The court determined that internal arrangements for tax compliance do not constitute distinct legal transactions under GST, thus quashing the show cause notice issued for alleged tax evasion.

ORDER :

1. This Writ Petition is filed for a Writ of Certiorari challenging the impugned show cause notice dated 17.08.2020 issued under Section 76 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “the CGST Act”).

GAIL’s Case :

2. The petitioner, Gas Authority of India Limited (GAIL), is a company incorporated under the Companies Act and a public sector undertaking with a majority holding by the Government of India. GAIL, inter alia, is engaged in two lines of business, namely, (i) the sale of natural gas to its customers; and (ii) the provision of transmission services for natural gas. In respect of transmission services, customers procure natural gas directly from suppliers such as ONGC, and GAIL provides pipeline infrastructure for transporting such gas to the customers’ premises.

2.1. Natural gas falls within the ambit of State taxation by virtue of its inclusion in Entry 54 of List II of the Seventh Schedule to the Constitution of India. Therefore, in respect of the sale of natural gas within the State of Tamil Nadu, tax is leviable under the provisions of the Tamil Nadu Value Added Tax Act, 2006. Under the CGST Act, GAIL is liable to pay tax only on the consideration received towards transmission charges.

2.2. Since GAIL is engaged in these two distinct activities across the country, it obtained separate GST registrations for the sake of uniformity, namely: (i) for the transmission vertical and (ii) for the trading vertical. Accordingly, in the state of Tamil Nadu, the following GSTINs were assigned to each of the said verticals.

''Transmission vertical - 33AAACG1209J1Z3

Trading vertical - 33AAACG1209J2Z2''

2.3. In a transaction involving the sale of natural gas, the seller undertakes to deliver the gas to the buyer’s doorstep. Accordingly, the sale price agreed with the customer includes all expenses incurred up to the place of delivery, that is, the customer’s premises. Such a composite transaction is subject to VAT in its entirety and, as a natural corollary, falls outside the ambit of GST. GAIL has been paying VAT at the applicable rate of 5% on such transactions and has been regularly filing VAT returns in respect thereof.

2.4. Insofar as the trading vertical is concerned, GAIL filed Form GSTR-3B and reported the sale of gas as “non-taxable supplies.” As per the GST regime, GAIL, on its own volition, bifurcated the transmission component embedded in the sale of gas and discharged GST under a separate registration pertaining to the transmission vertical. This arrangement was purely internal and adopted to ensure compliance with GST provisions. The transmission vertical paid GST at the applicable rate and raised invoices on the trading vertical. The trading vertical, in turn, while supplying gas to customers, recovered the said GST component through reimbursement, in addition to the base price, margin, and transmission charges. There is no discrepancy between the total amount collected from customers and the total tax remitted to the Government by the transmission vertical.

2.5. At this juncture, the respondent authorities entertained certain doubts regarding the said transactions and called upon GAIL to furnish documents and clarifications. GAIL duly submitted the required documents and explanations on 01.08.2019, 17.08.2019, 05.09.2019, and 24.09.2019. Further, officials of GAIL participated in discussions with the respondent Department, during which a detailed presentation explaining the transaction structure was made.

2.6. However, without properly appreciating the same, the impugned show cause notice dated 17.08.2020 was issued, alleging that GAIL had contravened Section 76 (1) of the CGST Act and calling upon GAIL to show cause as to why interest, penalty, and an amount of Rs.14,63,42,506/- allegedly collected from customers should not be recovered. The documents relied upon for the issuance of the show cause notice have also been listed in the annexures thereto. Aggrieved by the same and contend