HC Quashes GST Notice; Section 76 Inapplicable When Tax Paid

Gail (India) Ltd., a Government of India PSU, operates in two segments: the sale of natural gas and transmission of gas through pipelines. While the sale of natural gas was subject to VAT, transmission services attracted GST. To manage compliance, GAIL obtained separate GST registrations for its trading and transmission verticals. In practice, GST on transmission services was discharged by the transmission vertical, while the trading vertical recovered this component from customers as part of the overall sale price.

The department alleged that GAIL had collected GST but failed to remit it under Section 76 of the CGST Act and issued a show cause notice demanding Rs 14.63 crore along with interest and penalty. GAIL challenged the notice before the High Court, contending that the entire tax collected had already been paid to the Government and that the notice was issued despite a detailed prior inquiry acknowledging this position.

Issue Before Court: Whether a show cause notice under Section 76 of the CGST Act can be sustained when the tax collected from customers has already been fully remitted to the Government, albeit through another GST registration of the same entity.

HC Decided: The Madras High Court allowed the writ petition and quashed the show cause notice. The Court noted that Section 76 applies only where tax is collected but not paid to the Government. In the present case, it was undisputed even in the notice itself that the entire GST amount collected from customers had been duly deposited into the Government treasury by GAIL’s transmission vertical. Therefore, the essential condition for invoking Section 76 was absent. While acknowledging that separate GST registrations are treated as distinct persons under the law, the Court held that such technical distinctions cannot override the substantive fact that tax had been correctly paid.

Section 76 is not intended to create artificial tax demands or justify double taxation. The Court also took into account that a detailed inquiry had already been conducted and that identical proceedings initiated in Gujarat had been dropped on the same reasoning. Given that the issue involved a pure question of law and that the matter had been pending for several years, the Court found it appropriate to exercise writ jurisdiction even at the show cause stage. Therefore, the impugned notice was set aside as being without jurisdiction and contrary to the scheme of the CGST Act.

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