Rs. 3731 Crore Penalty Demand from the employees set aside

The Bombay High Court has overturned a substantial penalty of Rs 3731 Crore that was being demanded from an employee of Maersk India. The court ruled that penalties under Section 122(1A) of the CGST Act can only be imposed on a taxable person who is responsible for a transaction, has conducted it, and has legally retained the benefit of the tax involved. The employee, who was acting in a managerial capacity and assisting with tax compliance, was found not to meet these criteria.

The Hon'ble Bombay High Court in the case of Shantanu Sanjay Hundekari v. Union of India and Ors [Writ Petition (L) No. 30198 of 2021 dated March 28, 2024] allowed the writ petition and set aside the demand of penalty amount of Rs. 3731 Crore, thereby holding that, The penalty is imposable only on person under sub-section 1A of Section 122 of the Central Goods and Services Tax Act, 2017 ("the CGST Act”),  who is responsible for the transaction conducted, is a taxable person and is in legal position to retain the benefit of tax on the transaction covered under the aforesaid provisions of sub-section (1) of Section 122 of the CGST Act.

Facts

Shantanu Sanjay Hundekari("the Petitioner”) is the employee of M/s. Maersk Line India Private Limted("Maersk India”). The Petitioner was employed as Taxation Manager with Maersk India. Maersk India was appointed as Steamer Agent of Maersk A/S ("Maersk”) which is engaged in shipping business involving containerized transportation of goods, through vessels across the globe. 

The Petitioner in the capacity as a Taxation Manager rendered assistance to Maersk in its compliance with taxation laws including GST. The Petitioner also holds power of attorney to represent Maersk before the tax authorities. The Petitioner, on behalf of Maersk, assisted in investigation being conducted by the tax authorities which includes responding to summons, present the evidence, and to furnish the list of witness whose statement would be recorded.

Revenue Department after conducting the inquiry, alleged in the Show Cause Notice  that a sum of Rs. 1561 Crore was wrongly utilized as Input Tax Credit ("ITC”) by the Maersk. It was also alleged that Maersk has wrongly distributed the ITC. 
However, the Petitioner and other employees of Maersk were issued a Show Cause Notice ("the Impugned SCN”) under Section 74 of the CGST Act as to why the penalty equivalent to the tax alleged to be evaded by the Maersk amounting to Rs. 3731 Crore should not be imposed on the Petitioner as per sub-section 1A of Section 122 of the CGST Act read with Section 137 of the CGST Act on the ground that, the Petitioner has aided and abetted the commission of offence by Maersk .

Issue

Whether penalty can be levied from the employees of the Company under Section 122 (1A) of the CGST Act who is not directly involved in day to day affairs of the Company and has not retained the benefit of transaction?

Held

The Hon'ble Bombay High Court in the case of Writ Petition (L) No. 30198 of 2023 held as under:

• Observed that, Section 122 provides for levy of penalty for certain offences by the taxable person. Also, sub-section (1A) of Section 122 of the CGST Act provides that, the benefit of the transaction covered under clauses (i), (ii), (vii), and clause (ix) of  sub-section (1) and at whose instance such transaction is conducted, would be liable for penalty for an amount equal to the amount of tax evaded or ITC availed of or passed on.  
• Further observed that, sub-section 1A would apply only to the taxable person, as it states that the aforesaid provisions of sub-section (1) of Section 122 would only be applicable in realtion to taxable person as defined under Section 2(107) of the CGST Act,  read with Section 2(94) of the CGST Act, and person who retains the benefit fo transaction covered under aforesaid clause of sub-section (1) of Section 122 of the CGST Act.  
• Noted that, sub-section 1A of Section 122 of the CGST Act, cannot be attracted with respect to the person who has not retained the benefit of transaction covered under the aforesaid provision. The penalty is imposable only on person under sub-section 1A of Section 122 of the CGST Act,  who is responsible for the transaction conducted, is a taxable person and is in legal position to retain the benefit of tax on the transaction covered under the aforesaid provisions of sub-section (1) of Section 122 of the CGST Act. 
• Further Noted that, Section 137 of the CGST Act, relating to prosecution would not be applicable when demand cum show cause notice is issued under Section 74 of the CGST Act. 
• Opined that, the Revenue Department has erred in raising the demand from the Petitioner and other employees when liability arises against the Maersk and the notice was issued to pressurize and threaten the Petitioner. 
• Held that, the writ petition is allowed.

Relevant Provision

Section 122 (1A) of the CGST Act

"Section 122: Penalty for certain offences

(1) Where a taxable person who -

(A) Any person who retains the benefit of a transaction covered under clauses (i), (ii), (vii) or clause (ix) of sub-section (1) and at whose instance such transaction is conducted, shall be liable to a penalty of an amount equivalent to the tax evaded or input tax credit availed of or passed on"

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED BELOW