GST UPDATE

Writ Petition No.: 13152 of 2020 and 11033 of 2020
Court: High Court of Madras (Madurai Bench)
Case Title: GAIL(India) ltd. v. The Additional Commissioner
Outcome: Appeal was allowed and impugned Show cause notice was set aside.
Judgement Date: 15.04.2026

Business Structure of GAIL:
Before proceeding with the facts of the case, it is pertinent to understand the Business Structure of the company. Gas Authority of India Ltd (GAIL) is a co. registered under GST. It is engaged in two lines of business namely:
i. the sale of natural gas to its customers; and
ii. the provision of transmission services of natural gas.
GAIL (hereinafter referred to as petitioner) has a transmission vertical i.e. Vertical-2 which is engaged in the business of providing services of transmission of gas through pipeline infrastructure for transporting such gas directly from ONGC and GAIL to the premises of its customers. Trading/selling of Natural gas is covered in the entry no. 54 of List II of the seventh schedule to the Constitution of India, therefore, the activities of Vertical-1 of GAIL engaged in the sale of natural gas is exempt. The Vertical-1 i.e. business of selling natural gas falls within the ambit of State taxation, therefore, Tamil Nadu VAT was applicable on business of Vertical-1 of the petitioner. GAIL is liable to pay tax under GST only on the consideration received towards transmission charges i.e. Vertical-2. For operational convenience and uniformity in compliance across the country, GAIL obtained two separate GST registrations in the State of Tamil Nadu — one for its “Transmission Vertical” bearing GSTIN No. 33AAACG1209J1Z3 and another for its “Trading Vertical” bearing GSTIN No. 33AAACG1209J2Z2. The transmission vertical discharged GST liability on transmission services, whereas the trading vertical dealt with the sale of natural gas under the VAT regime. Petitioner undertakes to deliver the gas to the doorstep of customer, therefore, price agreed included all the expenses incurred upto the place of delivery.

Such a composite transaction is subject to VAT@5%. These sale transactions of vertical-1 were reported in the GSTR-3B as non-taxable supplies. The petitioner at its own will bifurcated the transmission component embedded in the sale of gas and discharged GST under separate registration of Vertical-2. The Vertical-2 i.e. transmission vertical paid GST at the applicable rate and raised invoices on the trading vertical. The trading vertical while supplying gas to its customers recovered the said GST component as reimbursement of GST cost on transmission charges in addition to the base price, margin and transmission charges. All the GST which was recovered from customers on reimbursement basis was timely and properly paid to the Government. This arrangement was purely internal and for the GST compliance.
BRIEF FACTS LEADING TO PRESENT PROCEEDINGS
Subsequently, the Department entertained doubts regarding the transaction structure and initiated inquiry proceedings calling upon GAIL to furnish documents and clarifications, which were duly submitted on various dates along with detailed explanations and presentations before the authorities. However, without considering the reply given by the petitioner, a show cause notice dated 17.08.2020 was issued in which it was purported that petitioner has contravened Section 76(1) of CGST Act and therefore, amount of Rs. 14,63,42,506/- along with interest and penalty was proposed to be recovered. Aggrieved by the issuance of the said show cause notice despite admitted payment of the tax amount through the transmission vertical, GAIL approached the High Court challenging the very jurisdiction and validity of the proceedings.
QUESTION BEFORE HON’BLE COURT:
• Whether two verticals registered in the same state with two different registrations be treated as same person or distinct persons?
• Whether Section 76 of the CGST Act could be invoked where the tax paid by one vertical which was recovered from customers on internal agreement between the two verticals can be treated as discharge of output tax liability of the other vertical who was actually liable to pay?
• Whether the writ petition against a show cause notice was maintainable?

BRIEF ARGUMENTS BY APPELLANT:
Appellant submitted following contentions: -
• Maintainability of Writ Petition Against the Show Cause Notice
Petitioner contended that the impugned show cause notice was not a mere proposal seeking explanation, but was in substance a pre-determined order wherein conclusive findings had already been recorded against the petitioner, thereby leaving no effective scope for adjudication. It was submitted that when the authority had already arrived at a final conclusion, the adjudication proceedings would be an empty formality. In such peculiar circumstances, the writ petition challenging the show cause notice itself was maintainable and the High Court ought to exercise its extraordinary jurisdiction under Article 226 of the Constitution of India. Reliance in this regard was placed upon the judgments in Siemens Ltd. v. State of Maharashtra. In the instant case, SCN had findings which were conclusive in nature recorded therein, thereby, leaving no scope for adjudication. Therefore, the instant writ petition is maintainable.
• Section 76 cannot be invoked when there are two separate registrations of the same entity :
Petitioner submitted that, Section 76 of CGST act, is invoked only on involvement of two distinct persons in the transaction. However, in the instant case of petitioner, transactions between the two verticals i.e. trading and transmission vertical, cannot be treated as transactions between two distinct persons. As, the two separate registrations were taken solely for the purpose of accounting and administration clarity and convenience and that the issuing invoices by vertical-2 to vertical-1 was solely an internal arrangement. Ultimately, tax collected from the customers were timely and properly deposited to the Government exchequer. Therefore, Section 76 cannot be invoked. Further, Section 76, being penal in nature, required strict interpretation and could not be invoked mechanically in the absence of actual retention or non-payment of tax.
• Earlier proceedings based on the mirror allegations were dropped:
It was held that in past period also, mirror allegations were raised which after the explanations furnished by the petitioner, proceedings were dropped by the revenue officials. Therefore, the impugned SCN should be dropped.
Therefore, the impugned order should be dropped.
BRIEF ARGUMENTS BY REVENUE DEPARTMENT:
Revenue Department contended that:
• Two separate registrations are treated as distinct persons under Section 25(4) of the CGST Act:
Revenue department contended that where a person obtains multiple registrations, then such registration should be treated as distinct persons in terms of Section 25(4) of the CGST Act. Therefore, the transactions between the two verticals of the petitioner should be treated as transactions between distinct persons and cannot be treated as internal purpose transactions of the same entity.
• Writ petition is not the remedy available at the preliminary stage of proceedings:
It was further submitted that the impugned proceedings were only at the stage of issuance of show cause notice and no final adjudication had yet taken place. The petitioner had adequate opportunity to submit a detailed reply along with all supporting materials before the adjudicating authority. If the writ in the instant is entertained by the Court, then the court would be acting as the assessing authority as the proceedings are at preliminary stage only.

• Amount which is collected as tax whether collectable or not once collected should be paid to the Government:
Further, department contended that Section 76 of the CGST Act requires that any amount collected as tax must necessarily be remitted to the Government exchequer. The fact that the supply is taxable or not does not makes any difference. Therefore, issuing SCN is tenable and correct.

Gujarat Order Not Conclusive
It was contended that reliance cannot be placed solely on the judgment of Gujarat High court particularly when such order itself could be subjected to appellate challenge and that authorities are vested with the jurisdiction under Section 76 of CGST act, therefore, as in the instant case jurisdiction has already been vested with, the writ petition is premature and not maintainable.
FINDINGS & JUDGEMENT:
Following are the findings of the Court in the instant case:
• Maintainability of the Writ Petition
Although ordinarily writ petitions against show cause notices are not entertained, the Court held that the peculiar facts of the present case justified exercise of writ jurisdiction. The Court noted that extensive inquiry had already preceded the issuance of the show cause notice, all relevant materials and accounts had been examined by the Department, and the controversy essentially involved interpretation of Section 76 of the CGST Act. Further, the matter had remained pending before the Court for more than five years and no further factual adjudication was necessary for deciding the issue. In such circumstances, relegating the petitioner to adjudication proceedings would serve no useful purpose.

• Allegations raised were already raised in previous proceedings as mirror allegation - Consideration of the Gujarat Proceedings
Hon’ble Court observed that allegations raised in the impugned SCN are mirror allegations which were raised in SCNs dated 30.12.2024 and after submission of reply given by the petitioner, the proceedings were dropped. The said authority had specifically recorded findings that the transmission services alone were taxable under the CGST Act, 2017; the transmission vertical had already discharged GST liability at the applicable rate; and the amount recovered by the trading vertical from customers merely represented reimbursement of the GST already paid by the transmission vertical and did not constitute independent collection of tax. The Court also observed that the final order was passed in December 2024 in the proceedings under the SCN dated 30.12.2024 and more than 1 year has lapsed since the date of order. No appeal was sought against the final order, thereby, leading to finalisation of transactions between verticals.

• SCN was preceded by a detailed inquiry wherein the payment of same amount of tax was acknowledged
In continuation of above, it was observed that a detailed inquiry was conducted before the SCN, therefore, after considering all the materials on record and accounts submitted by petitioner, it was held by the revenue that the exact amount as collected from the customers for the GST component is paid to the Government Exchequer. According to the Court, once the Revenue itself admitted that the entire amount collected had already been deposited with the Government, what remained for consideration was only a pure question of law relating to the interpretation and applicability of Section 76 of the CGST Act.

• The Term ‘Person’ includes company as a whole:
The Court observed that Section 76(1) and 76(4) of the CGST Act 2017, term ‘the person’ was mentioned in the provisions of the section, for this definition of the Term ‘Person’ was referred given in the Section 2(84) of CGST Act, 2017 which included ‘a company’. Thus, it was held that GAIL is a company and therefore covered under definition of ‘Person’. In continuation of above, it was observed that incidence of tax falls on the transaction, i.e. transmission services and collection of charges by GAIL. Further, there is no dispute about the rate of tax, the quantum of tax, the requirement that the incidence be borne by the its customers availing the services, or that every penny collected has been paid to the Government. Further, Section 76 of the CGST Section 76 of the CGST Act is intended to address situations where a person collects any amount as tax and wrongfully retains the same without remitting it to the Government.

• One vertical has paid the tax liability of another vertical:

It was observed that Section 22 of the CGST act mandates registration in every state, further Section 25 of the CGST act prescribes the procedure by which, even within the state, separate registrations are permitted. In this regard, Section 25(4) of the CGST Act has to be read with Section 25(5).In the instant case, the records clearly demonstrated that every rupee collected towards GST on transmission charges had already been paid into the Government treasury by the transmission vertical. Thus, neither was there any wrongful collection nor any wrongful retention of tax so as to attract Section 76 of the Act

• Verticals are not registered in different states and therefore cannot be treated as distinct persons:
In continuation of above, it is held that both the verticals are not registered as distinct entities registered in different states, but rather registered in the same state. Thus, the arrangement between the two verticals is merely a payment and reimbursement arrangement by the same person i.e. GAIL. When there is honest and accurate payment of tax, Section 76 cannot be invoked merely because the establishment is a distinct person in the same state.

Section 76 Cannot be Used to Justify Double Taxation
It was observed that proceedings under Section 76 cannot be utilized as a mechanism for effecting double taxation or double recovery of the same tax amount. Once the tax amount collected from customers had already reached the Government exchequer, the very basis for invocation of Section 76 ceased to exist.

Thus, it was held that the writ petition by the petitioner is allowed and impugned SCN stands to be dropped.

Author’s Comment:
This judgment assumes considerable significance in relation to the scope and misuse of Section 76 of the CGST Act. The Court has rightly emphasized that the true object of Section 76 is to prevent retention of tax collected from customers and not to create an avenue for double recovery by the Revenue. The judgment acts as an important safeguard against potential unjust enrichment of the Government through mechanical invocation of Section 76 in cases where no loss of revenue or wrongful retention of tax exists. The ruling reinforces the principle. Further this judgment directs department officials need to look at the substance of the arrangement rather than the form of the arrangement before initiating the proceedings.

Another aspect of the judgment is its discussion on the maintainability of writ petitions against show cause notices. The Court has implicitly reiterated that the language employed in a show cause notice must propulsive and not conclusive. A show cause notice is intended to initiate adjudication and invite explanation from the assessee; it cannot proceed on the basis of pre-judged conclusions that effectively render the adjudicatory process meaningless. Where the notice itself records definitive findings ignoring admitted facts favourable to the assessee, the writ jurisdiction of the High Court can justifiably be invoked.

Various Sections and Rules referred in the instant case:
Sec. 2(84), Sec. 22, Sec. 25, Sec. 76(1) and 76(4) of CGST Act, 2017

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