M.Alageshwaran vs. The Managing Director

Held

The Court held that the imposition of GST by the respondents on penalties levied in disciplinary proceedings against the petitioners was illegal and liable to be set aside. The Court found that the respondents' counter affidavit clearly stated that the notice for collection of GST was issued under Section 7(1)(d) alone, and without any specific provision or authority, the third respondent had issued the show cause notice to collect GST, which was illegal. Furthermore, even if Section 7(1A) of the Act read with Rule 5(e) of the Rules were considered applicable, the respondents failed to mention its applicability in the show cause notice, impugned order, or counter affidavit. The Court reasoned that Section 7(1A) applies to penalties imposed in the course of trade or commerce, such as delays in supply or payment as per an agreement. However, penalties imposed in disciplinary proceedings against employees do not fall under this category and therefore do not attract GST. The Court noted that the case laws cited by the respondents pertained to penalties in the course of trade or commerce and were not applicable to the present facts, which involved disciplinary proceedings. Consequently, the impugned orders were set aside, and the writ petitions were allowed. The Court directed the District Manager to conduct a domestic enquiry and take a decision in accordance with the procedure laid down in the Code.

Facts

The petitioners, employees of Tamil Nadu State Marketing Corporation Limited (TASMAC), filed multiple writ petitions challenging orders passed by TASMAC authorities imposing penalties. These penalties were levied in disciplinary proceedings. The petitioners argued that the imposition of GST on these penalties was illegal. The respondents, TASMAC authorities, contended that the penalties were collected under Section 7(1)(d) of the GST Act, or alternatively, under Section 7(1A) read with Rule 5(e) of the GST Rules, as the petitioners allegedly refrained from performing duties leading to shortages, thus attracting GST. The core of the dispute revolves around whether penalties imposed in disciplinary actions against employees are subject to GST.

Key Issues

1. Whether the imposition of GST on penalties levied in disciplinary proceedings against employees of TASMAC is legally sustainable, particularly when the show cause notice and impugned orders do not explicitly mention the applicability of Section 7(1A) of the GST Act read with Rule 5(e) of the GST Rules? Petitioner's arguments: The petitioners contended that the penalties were imposed in disciplinary proceedings and not in the course of trade or commerce, and therefore, GST is not leviable. They argued that the authorities failed to establish the applicability of Section 7(1A) r/w Rule 5(e) in their notices or orders. They also argued that the show cause notice was issued only under Section 7(1)(d), which does not apply to disciplinary penalties. Revenue/State's arguments: The respondents argued that the penalties were collected under Section 7(1)(d) of the GST Act. Alternatively, they submitted that Section 7(1A) of the Act read with Rule 5(e) of the Rules would be applicable, as the petitioners' actions (refraining from performing duties leading to shortages) attracted GST. They asserted that such penalties fall within the scope of GST as they relate to an obligation to refrain from an act or to tolerate a situation.