Case Law Details
Payu Payments Private Limited Vs Joint Director (Bombay High Court)
Even after a full GST audit and voluntary payment, PayU received a Show Cause Notice (SCN) demanding ₹38.33 crore for wrongfully claiming exemptions & ITC – High Court Declines to Halt GST Show Cause Notice Against Payu Payments
Bombay High Court has refused to intervene and quash a show cause notice issued by the Directorate General of GST Intelligence (DGGI) to Payu Payments Private Limited, a financial technology company. The court directed the petitioner to file a reply to the notice, reinforcing the principle that writ petitions challenging show cause notices should generally not be entertained when effective alternate remedies are available under the law.
The case stemmed from a show cause notice dated August 2, 2024, issued by the DGGI to Payu Payments. The notice alleged discrepancies and sought to invoke the extended period of limitation under Section 74 of the Central Goods and Services Tax Act, 2017, which applies in cases of tax not paid, short paid, erroneously refunded, or input tax credit (ITC) wrongly availed or utilised due to fraud, wilful misstatement, or suppression of facts.
Payu Payments, represented by senior counsel Mr. Shroff, argued that the DGGI’s notice was an exercise in excess of jurisdiction and unwarranted at this stage. The company contended that it had already undergone an audit covering the precise period in question. During this audit, full disclosures were allegedly made, and the audit team had flagged specific issues. Payu Payments claimed to have accepted the audit observations and voluntarily deposited the disputed amounts through DRC-03 entries in August 2023. Mr. Shroff referred to the audit report and its observations to support this claim.
Based on the prior audit and voluntary deposit, the petitioner argued that there was no justification for the DGGI to allege suppression of facts or invoke the extended period of limitation under Section 74. Mr. Shroff pointed to Explanation 2 of Section 74, which defines “suppression” for the purpose of invoking this extended period, and asserted that Payu Payments had suppressed nothing. He further submitted that the show cause notice itself failed to specify the precise nature of the alleged suppression.
Another key argument raised by the petitioner concerned the taxability of transactions up to Rs. 2,000 facilitated by payment intermediaries over digital networks. Payu Payments claimed that, based on recommendations of the Treatment Committee of the GST Council, these transactions were exempt, and therefore, they were not liable to pay GST on such amounts. The petitioner contended that merely claiming an exemption or input tax credit based on a particular interpretation or understanding did not amount to suppression or fraud warranting the invocation of Section 74.
Furthermore, Mr. Shroff expressed concern that the Treatment Committee of the GST Council had allegedly taken a view that contradicted the explanation to the relevant exemption notification, suggesting that the exemption applied only to merchant banks and not to entities like Payu Payments (which is registered as a payment aggregator under RBI norms). The petitioner argued that given the Treatment Committee’s stance, it was impossible to expect the Joint Director, DGGI, the adjudicating authority, to take a different view. This, according to the petitioner, rendered the show cause notice a mere formality and undermined the principles of natural justice, justifying the court’s interference without requiring a reply or adjudication proceedings.
The respondents, represented by Mr. Mishra, countered these submissions. They argued that the petitioner would be provided with a full opportunity to present their case during the adjudication process. Mr. Mishra referred to the findings of the investigations conducted by the DGGI, which formed the basis for the show cause notice. He contended that these findings, while prima facie, indicated suppression and justified the invocation of the extended limitation period under Section 74. He submitted that all contentions raised by the petitioner involved factual matters that could and should be addressed in response to the show cause notice before the adjudicating authority, and there was no jurisdictional error warranting the court’s intervention at this preliminary stage.
The High Court, after considering the rival contentions, noted that the show cause notice was not based solely on the audit report relied upon by the petitioner. The court observed that the DGGI’s notice referenced the petitioner’s response at the pre-show cause stage, after the audit report was prepared. Specifically, the show cause notice referred to statements recorded on July 1, 2024, from Payu Payments’ Finance Manager and an HDFC Bank official. These statements, recorded post-audit, prima facie suggested that Payu Payments, not being registered as a bank but a payment aggregator, might not have been entitled to the exemption it availed or the input tax credit claimed on certain transactions.
The court acknowledged that the findings in the show cause notice were necessarily tentative at this stage. However, it reiterated the established legal position that the scope of judicial review at the stage of issuing a show cause notice is extremely narrow. The court’s role is not to decide the correctness of the factual allegations at this juncture, but to ascertain if there is a fundamental lack of jurisdiction or a clear violation of natural justice or fundamental rights.
Referring to Section 65(7) of the CGST Act, the court pointed out that an audit, even if it flags issues which the taxpayer accepts, does not preclude the proper officer from initiating action under Section 73 (normal period of limitation) or Section 74 (extended period of limitation) based on the audit findings. Thus, the court found no merit in the petitioner’s argument that the prior audit or voluntary deposits automatically barred the invocation of Section 74. These were, the court stated, defences that should be raised and considered during the adjudication process.
Regarding the arguments based on the GST Council’s Treatment Committee recommendations, the court held that such discussions or recommendations do not constrain the adjudicating authority from taking a view based on the law and the facts presented during adjudication. If the petitioner believed the recommendations were inconsistent with the exemption notification, they were free to argue this with supporting facts before the Joint Director. Alleging that the adjudicating authority would not take a different view was insufficient ground for the court to interfere with the show cause notice.
The court also noted the discrepancy between the relatively smaller amount of wrongful ITC identified in the audit report (Rs. 6.20 lakh) and the significantly larger amount (Rs. 38.33 crore) prima facie revealed by the subsequent investigations cited in the show cause notice. While not accepting the latter figure as definitive at this stage, the court found that these new materials provided a basis for further investigation and adjudication.
The court cited established judicial precedents regarding the exhaustion of alternate remedies. It referred to its own decision in Oberoi Constructions Limited Vs. Union of India and ors. (decided on November 11, 2024), where it had discussed the principle of not interfering with show cause notices when alternate remedies are available. The court applied the reasoning from Oberoi Constructions to the present case.
The Supreme Court judgment in Whirlpool Corporation Vs. Registrar of Trade Marks, Mumbai and others (1998) was also referenced, which outlines the exceptional circumstances where a writ petition may be entertained at the show cause notice stage: enforcement of fundamental rights, violation of natural justice principles, or proceedings being wholly without jurisdiction. The Bombay High Court found that none of these exceptional circumstances were made out in the case of Payu Payments, suggesting the petitioner was merely attempting to prematurely halt the proceedings.
Furthermore, the court relied on the Supreme Court’s ruling in The Special Director and another Vs. Mohd. Ghulam Ghouse and another (2024), which cautioned High Courts against routinely entertaining writ petitions against show cause notices. That judgment held that intervention at the SCN stage is warranted only if the notice is “totally non est in the eyes of law for absolute want of jurisdiction.” The Supreme Court had advised that recipients of SCNs should first raise jurisdictional issues and all other defences before the issuing authority.
Applying the ratio of these decisions, the Bombay High Court concluded that there was no basis to interfere with the impugned show cause notice. The petition was dismissed without costs. However, acknowledging the petitioner’s request, the court granted Payu Payments a period of four weeks from the date of uploading the order to file their reply to the show cause notice. The adjudicating authority was directed to consider this reply.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. This Interim Application seeks to carry out the formal amendment in the cause-title to the Petition.
2.The amendment is allowed. The amendment to be carried out forthwith. Re-verification is dispensed with.
3 Interim Application is disposed of.
4. Heard learned counsel for the parties.
5. This is yet another case where the Petitioner has rushed to this Court to challenge a show cause notice dated 2nd August 2024 issued by the Directorate General of GST Intelligence (“DGGI”).
6. Mr. Shroff, learned senior counsel for the Petitioner, submits that the Petitioner was audited for the precise period in question. He submits that complete disclosures were made during the audit, and the audit team flagged specific issues. The Petitioner agreed to the audit team’s observations and voluntarily deposited the amount vide DRC-03 debit entries dated 19 August 2023 and 23 August 2023. For this, Mr. Shroff referred to the audit report and the observations at paragraph No.9.
7. Shroff submitted that once the Petitioner was audited and complete disclosures were made, there was no justification for either alleging any suppression or invoking the extended period of limitation under section 74 of the Central Goods and Services Tax Act, 2017 (“CGST Act”). He also referred to Explanation 2 in section 74, which defines “suppression” for the purposes of section 74 and the invocation of an extended period of limitation.
8. Mr. Shroff submitted that the Petitioner has suppressed nothing, and the show cause notice also does not allege the precise nature of suppression. He submitted that under such circumstances, issuing the impugned show cause notice by invoking the extended limitation period is an exercise in excess of jurisdiction. Therefore, he submits that the impugned show cause notice is without jurisdiction and must be interfered with at this stage.
9. Mr. Shroff submitted that in terms of the recommendations of the Treatment Committee of GST Council exempted all payments involved in settlement of transactions intermediaries over digital networks up to Rs.2,000/-. He submitted that the Petitioner, based upon this, was not liable to pay any GST on transactions up to Rs.2,000/-. He submitted that a mere claim for input tax credit does not amount to any suppression or fraud for invocation of the provisions of section 74 of the CGST Act.
10. Mr. Shroff submitted that the Treatment Committee of the GST has already expressed a view that exemption is available to Merchant banks and not to others. He submitted that such a view contradicts the explanation to the exemption notification. He submitted that once the Treatment Committee has taken this view, it is impossible to expect the Joint Director, DGGI-the Adjudicating Authority, to take any different view on the matter. He, therefore, submitted that the impugned show cause notice is only lip service to the principles of natural justice and fair play. Mr. Shroff submits that this is another reason the Court should interfere with the impugned show cause notice without requiring the Petitioner to file any reply or face any adjudication proceedings.
Mr. Mishra, learned counsel for the Respondents, submits that full opportunity will be offered to the Petitioner, and there is no case made out to interfere with the impugned show cause notice. He refers to the findings of the investigations based upon which a decision was taken to issue a show cause notice to the Petitioner. He submits that those findings make out the prima facie case of suppression and call for the invocation of an extended limitation period. He submits that all the contentions can be raised in response to the show cause notice. He submitted that there is no jurisdictional error and the contentions now raised would involve investigations into factual matters. Therefore, he submitted that this petition may not be entertained.
12. The rival contentions are now fall for our determination.
13. The record shows that the Petitioner was audited, and an audit report was prepared on September 26, 2023. However, the impugned show-cause notice refers to the Petitioner’s response at the pre-show-cause stage, after the audit report was prepared. Clause 3.5 of the show-cause notice refers to the statement of the petitioner’s Finance Manager, which was recorded on July 1, 2024. These statements accept that the Petitioner is not registered as a Bank but a payment aggregator as per the RBI norms.
14. The show cause notice also refers to the agreement between the Petitioner and M/s HDFC Bank Limited, i.e. an acquiring bank. The Senior Vice President of HDFC Bank Limited has also made a statement, which is referred to in the show cause notice. This statement is also post the audit report relied upon by the Petitioner. This statement also indicates that HDFC Bank was executing all the functions ascribed to an acquiring bank to the transactions with the Petitioner for authorisation and processing the credit.
15. Based upon, inter-alia the above statements which were recorded after the audit report now relied upon by the Petitioner, the show cause notice alleges that at least prima facie, the Petitioner was not entitled to exemption but has still availed of the exemption and/or has availed the input tax credit on such transactions. At this stage, what is relevant is that the show cause notice is based upon findings of investigations that were ordered into the matter. No doubt, such findings are necessarily tentative. The scope of judicial review is extremely narrow at the stage of issuing a show cause notice. At this stage, we cannot be expected to decide whether the factual allegations are correct or not, but we do not think that any case is made to halt further proceedings under the show-cause notice.
16. Even the audit report had flagged certain issues which the Petitioner then admitted. Section 65(7) of the CGST Act, 2017, which deals inter-alia with audit, provides that where the audit conducted under sub-section (1) results in the detection of tax not paid, or short paid or erroneously refunded or input tax credit wrongly availed or utilised, the proper Officer may initiate action under sections 73 or 74.
17. Therefore, based on the premise that the audit had cleared the Petitioner or that allegedly complete disclosures were made during the audit, no case is made to interfere with the impugned show cause notice or the invocation of section 74 of the CGST Act. In any event, the contentions can always be raised in response to the show cause notice, and there is no reason to believe that such defences would not be considered and dealt with in accordance with the law.
18. The contentions based on the Treatment Committee’s discussion and recommendations also do not affect the case. The Treatment Committee may have made certain recommendations. However, if, according to the Petitioner, such recommendations are contrary to the exemption notification or the explanation in the exemption notification, it is for them to urge this ground by providing sufficient factual basis to sustain their contentions but by alleging that the adjudicating authorities will never take some different view, no case is made out to insist for interference with the show cause notice itself.
19. Incidentally, the audit report had referred to the wrongful input tax credit to the extent of Rs.6,20,590/-. The investigations have now prima facie revealed availment and utilisation to the extent of Rs.38.33 crores. Again, we do not say that all these must be accepted as correct at this stage. The Petitioner is at liberty to point out how this is not correct. But, based upon all these materials, we are not satisfied that a case has been made to interfere with the show cause notice itself.
20.In the case of Oberoi Constructions Limited Vs. Union of India and ors.,Writ Petition (L) No.33260 of 2023 and connected matters decided on 11th November, 2024, we have discussed several precedents on the issue of exhaustion of alternate remedies. By adopting the reasoning in the said decision, we are not inclined to interfere with the impugned show cause notice in this case.
21.In the case of Whirlpool Corporation Vs. Registrar of Trade Marks, Mumbai and others, (1998)8 SCC 1, the Hon’ble Supreme Court has explained that the writ petition may be entertained at the show cause notice stage, where the Petitioner seeks enforcement of any fundamental rights, where there is violation of the principles of natural justice or where the order or the proceedings are wholly without jurisdiction. We are satisfied that under all these circumstances are not made out in this case, and the Petitioner is only bent upon taking a chance to see if the proceedings are halted or hurdles are created in them.
22. In the case of The Special Director and another Vs. Mohd. Ghulam Ghouse and another, (2024)3 SCC 440, the Hon’ble Supreme Court has held that unless the High Court is satisfied that the show cause notice was totally non est in the eyes of law for absolute want of jurisdiction of the authority and to investigate the acts, the writ petition should not be entertained, for mere asking and as a matter of routine. The writ petitioner should merely be directed to respond to the show cause notice and raise all defences and contentions that may be highlighted in the petition. Whether the show cause notice was found on any legal terms is a jurisdictional issue, the recipient can urge before the authority issuing the notice. That issue can also be adjudicated by the the authority initially issuing the notice before the party approaches the Court.
23.Applying the ratio of the above decisions to the facts of this case, we are satisfied that no case is made out to interfere with the impugned show cause notice.
24.For all the above reasons, we dismiss this Petition without any order of costs.
25. At this stage, Mr. Shroff submits that Petitioner be granted four weeks to file a reply to the impugned show cause notice. The request is reasonable, and if the Petitioner files a reply within four weeks from the date of uploading the present order, such reply should be considered by the Adjudicating Authority.
26. This petition is dismissed without costs. However, the time to file a reply to the show cause notice is extended by four weeks as requested.
Author Bio
