Undervaluation to Evade GST Cannot Be Allowed: Allahabad High Court Upholds Seizure of Pan Masala and Scented Tobacco Consignment

Failure to Prove the Actual Movement of Goods Renders the Transaction Suspicious—Burden Lies on the Dealer – Allahabad High Court in a significant ruling delivered on March 3, 2025, dismissed a batch of petitions challenging the seizure of consignments of pan masala and scented tobacco, holding that the dealers failed to prove the genuine movement of goods and engaged in deliberate undervaluation to evade GST requirements. The Court ruled that when a dealer undervalues goods to avoid tax and fails to substantiate their transportation claims, authorities are justified in seizing the goods and imposing penalties.

"When goods are transported without proving their genuine movement, and documents appear manipulated to evade tax, the authorities have every right to seize the goods and demand tax compliance. The law does not permit such manipulative practices," the Court observed while upholding the seizure order.

The case involved multiple traders, including M/S Jaya Traders, M/S Durga Traders, M/S Arti Traders, M/S Kamakhya Traders, and M/S Dristy Traders, who challenged the orders of the Additional Commissioner (Grade-2), UP Commercial Tax Department, under Section 129(3) of the GST Act. The dealers had argued that their goods were seized on the ground of under-valuation, which they claimed was beyond the jurisdiction of the seizing authority.

The petitioners contended that the goods were legally transported from West Bengal and Assam to New Delhi and were accompanied by proper tax invoices. They further claimed that since the value of the goods was below Rs. 50,000, no e-way bill was required under GST rules.

However, the goods were intercepted at Kanpur, where the authorities discovered discrepancies in the documents and statements given by the truck driver, leading to the seizure and penalty proceedings.

"The documents claim the goods originated from West Bengal and Assam, yet the truck driver categorically stated that the goods were loaded at Kanpur. Such contradictions raise serious doubts about the authenticity of the transportation records," the Court remarked.

The High Court found glaring inconsistencies in the traders’ claims, noting that they failed to provide critical details such as truck numbers, toll receipts, or any independent proof of movement from West Bengal and Assam.

"The petitioners have utterly failed to produce any cogent material to substantiate their claim that the goods were transported from West Bengal or Assam. The primary burden to prove the legitimate movement of goods lies on the dealer, and in this case, the petitioners have completely failed to discharge that burden," the Court ruled.

The Court further observed that: "The records clearly indicate that the seized goods were manufactured at Kanpur. If the goods were genuinely transported from another state, the traders should have been able to provide verifiable transportation details. Their inability to do so supports the authorities’ finding that the consignment was being moved to evade GST obligations."

The High Court relied on the Supreme Court’s decision in State of Karnataka v. M/s Ecom Gill Coffee Trading Pvt. Ltd. (2023), which emphasized that the dealer bears the primary responsibility of proving the authenticity of transactions and physical movement of goods.

"The Hon’ble Supreme Court has categorically held that a dealer seeking tax exemptions or benefits must provide undisputed proof of physical movement of goods. If they fail to do so, the presumption is that the transaction was designed to evade tax," the High Court reiterated.

The Court also referred to its own previous judgment in M/s Shiv Trading v. State of UP (2023), where it ruled: "When a dealer fails to establish beyond doubt the actual transaction and movement of goods, the authorities are justified in treating the transaction as an attempt to evade tax."

Court Holds That Undervaluation to Avoid E-Way Bill is a Manipulative Tactic

The High Court dismissed the traders' claim that since the invoice value was under Rs. 50,000, no e-way bill was required, stating that intentional undervaluation to evade tax laws cannot be condoned.

"A dealer cannot artificially undervalue goods to fall below the e-way bill threshold and then claim immunity from tax compliance. The law does not provide a loophole for tax evasion under the guise of minor technicalities," the Court ruled.

The Court referred to its ruling in M/s Radha Fragrance v. Union of India (2023), where it had observed: "When goods of significant quantity are declared at an artificially low price solely to avoid e-way bill requirements, such actions indicate deliberate tax evasion and must be dealt with strictly."

Final Judgment: No Relief for Petitioners, Seizure Upheld

The High Court dismissed all the writ petitions and upheld the seizure orders, ruling that the dealers had failed to prove the legitimacy of their transportation claims and had deliberately undervalued goods to avoid GST regulations.

"The burden of proving lawful movement of goods lies on the dealer. When discrepancies exist between the transport documents and physical verification, the authorities have the right to detain and seize goods under GST law. The petitioners have failed to demonstrate genuine compliance, and therefore, their claims have no merit," the Court concluded.

The Allahabad High Court’s ruling sends a strong message against tax evasion through manipulated invoicing and false transport claims. By upholding the seizure of the goods, the Court reinforces the principle that traders must provide clear and verifiable proof of transactions to claim tax benefits.

"When tax laws provide exemptions or procedural relaxations, they are meant for genuine traders, not those who manipulate documentation to evade compliance. The law does not permit selective adherence based on convenience," the High Court declared in its parting remarks.

Date of Decision: 03/03/2025