• Dated 04^th June, 2025

Jharkhand High Court Rule Sale Below Market Price Not Indicative of Sham Transaction Under GST Law

BRIEF FACTS:

In the landmark case of M/s Sri Ram Stone Works v. State of Jharkhand (W.P. (T) No. 5535 of 2024), the moot issue was whether the sale of goods at prices below the prevailing market rate could be treated as a sham transaction or indicative of tax evasion under the Jharkhand Goods and Services Tax (JGST) Act, 2017. The revenue authorities had issued notices to the petitioners—mining lessees and registered dealers under Section 61 of the Act, alleging that the underpricing of goods such as stone boulders and chips suggested discrepancies warranting reassessment of tax liability. The petitioners challenged these notices, arguing that the scrutiny powers under Section 61 are limited to identifying inconsistencies within self-declared returns and do not authorize comparisons with arbitrary market prices. They contended that as long as the transaction is genuine and the value declared aligns with the actual consideration received, as provided under Section 15 of the Act, there is no basis for treating such sales as fraudulent or underreported. The core dispute, therefore, revolved around the legality and jurisdiction of tax authorities using market value benchmarks to question pricing decisions in the absence of evidence of sham or collusive transactions.

ASSESSEE'S CONTENTION:

In this case, the appellants (petitioners), including M/s Sri Ram Stone Works and similarly placed Assessees, contended that the notices issued under Section 61 of the JGST Act, 2017, were without jurisdiction and legally unsustainable. Represented by their counsels, the appellants argued that Section 61 merely allows the proper officer to scrutinize returns for discrepancies and seek explanations, not to question the pricing of goods by comparing it with market rates. They emphasized that the sale prices reflected in their returns were based on actual transaction values, which are valid under Section 15 of the JGST Act unless there is evidence of fraud, collusion, or a sham transaction. The petitioners highlighted that there were no inconsistencies within their filed returns, and the revenue's reliance on market rate comparisons was arbitrary and beyond the scope of the law.

DEPARTMENT'S CONTENTION :

The Department, represented by the State of Jharkhand and its revenue authorities, contended that the notices issued under Section 61 of the JGST Act were valid and within their jurisdiction. They argued that the petitioners had sold goods, such as stone boulders and chips, at prices significantly lower than the prevailing market rates, which raised a reasonable suspicion of underreporting of taxable value and possible tax evasion. According to the Department, such price discrepancies warranted scrutiny to protect the interests of revenue and ensure compliance with GST provisions. They maintained that benchmarking transaction values against market prices is a legitimate method to detect anomalies and assess the risk of undervaluation. The Department also asserted that the notices were part of a preliminary return-scrutiny process, and no final conclusions had been drawn. They argued that the petitioners were given opportunities to explain the pricing, and the writ petitions were premature since the statutory process had not yet concluded.

DECISION:

The Hon'ble Jharkhand High Court has ruled in favour of the petitioners and quashed the notices issued by the revenue authorities under Section 61 of the JGST Act, 2017 wherein, it has held that the scope of Section 61 is strictly limited to the scrutiny of discrepancies within the self-assessed returns filed by registered persons. The Court clarified that this provision does not empower tax officers to question the adequacy of the sale price or compare it with hypothetical market rates unless there is credible evidence of fraud, collusion, or a sham transaction. It emphasized that under Section 15 of the JGST Act, the "transaction value, "the actual price paid or payable, is the legal basis for taxation, and such value cannot be substituted merely because the price appears lower than market standards. The Court found that the repeated issuance of notices based solely on price benchmarking, without identifying any real discrepancies in the returns or establishing fraudulent conduct, amounted to a misuse of statutory powers and caused undue harassment to genuine businesses. Consequently, the Hon'ble High Court quashed the impugned notices and held that selling goods below market price, in itself, does not constitute tax evasion or a sham transaction under the GST framework.

BTA's COMMENT:

This judgment by the Jharkhand High Court provides crucial clarity on the limits of departmental powers under the JGST Act, 2017. It reinforces the principle that genuine business transactions, such as sales at concessional or below-market prices, cannot be treated as suspicious or invalid in the absence of concrete evidence of fraud or sham conduct. The ruling upholds taxpayer rights by emphasizing that scrutiny under Section 61 must be confined to discrepancies within return filings and cannot extend to arbitrary assessments based on market price comparisons. This decision sets an important precedent for protecting legitimate commercial practices from undue interference and affirms the legal sanctity of the transaction value as defined under Section 15 of the JGST Act.

Author: Madhurima Bose

Edited by: Shaily Gupta