matter of inspection, search and seizure, or section 69 in the matter of arrest which have been couched in the CGST Act, 2017. However, the present form of operation of the provisions via enforcement of the said Circular seems to suggest that there is a complete abdication of power by the Legislature to the Executive to deal with matters in relation to interception, inspection, detention and confiscation of goods in movement. One hopes this Circular and MOV Forms which are at present in challenge before the Delhi High Court are struck down by the Court and such transgressions of the law by the Executive are discouraged and trumped down to set an example for the future and for assisting the cardinal principle of the rule of law to prevail.