Bombay High Court Says Merchant Settlement Funds Cannot Be Treated as Payment Aggregator Assets

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 19.10.2026

Bombay High Court Says Merchant Settlement Funds Cannot Be Treated as Payment Aggregator Assets

The Bombay High Court has set aside provisional GST attachments on 1Pay Mobileware Private Limited’s bank and escrow accounts, holding that the DGGI acted on suspicion without showing a specific GST liability or cogent material linking the payment aggregator to tax evasion.

Court finds Section 83 power was used without the required foundation

In 1Pay Mobileware Private Limited v. Union of India & Ors. (Writ Petition No. 4586 of 2026), decided on 16 October 2026, the Bombay High Court examined whether the Directorate General of GST Intelligence (DGGI) could freeze the accounts of an RBI-authorised payment aggregator during an investigation into alleged GST evasion by an online money-gaming syndicate.

The Court concluded that the attachment orders did not meet the strict statutory conditions under Section 83 of the Central Goods and Services Tax Act, 2017. It therefore allowed the writ petition and quashed the impugned attachment orders, including the continuing restrictions under the partial de-freezing orders.

Background: payment aggregator’s accounts frozen during gaming-syndicate investigation

1Pay Mobileware is a company incorporated in 2019 and authorised by the Reserve Bank of India to operate as an online payment aggregator from May 2024. In June 2026, it also received authorisation to operate as an offline payment aggregator.

On 10 August 2026, DGGI officers sealed the company’s Mumbai premises and provisionally attached several bank accounts under Section 83 of the CGST Act. These included current accounts and RBI-mandated escrow accounts maintained with HDFC Bank, ICICI Bank, Kotak Mahindra Bank and IDFC Bank.

DGGI alleged that 1Pay may have played a role beyond that of a payment intermediary in an organised online money-gaming network. According to the department, fictitious or non-functional merchants may have been onboarded to route and layer funds generated from gaming activities without payment of applicable GST.

The agency also relied on alleged non-cooperation in the investigation. It stated that the company’s registered and additional business premises were locked, records were unavailable, its server was empty, and certain information sought through summons had not been furnished. DGGI said that approximately 88 merchants identified from the company’s GSTR-1 data appeared to be non-existent or non-functional.

1Pay argued that the freeze paralysed legitimate payment settlements

The company contended that it was a regulated payment aggregator, comparable in function to other payment platforms, and that its escrow funds largely belonged to third-party merchants rather than to 1Pay itself. It submitted that the blanket freeze had disrupted settlement payments for government, public-sector and statutory bodies using its platform.

Among the entities identified as having unsettled funds were IRCTC, the Institute of Chartered Accountants of India, LIC Housing Finance, HDFC Bank and Tamil Nadu Power Finance and Infrastructure Development Corporation. The company also highlighted disruptions to FASTag and National Electronic Toll Collection settlements.

DGGI subsequently permitted limited settlement payments from one escrow account to specified government and PSU-linked entities. However, it continued the debit freeze over the accounts generally, stating that it was needed to safeguard revenue while the investigation continued.

Why the High Court set aside the attachments

The Court held that Section 83 authorises provisional attachment only after proceedings under the specified chapters of the CGST Act have been initiated and only where the Commissioner forms an opinion, based on tangible material, that attachment is necessary to protect government revenue.

Relying on the Supreme Court’s decision in Radha Krishan Industries, the Court stressed that provisional attachment is a “draconian” power. It cannot be used merely because attachment seems convenient, expedient or commercially useful. The authority must demonstrate a live link between credible material, the proposed attachment and the necessity to protect revenue.

The Court identified several decisive deficiencies:

• No identified GST liability of 1Pay: The attachment orders did not explain any tax liability attributable to the payment aggregator itself. The allegations broadly concerned suspected money laundering and GST evasion by unnamed third parties.
• No particulars of alleged wrongful transactions: The orders did not identify the specific transactions, merchants, nature of GST evasion, or the company’s alleged role in it.
• No basis for treating 1Pay as a person covered by Section 83: The material did not show that 1Pay was a taxable person with a relevant liability or a person falling within Section 122(1A) of the CGST Act.
• Escrow money was not 1Pay’s property: The Court held that funds in the RBI-mandated escrow account were impressed with a trust and belonged to merchants and beneficiaries, not the payment aggregator. They could not be attached as the company’s property under Section 83.
• Orders could not be repaired through later affidavits: The Court said the deficiencies in the original attachment orders could not be justified by explanations added in DGGI’s affidavit filed during the writ proceedings.
• Suspicion was not enough: Although the department cited non-cooperation and suspected involvement with 88 merchants, it did not disclose their identities, transaction details, or evidence showing 1Pay’s involvement in any GST evasion.

The Court also noted that 1Pay serviced several government entities and could not be treated as a “fly-by-night operator” on the material before it.

Significance for payment aggregators and GST investigations

This judgment reinforces that GST authorities must exercise provisional attachment powers with exceptional care. An investigation or a general suspicion of wrongdoing does not, by itself, justify freezing operational bank accounts, particularly where the accounts hold third-party settlement funds.

For RBI-regulated payment aggregators, the ruling is especially significant because escrow accounts are designed to hold merchant funds pending settlement. Treating those balances as the payment aggregator’s attachable property can disrupt payments to merchants, government bodies, banks and consumers while exceeding the limits of Section 83.

The decision also underlines three broader principles:

1. Specificity is essential: Authorities must identify the taxpayer’s own alleged liability and the factual basis for attachment.
2. Necessity and proportionality must be demonstrated: A freeze must be truly necessary to protect revenue, not simply useful for an ongoing inquiry.
3. Third-party funds require distinct treatment: Funds held in escrow for merchant settlement cannot automatically be treated as assets belonging to the payment intermediary.

Outcome

The Bombay High Court allowed 1Pay Mobileware’s writ petition and quashed the challenged provisional attachment orders and continuing partial-freezing restrictions. No order as to costs was made. The ruling confirms that Section 83 cannot be used as an investigative shortcut: a provisional attachment requires credible, recorded material showing that the taxpayer’s own property must be frozen to protect a genuine revenue interest.

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Source: Bombay High Court

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