In a recent ruling, the Delhi High Court addressed a significant issue regarding the calculation of GST demands, particularly focusing on the case of M/s IMS Mercantiles Ltd. The company, involved in the sale of lithium-ion batteries, was initially subjected to a GST demand based on its total turnover due to alleged misclassification of goods. The authorities had imposed a higher tax rate of 28% on the entire turnover, despite the disputed goods constituting only a small fraction of the company's sales.
The High Court highlighted a critical error in the approach taken by the Adjudicating Authority, which had failed to segregate the turnover related to the disputed combo packs from the entire business volume. The court emphasized that GST should only be levied on the specific B2B and B2C sales found to be misclassified, rather than the entire turnover. This distinction is crucial as it determines the correct tax liability and any associated penalties.
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Furthermore, the court clarified that the pre-deposit required for filing an appeal should be calculated based solely on the tax amount related to these specific sales, not the total turnover. The petitioner was granted an extension until November 30, 2025, to file an appeal, which the Commissioner (Appeals) is instructed to adjudicate fairly, including a personal hearing.
This decision underscores the importance of accurate classification and assessment in GST matters, ensuring that businesses are not unfairly penalized for issues pertaining to a limited segment of their operations.
Order Date: 10 October 2025
Case Title: M/s IMS Mercantiles Ltd. v. Union of India & Anr.
Facts:
- The petitioner, engaged in the business of lithium-ion and other batteries, was subjected to a search by GST authorities on 12.03.2021 for alleged misclassification under HSN 8507, charging 18% GST instead of 28%.
- A show cause notice dated 03.08.2024 was issued alleging tax evasion. Despite submitting a reply on 18.09.2024, an Order-in-Original (OIO) dated 10.01.2025 was passed confirming the demand.
- The petitioner filed a rectification application under Section 161 of the CGST Act, claiming that the disputed “combo packs” of batteries and chargers constituted only 3% of total turnover.
- The High Court, in an earlier writ (W.P.(C) 4785/2025, order dated 16.04.2025), directed the Adjudicating Authority to grant a personal hearing and decide the rectification plea after verifying the turnover breakup.
- The Authority, however, passed a fresh order on 24.07.2025, re-confirming the entire demand on the total turnover and imposing penalties aggregating over ₹250 crore under Sections 74(1), 122(1)(x), 122(1)(xvi), 122(1)(xvii) and 125 of the CGST/DGST Acts.
Issue:
- Whether the Adjudicating Authority could demand GST and impose penalties on the entire turnover, instead of restricting it to the disputed B2B and B2C combo sales found misclassified?
Order:
- The Court found a fundamental flaw in the Authority’s approach, noting that despite availability of actual B2B and B2C turnover data, the entire turnover was wrongly treated as taxable at the higher rate.
- It observed that even if misclassification occurred, the taxable quantum must be confined to the disputed supplies and not extended to total business volume.
- Importantly, the Court clarified that the pre-deposit under Section 107(6) shall be computed only on the tax amount attributable to B2B and B2C combo sales, not the total turnover.
- The petitioner was granted time till 30 November 2025 to file the appeal, which the Commissioner (Appeals) must adjudicate on merits, providing a personal hearing and passing a reasoned order.
- The observations in the writ were held non-binding on the final adjudication.
