Bombay HC Declines to Halt GST SCN against PayU Post Audit & Voluntary Payment

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.