BACKGROUND

A group of petitioners (purchasing dealers) challenged Section 16(2)(c) of the CGST Act, 2017 as arbitrary, ultra vires, and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution of India. In the alternative, they prayed that the provision be read down so as to apply only to fraudulent or collusive transactions, thereby protecting bona fide purchasers. The common thread across all petitions was that ITC was being denied to them solely because their respective suppliers had failed to deposit the tax collected with the Government — a default entirely outside the purchaser's control or knowledge.

COURT OBSERVATIONS (VERBATIM)

On the SOR and the inseparable link between ITC and actual tax payment (Para 43):

"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'."

On the GST regime being distinct from the VAT regime (Para 60):

"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."

On the purchasing dealer not being remediless (Para 62):

"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."

On double taxation argument (Para 63):

"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."

On Section 16(2)(c) being clear and unambiguous (Para 67):

"...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."

On distinguishing DVAT provisions from CGST (Para 68):

"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."

On burden of proof under Section 155 (Para 70):

"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."

On conjoint reading of Section 16(2) clauses (Para 80):

"Thus, the Revenue cannot be directed to stop at clause (b), since eligibility for input tax credit is established only after the receipt of goods or services or both, and upon the tax charged in respect of such supply being duly paid to the Government. A registered person (dealer) cannot be held entitled to claim input tax credit unless all the conditions up to clause (c) are satisfied."

On the doctrine of reading down not being applicable (Para 82):

"We do not find that the provision of Section 16(2)(c) if read with the scheme of GST regime as discussed, conflicts with constitutional or legal principles. The provision of Section 16(2)(c) cannot be read in isolation, but has to read with attendant provisions as discussed hereinabove, which enables the government to secure its interest in revenue, by keeping a check on fraudulent transactions while maintaining the interest of genuine purchasers."

On the Axel Kittel principle and a balanced approach (Para 87):

"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."

On Government's obligation to act (Para 88):

"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."

FINAL VERDICT

Section 16(2)(c) of the CGST Act is neither read down nor declared ultra vires. The Court held the provision to be constitutionally valid, clear, and unambiguous when read conjointly with Sections 41(2), 53, and 155 of the CGST Act and Rule 37A of the CGST Rules, 2017. The writ petitions are listed for decision on individual merits. 👎