Background

A batch of over 50 writ petitions was filed before the Gujarat High Court challenging the vires of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. The petitioners were purchasing dealers who had paid GST to their registered suppliers against proper tax invoices, duly reflected in GSTR-2A/2B. However, since their respective suppliers defaulted in depositing the tax so collected with the Government, the Revenue denied Input Tax Credit to these purchasing dealers. The lead matter was taken up as SCA No. 18080 of 2023. The Court confined its examination solely to the constitutional validity of Section 16(2)(c) and expressly did not examine the merits of individual matters.

Court Observations (Verbatim)

On the GST ITC Scheme and Section 16(2)(c):

"The SOR emphatically mentions about 'input tax credit making it available in respect of taxes paid'. Thus, availment of ITC is intrinsically connected with the factum of 'taxes paid'." (Para 43)

On distinction from VAT regime and Section 53:

"Furthermore, Section 53 of the CGST Act is highly relevant, as it mandates that the tax component utilized by an inter-State supplier must be transferred to the Destination State... If a supplier in the originating state fails to deposit the tax, yet the recipient (or a downstream dealer) is permitted to claim credit based solely on invoices, the originating state would be forced to transfer funds to the destination state that it never actually received. This would result in a direct loss of revenue for the originating state." (Para 59)

"Therefore, considering the overall scheme of the Act, any 'reading down' (narrow interpretation) of Section 16(2)(c) would trigger cascading fiscal consequences. The legal position under the former VAT regime was materially different, as input tax credit was confined within the originating state. In contrast, the GST regime is destination-based; therefore, input tax credit must operate seamlessly across state lines for inter-State supplies, requiring strict compliance to maintain fiscal balance." (Para 60)

On the statutory mechanism protecting purchasers:

"The scheme of ITC under the GST framework does not envisage a situation where the purchasing dealer is left remediless. The Revenue is empowered to initiate recovery proceedings against the supplier under Sections 73 and 74 of the CGST Act for failure to discharge tax liability in respect of the original transaction. Further, in terms of Rule 37A of the CGST Rules, 2017 once the supplier discharges such tax liability, the purchasing dealer becomes entitled to re-avail the credit in the immediately succeeding month. Thus, the statutory mechanism does not permanently deprive the purchasing dealer of ITC; rather, the credit is restored upon payment of tax into the Government treasury. Mere delay or hardship in availing ITC, therefore, cannot constitute a valid ground for reading down Section 16(2)(c) of the CGST Act." (Para 62)

On double taxation argument:

"The contention regarding double taxation is misconceived. It is well settled that ITC is not a constitutional or vested right, but a statutory concession, subject to the conditions and restrictions prescribed under the Act. Where the statute provides for reversal and re-availment of credit, the same cannot be characterised as double taxation so as to invalidate the provision." (Para 63)

On ultra vires challenge:

"The mere absence of a specific statutory mechanism enabling recovery by the purchasing dealer from the supplier cannot, by itself, render Section 16(2)(c) of the CGST Act ultra vires." (Para 64)

On the doctrine of reading down:

"However, in the present case, Section 16(2)(c) of the CGST Act is clear, self-explanatory, and unambiguous. Its plain reading does not give rise to any constitutional or legal infirmity. The underlying intent of the provision is that the Government cannot be deprived of revenue on account of illegal or defaulting conduct on the part of the supplier." (Para 67)

On inapplicability of DVAT ratio:

"On a close scrutiny of the scheme of the GST regime, it is evident that Section 16(2)(c) of the CGST Act cannot be equated with the VAT regime, particularly with Section 9(2)(g) of the DVAT Act, as examined by the Delhi High Court in On Quest Merchandising India (P) Ltd. (supra). It is also noticed that the Tripura High Court, while following in the case of On Quest Merchandising India (P) Ltd. (supra), has read down Section 16(2)(c) of the CGST Act on the ground of practical impossibility for the purchaser to ensure that the supplier has deposited tax. With respect, we are unable to agree with the said view. The Tripura High Court proceeded on the premise that ITC is intended solely to avoid double taxation under the CGST regime, but did not adequately consider the interplay of Sections 41 and 53 of the CGST Act read with Rule 37A of the CGST Rules, 2017." (Para 68)

On Section 155 — burden of proof:

"Thus, the purchasing dealer must discharge the initial burden of establishing eligibility to claim input tax credit. Such eligibility is intrinsically linked to the fulfilment of statutory conditions, including the deposit of tax by the supplier with the Government. The expression 'eligible' in Section 155 of the CGST Act cannot be construed as dependent upon a unilateral act of claim by the purchaser; rather, it has a direct nexus with the actual payment of tax by the supplier." (Para 70)

On reading clauses conjointly:

"Hence, the clauses under sub-section (2), from (a) to (d), are to be read conjointly and not independently of each other." (Para 80)

On Lex Non Cogit Ad Impossibilia:

"The petitioners have heavily placed reliance on the maxim Lex Non Cogit Ad Impossibilia... However, the scheme of the GST regime does not strictly attract the intent of the maxim... It is true that the purchasers cannot compel the supplier to deposit tax with the government... but simultaneously they can avoid the circumstances by due care and caution. The GST regime operates on the contract/agreement between two parties. While entering into an agreement, a purchaser can ensure there is a clause that takes care of the lacuna and holds the supplier liable to indemnify the purchaser if the said purchasing dealer suffers a loss due to a default by the supplier to remit to the government the tax collected from the purchaser." (Para 76)

On the Axel Kittel principle and final observations:

"A balanced approach is needed, which finds place in the decision expressed by the European Court of Justice ('ECJ') in the case of Axel Kittel & Recolta Recycling SPRL (supra). Under this principle, the availment of ITC can be denied only if it is shown that the recipient knew or ought to have known that their purchase was connected with a fraudulent evasion of tax." (Para 87)

"Albeit, we acknowledge that the provisions of Section 16(2)(c) of the Act are to be viewed from a regulatory standpoint and are anchored in the legitimate objective of maintaining the integrity of the tax chain, preventing systemic revenue loss to the Government; however, it is high time that, in order to resolve the conundrum, the Government undertakes a comprehensive re-evaluation of the dicey situation which purchasers are facing. There is a pressing need for legislative amendments or clarifications to be issued within the GST framework to alleviate the disproportionate financial and administrative burdens currently placed upon purchasers who have an honest claim of ITC. Beyond mere policy changes, the Government should implement a robust, technology-driven tracking mechanism enabling verification of payments made by suppliers against specific invoices in real time, thereby insulating bona fide recipients from the defaults of their vendors." (Para 88)

 

Final Verdict

The Gujarat High Court declined to read down Section 16(2)(c) of the CGST Act or declare it ultra vires the Constitution of India. The writ petitions were rejected on the constitutional question, and the matters were directed to be listed for decision on merits. The Court however strongly urged the Government to address the hardship of genuine purchasers at the earliest through legislative or technological measures.