Madras High Court Quashes GST Demand On GAIL, Says No Recovery If Tax Already Paid

The Madurai Bench of the Madras High Court has quashed a show cause notice issued to GAIL (India) Ltd. under Section 76 CGST Act, holding that recovery proceedings cannot be sustained where the tax collected has already been remitted to the Government, even if paid through another GST registration of the same entity.

Section 76 of the CGST Act, 2017 provides that any person who collects an amount as representing tax must forthwith pay the same to the Government, irrespective of whether the underlying supply is taxable.

The bench of Justice D. Bharatha Chakravarthy observed that, “Section 76 of the CGST Act is clear and simple. Any person collecting any money as tax cannot retain it for himself, even if the tax is not chargeable. Ultimately, it is the person who wrongfully bore the incidence of tax who is entitled to a refund, and the person who collects has no say. Thus, neither is the tax amount wrongly collected, nor is it wrongfully retained.”

The writ petition was filed by GAIL challenging the show cause notice dated August 17, 2020, issued by GST authorities alleging contravention of Section 76.

The notice sought recovery of Rs. 14.63 crore on the ground that GAIL had collected an amount representing GST from customers but failed to deposit it with the Government.

GAIL, a public sector undertaking engaged in the sale and transmission of natural gas, explained that it operates through two separate GST registrations, one for its trading vertical and another for its transmission vertical. While natural gas is outside the GST regime and subject to VAT, GST is applicable on transmission services.

It submitted that although the trading vertical collected the overall consideration from customers, the GST component on transmission charges was discharged entirely by the transmission vertical. The bifurcation was an internal arrangement for compliance and accounting purposes.

The Revenue contended that under Section 25(4) of the CGST Act, separate registrations are treated as distinct persons, and therefore transactions between the two verticals could not be treated as internal. It argued that since the trading vertical collected the GST component but did not itself remit the tax, Section 76 was attracted.

Rejecting this contention, the Court held that the requirement for invoking Section 76 that is collection of tax and failure to remit it, was not satisfied. It noted that there was no dispute that the entire GST component collected from customers had, in fact, been paid to the Government by GAIL's transmission vertical and that the show cause notice itself recorded that the amounts collected and remitted were matching.

Addressing the argument on “distinct persons”, the Court observed that, “There can be no two opinions that GAIL (Transmission Vertical) and GAIL (Trading Vertical), having obtained two registrations, are two distinct persons for the purposes of the Act. Even then, at best, it can be said that GAIL (Trading Vertical), instead of paying and remitting the tax under that registration, had paid the same through GAIL (Transmission Vertical).”

The court further found that the show cause notice ignored its own recorded findings regarding payment of tax and proceeded to demand the same amount again. It held that “Section 76 proceedings are no method to justify double taxation.”

In view of these findings, the Court held that the show cause notice was without jurisdiction and liable to be quashed.

Accordingly, the writ petition was allowed and the impugned show cause notice dated August 17, 2020 was set aside

For Petitioner: Advocate Joseph Prabakar

For Respondent: AR.L. Sundaresan, Additional Solicitor General of India Assisted by R. Gowrishankar, Senior Standing Counsel