Delhi HC in IMS Mercantiles: GST demand not on total turnover; pre-deposit on combos

Executive Summary

GST disputes over combo products—like charger and battery packs—have become a flashpoint for both tax authorities and businesses. The recent Delhi High Court ruling in IMS Mercantiles Ltd v. Union of India has brought much-needed clarity: when the dispute is about the GST rate on a specific product line (here, charger–battery combos), both the tax demand and the mandatory pre-deposit for appeal must be calculated only on the turnover of those disputed goods, not on the taxpayer’s entire business turnover. This principle, now judicially endorsed, is a crucial shield for CFOs and tax teams facing similar show cause notices (SCNs) or orders-in-original (OIOs). The judgment also underscores the limits of writ jurisdiction—when factual disputes arise, the High Court will direct taxpayers to the appellate route, but with safeguards to ensure proportionality in pre-deposit and demand.

This article unpacks the legal reasoning, practical implications, and stepwise playbook for taxpayers to align their compliance, documentation, and appellate strategy with the Court’s directive.

Delhi HC’s Decision in IMS Mercantiles: Key Legal Takeaways

The heart of the IMS Mercantiles case was a classic GST conundrum: the department alleged that the taxpayer misclassified charger–battery combo packs under HSN 8507 (18% GST) instead of the correct 28% rate, and then raised a demand on the entire turnover—not just the turnover of the disputed combos. The taxpayer, however, had maintained records showing that these combos made up only about 3% of total sales.

The High Court’s core conclusions:

• Demand must be turnover-linked: Any GST demand for misclassification must be restricted to the turnover of the disputed goods (here, B2B and B2C combo pack sales), not the total business turnover.
• Pre-deposit for appeal is combo-specific: The mandatory pre-deposit under Section 107 of the CGST Act must be computed only on the disputed combo turnover, not the entire turnover.
• Writ jurisdiction is limited: The Court declined to re-examine factual disputes (like the exact quantum of combo sales) and directed the taxpayer to pursue the statutory appellate remedy. However, it protected the taxpayer by clarifying the correct basis for pre-deposit and demand.

Practical Implications

• Taxpayers facing similar SCNs or OIOs should immediately contest any demand or penalty calculated on total turnover when the dispute is product-specific.
• The appellate pathway is the correct route for factual reassessment, but the pre-deposit must be limited to the disputed turnover.
• Penalties and interest must also be proportionate and linked only to the turnover of the goods in dispute.

For expert assistance in handling such matters, companies in Delhi can consider consulting chartered accountants in Delhi.

Turnover-Linkage Principle: Legal Rationale and Application

Statutory Basis for Demand Calculation

GST law is clear: tax liability, interest, and penalties must be computed with reference to the actual supplies that are in dispute. HSN classification determines the applicable rate, but any misclassification affects only those supplies—not the entire business.

• Section 74 (CGST Act): Authorises demand and penalty for tax short-paid due to fraud, wilful misstatement, or suppression, but only “in respect of such tax.”
• Section 122: Penalties for specific contraventions (like misclassification or incorrect returns) must be tied to the supplies where the default occurred.

Court’s Critique of “Total Turnover” Demand

The High Court found a “fundamental flaw” in the department’s approach: despite having clear data on combo pack sales, the adjudicating authority imposed GST and penalties on the total turnover. The Court held that this was unsustainable, as the alleged misclassification related only to the combo packs.

Turnover-Linkage Principle: Definition and Scope

The turnover-linkage principle means that all tax, interest, and penalty calculations must be strictly limited to the turnover of the disputed goods or services. This principle is now judicially recognised and should guide both departmental officers and taxpayers in all similar cases.

Segregating and Evidencing Combo Pack Turnover: Practical Steps

For CFOs and tax teams, the first and most critical step is to accurately identify and segregate the turnover attributable to the disputed combo packs. Here’s how to do it:

1. Transaction-Level Mapping

• Extract all sales data from your ERP or accounting system, filtering for the specific SKUs or product codes representing the combo packs.
• Segregate B2B and B2C sales, as both are relevant for GST demand.

1. Alignment with GST Returns

• Cross-check the extracted turnover figures with GSTR-1 (outward supplies), GSTR-3B (summary returns), and GSTR-9C (annual reconciliation).
• Ensure that the combo pack turnover is clearly identifiable and reconcilable across all returns.

1. Invoice-Wise Documentation

• Maintain a complete set of invoices for all combo pack sales, with HSN codes and product descriptions clearly mentioned.
• For B2C sales where invoices may be missing, reconstruct turnover using POS data, retail inventory movement, and bank receipts.

1. Product Master and Ledger Maintenance

• Keep a detailed product master in your ERP, mapping each SKU to its correct HSN code and GST rate.
• Maintain separate ledgers or schedules for combo pack sales to facilitate easy extraction and reconciliation.

1. Audit Trail and Reconciliation

• Prepare a reconciliation statement bridging total turnover with combo pack turnover, supported by documentary evidence.
• If any gaps exist (especially in B2C sales), supplement with CA certificates, POS logs, and other secondary evidence.

Key Point: The more robust and transparent your documentation, the stronger your position during departmental scrutiny or appeal.

For professional GST audit services, and reconciliation help, companies in Ghaziabad can rely on expert chartered accountants.

Pre-Deposit Computation: From Total to Combo-Turnover

The IMS Mercantiles ruling makes it clear: pre-deposit for appeal must be calculated only on the turnover of the disputed combo packs.

Stepwise Guide

1. Isolate Disputed Turnover
   Use the segregation steps above to arrive at the exact turnover of combo packs for each financial year.
2. Apply Correct Tax Differential
   Calculate the tax shortfall by applying the correct GST rate (e.g., 28% instead of 18%) only to the combo pack turnover.
3. Interest and Penalty
   Compute interest and penalty only on the disputed turnover, not on the total business turnover.
4. Supporting Documentation
   Prepare a detailed working paper showing the calculation, with all supporting documents attached for submission with the appeal.

Best Practice: Always attach a reconciliation statement and a CA certificate to your appeal, demonstrating the accuracy of your combo turnover figures.

For matters related to GST litigation, including pre-deposit disputes, professional guidance on GST litigation services is advisable.

HSN Code Consistency and Mixed-Rate Invoicing: Risk Management

A recurring theme in GST disputes is inconsistent HSN mapping and mixed-rate invoicing—both of which can trigger allegations of misclassification and intent to evade tax. The IMS Mercantiles case is a textbook example: the department pointed to invoices where the same combo product was taxed at both 18% and 28%, arguing this reflected deliberate evasion.

How to Maintain HSN Consistency and Defend Your Position

• Centralise Product Codification
  Ensure your ERP or accounting system has a single, authoritative product master. Each SKU should be mapped to one HSN code and GST rate, with controls to prevent manual overrides.
• Train Sales and Accounts Teams
  Regularly sensitise staff on the importance of correct HSN usage. Even a single slip can become the department’s “smoking gun” in a future SCN.
• Harmonise Product Catalogues
  Align product descriptions, HSN codes, and GST rates across all branches, depots, and sales channels. The same product must always carry the same HSN and rate.
• Mixed-Rate Invoicing Protocols
  If you discover that some combo packs were inadvertently taxed at different rates, document the root cause (e.g., system error, staff oversight) and take corrective action. Respond to the department with a clear narrative, supported by internal investigation reports and evidence of remedial steps.
• Sample Best Practices
• Attach a summary table to your GST returns showing SKU-wise HSN mapping and turnover.
• Maintain a change log for any HSN code updates, with management approval and rationale.
• For legacy issues, prepare a one-time reconciliation and submit it proactively if a dispute arises.

Key Point: Consistency is your best defence. If the department cannot show a pattern of wilful misclassification, penalty exposure drops significantly.

For detailed GST compliance guidance, check out this blog on HSN code compliance and e-way bill advisory.

Penalty Exposure: Legal Assessment and Defence Strategies

The IMS Mercantiles order saw penalties imposed under multiple sections—74(1), 122(1)(x), 122(1)(xvi), 122(1)(xvii), and 125—each carrying its own legal threshold. The High Court’s turnover-linkage principle applies here too: penalties must be proportionate and limited to the turnover of the disputed goods.

How to Assess and Challenge Penalties

• Link Penalty to Disputed Turnover
  Argue that penalties under Sections 74 and 122 can only be levied on the quantum of tax short-paid on the combo packs, not on the entire business turnover.
• Challenge “Intent to Evade” Allegations
  Demonstrate that any rate inconsistency was due to bona fide error, not fraud or wilful misstatement. Submit internal emails, training records, and system logs as evidence.
• Precedents and Proportionality
  Cite the IMS Mercantiles ruling and similar judgments where courts have struck down penalties imposed on total turnover in product-specific disputes.
• Burden of Proof
  The department must prove deliberate evasion. If you have robust combo-specific evidence, the onus shifts back to the department.

Best Practice
Prepare a penalty matrix showing, for each section, the exact turnover and tax at risk, with supporting documentation. This makes it easier for appellate authorities to see the proportionality argument.

Appellate Roadmap When Writ Court Avoids Factual Reassessment

The Delhi HC’s approach is now standard: when factual disputes arise, the High Court will not re-examine evidence but will direct the taxpayer to the statutory appellate remedy. Here’s how to navigate this pathway:

• Appeal to Commissioner (Appeals)
  File your appeal within the time allowed by the High Court (or within the statutory period, if no writ is involved). Attach the recalculated pre-deposit, working papers, and all combo-specific evidence.
• Further Appellate Stages
  If needed, proceed to the GST Appellate Tribunal and, ultimately, the High Court. At each stage, focus on the turnover-linkage principle and the department’s failure to justify a total turnover-based demand.
• Procedural Safeguards
• Track the limitation period carefully, especially if there was a writ petition in between.
• If there’s any delay, file a condonation application with a detailed explanation and supporting documents.
• Always request a personal hearing and ensure your combo turnover evidence is on record.

Key Point
The appellate process is your opportunity to present a full evidentiary matrix and demonstrate the fundamental flaw in the department’s approach.

For help with GST appeal procedures, businesses can consult expert tax professionals.

Guidance for Taxpayers Facing Similar Notices: Recordkeeping & Response Playbook

The IMS Mercantiles precedent is a wake-up call for all businesses dealing with combo products or mixed-rate supplies.

Proactive Steps

• Periodic Review of Product Coding
  Schedule regular audits of HSN mapping and GST rates across all SKUs.
• Real-Time Segregation
  Set up your accounts to track disputed product lines separately from day one.
• Drafting Replies to SCNs/OIOs
• Immediately contest any demand on total turnover.
• Present a clear, reconciled statement of B2B/B2C combo turnover, with supporting documents.
• Attach a CA certificate if possible.
• Anticipate Scrutiny
  Keep all supporting documentation ready—ERP extracts, POS logs, bank statements, and inventory records.

For companies in Gurgaon, expert support is available through specialists in GST consultancy services.

Reconstructing or Validating Incomplete B2C Documentation

B2C sales often pose a challenge due to missing invoices or fragmented records. The IMS Mercantiles case shows that secondary evidence is both necessary and acceptable.

Remedial Actions

• Secondary Evidence
• POS logs and retail inventory movement records
• Bank receipts and reconciled cash collections
• CA certificates attesting to aggregate turnover
• Presenting Reconstructed Data
• Prepare a summary statement, certified by a CA, showing the methodology and sources used.
• Submit this as provisional evidence, with a request for further audit if required.

Key Point
Transparency and good faith go a long way. If you show a genuine effort to reconstruct and validate turnover, appellate authorities are more likely to accept your figures.

Conclusion

The Delhi High Court’s ruling in IMS Mercantiles restores proportionality and fairness to GST adjudication on product-specific disputes. For tax teams and CFOs, the message is clear:

• Segregate and evidence disputed turnover from day one
• Contest any demand or penalty on total turnover
• Maintain HSN consistency and robust documentation
• Use the appellate process to challenge overbroad departmental actions

By aligning your compliance and response strategy with these principles, you not only defend your current case but also future-proof your business against similar GST disputes.

Key Takeaways

• GST demand and pre-deposit must be strictly turnover-linked in product-specific disputes.
• HSN consistency, documentation, and proactive recordkeeping are your best shields.
• The appellate route is the right forum for factual disputes—prepare your evidentiary matrix in advance.
• Even with incomplete B2C records, secondary evidence and CA certification can bridge the gap.

If you need templates, checklists, or further guidance on any of these steps, just ask. The IMS Mercantiles precedent is now your ally—use it wisely.

For businesses across India wanting comprehensive support, chartered accountants in India are well-equipped to assist.