Facts of the Case

The petitioner, Atlantic Care Chemicals Pvt. Ltd., manufactured hand sanitizers and, for the assessment period April 2020 to June 2021, classified them under Tariff heading 30049088 (medicament) attracting GST at 12%, filing returns and paying tax accordingly — returns that were initially accepted by the jurisdictional CGST authority (1st respondent). On 05.07.2022, the 1st respondent issued a show-cause notice under Section 74(1) of the CGST Act, reclassifying the product as alcohol-based hand sanitizer under HSN 3808, exigible to GST at 18%, and subsequently passed an Order-in-Original dated 24.07.2023 imposing penalty under Section 74(9) read with Sections 122(2)(b), 122(1)(i) and 125 of the CGST Act. The petitioner paid the assessed tax with interest and did not dispute the higher classification going forward, but challenged only the initiation of penalty proceedings.

Issues Involved

  1. Whether penalty could be imposed under Sections 74(9)/122/125 of the CGST Act where the underlying dispute was a bona fide classification issue (12% vs 18%) rather than tax evasion.

Petitioner's Arguments

  • Whether hand sanitizers were liable to be taxed at 12% or 18% was not a settled question, and the 1st respondent had itself initially accepted the petitioner's return declaring 12%; the issue was one of classification and was genuinely debatable, so the petitioner could not be said to have evaded tax, making initiation of penalty proceedings unjustified.
  • Relying on the Kerala High Court's decision in Chakkiath Brothers v. Assistant Commissioner, [2014 (3) KLT 222], it was submitted that a mere classification dispute cannot found penalty proceedings, and the impugned order had not considered this binding precedent at all.

Respondent's Arguments

  • The record does not disclose a detailed rebuttal on record beyond issuance of the show-cause notice and subsequent Order-in-Original reclassifying the product and imposing penalty in accordance with the provisions cited, which the petitioner had complied with as to the tax and interest component.

Court Order / Findings

  • The Court found that since the classification of hand sanitizers (12% vs 18%) involved a genuinely debatable issue, and the impugned order had failed to consider the binding precedent in Chakkiath Brothers v. Assistant Commissioner holding that a mere classification dispute cannot found penalty proceedings, the matter needed to be remanded for a fresh decision on the penalty aspect alone.
  • The writ petition was allowed, the impugned order was set aside, and the matter was remanded to the 1st respondent to decide the penalty proceedings afresh after taking into account the Chakkiath Brothers precedent.

Important Clarification

Where the classification of a product for GST rate purposes is genuinely debatable — as with alcohol-based hand sanitizers straddling the "medicament" and "disinfectant" tariff entries — and the taxpayer has paid the tax and interest on the higher rate ultimately adopted by the department without protest, penalty under Sections 74(9)/122/125 of the CGST Act cannot be sustained without the adjudicating authority first considering binding precedent that a mere classification dispute does not amount to tax evasion warranting penalty.

Sections Involved

  • Section 74(1) and (9) of the CGST Act, 2017 – governs determination and adjudication of tax not paid by reason of fraud, wilful misstatement or suppression, and the associated penalty.
  • Section 122(1)(i) and 122(2)(b) of the CGST Act, 2017 – prescribe penalties for specified offences including short payment of tax.
  • Section 125 of the CGST Act, 2017 – prescribes a general penalty for contraventions without a specifically prescribed penalty.

Decision – In Favour of

The decision was in favour of the Assessee, with the penalty order set aside and the matter remanded for fresh consideration of the penalty question alone, in light of binding precedent on classification disputes.

Case Details

  • Court: High Court of Kerala at Ernakulam
  • Case Number: WP(C) No.28372 of 2023
  • Coram: Hon'ble Mr. Justice Dinesh Kumar Singh
  • Date of Order: 07 September 2023

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