The Telangana High Court on Wednesday, March 11, has reserved its order on a writ petition filed by the Managing Director of Fino Payments Bank Limited challenging his arrest in an alleged Goods and Services Tax (GST) evasion probe involving merchants using the bank’s payment aggregation platform.
The Bench said it would pronounce the judgement on March 17 after hearing detailed arguments from both sides in the case that raises questions about the liability of payment aggregators for alleged tax defaults by merchants operating on their platforms.
Senior Advocate Abhishek Manu Singhvi, appearing for the petitioner, argued that the Managing Director had no role in the alleged GST evasion and cannot be held criminally liable for the actions of independent merchants who used the bank’s infrastructure to process payments.
Singhvi submitted that Fino operates only as a payment aggregator and banking platform that provides digital infrastructure for merchants to process transactions.
According to him, the GST liability, if any, lies with the sellers or buyers involved in the underlying transaction and cannot be imputed to a payment intermediary facilitating the payment flow.
“There is no allegation of GST default against the petitioner personally. The allegations relate only to certain suppliers using the platform,” Singhvi told the court.
He further submitted that the bank followed onboarding and de-boarding protocols prescribed by the Reserve Bank of India, and that entities found to be non-compliant with tax obligations were removed from the platform.
Singhvi also emphasised that the petitioner had no personal role in onboarding merchants on the platform, arguing that criminal liability cannot be attributed to him for alleged tax defaults by third-party sellers.
To demonstrate bona fides, Singhvi told the court that around ?28 crore of GST dues had already been paid.
He also pointed out that other payment aggregators operating similar models, such as HDFC Bank Limited and Razorpay Software Private Limited, had not been implicated in the case.
The senior counsel relied on a judgment of the Bombay High Court in the Mahesh Gada case to argue that the role of intermediaries must be carefully distinguished from that of principal tax defaulters.
Opposing the petition, Additional Solicitor General N. Venkataraman, appearing for the revenue authorities, defended the arrest and the ongoing investigation.
He told the court that preliminary investigations had uncovered multiple violations of the GST law, including large-scale non-issuance of invoices for transactions processed through the platform.
According to the revenue authorities, analysis of transaction data suggested that approximately ?10,000 crore had been collected without issuance of invoices, pointing to what the prosecution described as a large-scale tax evasion network involving multiple entities.
Venkataraman also submitted that due process had been followed before the arrest, stating that the authorisation was issued by the competent authority after necessary approvals and that summons had been issued during the investigation.
He characterised the matter as a “serious economic offence” and sought continuation of custodial interrogation, while opposing the relief sought by the petitioner.
During the hearing, the Bench sought clarification on whether the seizure list and panchnama had been placed on record. The ASG responded in the affirmative.
The court also noted that earlier summons had been issued seeking details relating to 177 entities allegedly linked to the transactions under investigation. However, the authorities said the summons could not be acted upon because the concerned Vice President of the bank had not appeared before them.
In rejoinder, Singhvi disputed allegations of non-cooperation and produced documents to show that the summons had not been effectively served.
He referred to email communications from GST officers indicating that the summons could not be delivered, arguing that the claim of deliberate non-compliance by the petitioner was incorrect.
Singhvi also relied on the Supreme Court’s ruling in the Pankaj Bansal case, which emphasised strict adherence to procedural safeguards and communication of grounds of arrest in economic offence cases.
After hearing both sides, the Bench directed that a fresh summons be issued to the Vice President concerned and reserved its order on the writ petition challenging the arrest.
Implication on digital payments
Ikesh Nagpal, Lead-Indirect Tax, AKM Global, a tax and consulting firm, said that the High Court's decision to examine the legality of the arrest raises an important and evolving question in the era of digital payments.
"It brings into focus how far liability can travel in platform-based transactions. As fintech and payment aggregation models continue to expand, the arrest of a bank's MD over merchant actions challenges the very foundation of the 'intermediary' business model. This case will ultimately decide whether India’s fintech revolution requires founders to police every rupee they route, or merely facilitate it. The law must clearly distinguish between entities that merely facilitate transactions and those that are directly responsible for the underlying taxable supplies.”
The case is being closely watched by fintech and banking players as it could clarify the extent to which payment aggregators may be held liable for alleged tax violations by merchants using their platforms under the GST regime.
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