Emphasising that RBI-authorised escrow structures protecting merchant funds received judicial recognition, and the GST department must now show more than allegations before freezing operational accounts, the Bombay High Court has has quashed the provisional attachment of 1Pay Mobileware’s bank accounts under Section 83 of the CGST Act, 2017.
The Court found that the attachments rested on suspicion, with a complete absence of cogent and credible material satisfying the safeguards. Further, the orders failed to identify specific transactions, the entities involved, the manner of GST evasion or 1Pay’s role. There was also no material establishing the petitioner’s status as a taxable person or a person covered by Section 122(1A) for the attachment.
The Court also held that the escrow monies were impressed with a trust and did not belong to 1Pay, and consequently, they could not be attached under Section 83 of the CGST Act. Applying Radha Krishan Industries vs State of Himachal Pradesh [(2021) 6 SCC 771], the Court emphasised a live link between tangible material and the necessity for attachment.
Briefly, 1Pay Mobileware Private Limited, an RBI-authorised payment aggregator, challenged the provisional attachment of its current and escrow bank accounts by DGGI under Section 83 of the CGST Act, 2017. DGGI suspected that the company was involved in routing funds for an organised online money gaming syndicate allegedly evading GST. The department also alleged non-cooperation, absence of records at the business premises and an empty server.
Although certain government-linked merchant settlements were subsequently permitted, the remaining account restrictions continued. The company contended that the statutory conditions for attachment were not met and that the freeze disrupted its business and merchant settlements.
The Division Bench comprising Justice M. S. Karnik and Justice Sandesh D. Patil found that the attachment orders contained vague allegations without identifying specific transactions, the entities involved, the manner of GST evasion or the petitioner’s role in it. Neither the orders nor the affidavit disclosed material establishing that the petitioner fell within the category of a taxable person or a person specified in Section 122(1A) for the purpose of the attachment.
The Court also noted that the identities and transaction details of the allegedly non-existent merchants were not disclosed, while the petitioner’s GSTR-1 entries relied upon by DGGI were merely commission invoices. Importantly, the Court held that the escrow funds were impressed with a trust, did not belong to the petitioner and therefore could not be attached under Section 83 of the CGST Act.
