ITC Cannot Be Held Hostage to Supplier’s Default: A Watershed Moment in GST Jurisprudence – An Analysis of Instakart Services, National Plasto Moulding and Sahil Enterprises
Introduction
Few provisions of the GST law have generated as much litigation, anguish and controversy as Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. In its bare operation, this provision conditions the availability of Input Tax Credit (ITC) in the hands of a recipient upon the actual payment of tax by the supplier to the Government — a circumstance entirely outside the recipient’s control, knowledge or ability to monitor. Since 2017, tax authorities across India have wielded this provision as a sword against bonafide recipients, raising massive demands and reversing legitimately availed ITC simply because an upstream supplier defaulted.
Over the past year, a clear and consistent judicial consensus has emerged across multiple High Courts, capped by the Karnataka High Court’s significant ruling in M/s Instakart Services Private Limited vs. Union of India (WP No. 4917 of 2021, dated 09.02.2026). Read together with the Gauhati High Court’s decision in National Plasto Moulding vs. State of Assam (2024) 21 Centax 182 and the Tripura High Court’s ruling in M/s Sahil Enterprises vs. Union of India (W.P.(C) 688/2022, dated 06.01.2026), these three judgments form a powerful trilogy that tax professionals and advocates can deploy effectively in proceedings before adjudicating authorities, appellate forums and courts.
This article analyses the legal reasoning in these decisions, distils the operative principles and examines their practical utility for practitioners.
The Provision Under Scrutiny: Section 16(2)(c)
Section 16(2) of the CGST Act, 2017 sets out four cumulative conditions for a registered person to avail ITC:
- (a) Possession of a valid tax invoice or prescribed document;
- (b) Receipt of goods or services;
- (aa)/(ba) Reflection in GSTR-2B / non-restriction under Section 38;
- (c) The tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of ITC; and
- (d) Filing of return under Section 39.
Clause (c) is the problem provision. Its literal interpretation means that even if a recipient has paid full GST to its supplier, holds a valid invoice, has received the goods, and has filed its returns — it still loses ITC if the supplier quietly pockets the tax and defaults on its GSTR-3B filing. The recipient has no statutory mechanism to verify the supplier’s payment compliance. Section 28 of the erstwhile VAT laws and analogously the GST framework itself treats supplier return data as confidential inter-se third parties.
Section 16(2)(aa) , Rule 36(4) compounds the issue further by restricting ITC availment only to the extent reflected in the recipient’s GSTR-2B — which in turn depends entirely on the supplier’s GSTR-1 and GSTR-3B compliance.
The constitutional challenge to both these provisions formed the core of the litigation in all three cases.
The Judicial Journey: Building a Consistent Doctrine
The Foundation: On Quest Merchandising and the DVAT Analogy
Before examining the three key decisions, it is essential to understand their foundation — the Delhi High Court’s landmark ruling in On Quest Merchandising India Pvt. Ltd. vs. Government of NCT of Delhi (2018) 56 GSTR 177, which dealt with Section 9(2)(g) of the Delhi Value Added Tax Act, 2004 — a provision substantially identical to Section 16(2)(c) of the CGST Act.
The Delhi High Court held that the legislature had singularly failed to distinguish between bonafide purchasing dealers who take all precautions and those who do not. The Court read down the provision to exclude bonafide purchasers from its operation, ruling that where a recipient has transacted with a validly registered supplier who issued a proper tax invoice and there is no mismatch of transactions, ITC cannot be denied on account of the supplier’s default. The Revenue’s remedy is to proceed against the defaulting supplier.
The Supreme Court affirmed this in Commissioner Trade and Tax vs. Arise India Ltd. (SLP Civil 36750/2017) and reiterated the position in Commissioner Trade and Tax, Delhi vs. Shanti Kiran India (P) Ltd. (2025) 25 Centax 222 (SC), where it expressly held that where the seller was registered on the date of transaction and neither the transactions nor invoices have been doubted, there is no good reason to deny ITC.
This DVAT-based precedent became the template for the GST-era challenges.
First Pillar: National Plasto Moulding vs. State of Assam (Gauhati HC, 2024)
The Gauhati High Court was the first to extend this reasoning directly to Section 16(2)(c) of the CGST Act. The Court held that the controversy was squarely covered by On Quest Merchandising as approved by the Supreme Court in Arise India. The Court’s key findings were:
First, Section 9(2)(g) of the DVAT Act is analogous to Section 16(2)(c) and 16(2)(d) of the CGST Act, and therefore the reading-down applied in the DVAT context must equally apply to the GST provisions.
Second, the show-cause notices issued to bonafide purchasing dealers were set aside. The Court held that the Department remains free to act in cases where purchase transactions are not bonafide — preserving the Revenue’s legitimate interest while protecting honest taxpayers.
Third, the SLP filed against National Plasto Moulding was dismissed by the Supreme Court — giving the decision additional authoritative weight.
Practitioner’s Note: The Gauhati HC’s finding that the DVAT provision is “analogous” to Section 16(2)(c) CGST is a critical bridge argument. Authorities cannot distinguish On Quest/Arise India merely on the ground that those cases arose under DVAT and not GST.
Second Pillar: M/s Sahil Enterprises vs. Union of India (Tripura HC, Division Bench, 06.01.2026)
The Tripura High Court’s Division Bench ruling in Sahil Enterprises is perhaps the most analytically comprehensive of the three. The facts were typical of countless GST cases across India — a bonafide trader purchased rubber products, paid GST to its registered supplier, availed ITC in its Electronic Credit Ledger, only to find that the supplier filed ‘Nil’ GSTR-3B returns while correctly disclosing the outward supply in GSTR-1. The Revenue blocked ITC and issued a demand under Section 73 (notably, not Section 74, which deals with fraud).
The Division Bench’s reasoning covered several vital grounds:
Constitutional Validity Upheld, But Read Down: The Court held that Section 16(2)(c) is not violative of Articles 14, 19(1)(g), 265 and 300A of the Constitution — refusing to strike it down. However, it held that the provision ought not to be interpreted to deny ITC to purchasers in bonafide transactions. It must be read down and applied only where the transaction is found to be not bonafide, collusive, or fraudulent.
Practical Impossibility Acknowledged: The Court noted — and the respondents did not dispute — that there is no mechanism with the recipient to verify whether the supplier has discharged its GST liability. Requiring a recipient to do the impossible is legally impermissible.
Principle Against Double Taxation: This is perhaps the most powerful reasoning in Sahil Enterprises. The Court held that ITC is introduced precisely to avoid double taxation. When a recipient pays GST to the supplier and is then denied ITC and made to pay again, the effective result is double taxation without express legislative sanction — violating the fundamental rule articulated by the Supreme Court in Mahaveer Kumar Jain vs. CIT (2018) 6 SCC 527 and Jain Bros. vs. Union of India (1969) 3 SCC 311.
Section 73 vs. Section 74 as Indicator of Good Faith: The Court took note of a significant fact — the Revenue had invoked Section 73 (non-fraud provision) and not Section 74 (fraud provision). This itself established that the Revenue did not allege any fraud or collusion on the petitioner’s part, making ITC denial Completely unjustifiable.
Exception Preserved: The Court carved out the exception expressly — where fraud, collusion or connivance between buyer and seller is established, the Revenue retains full authority to deny ITC and proceed accordingly.
Third Pillar: M/s Instakart Services vs. Union of India (Karnataka HC, 09.02.2026)
The Karnataka High Court, speaking through Justice S.R. Krishna Kumar, brought the doctrine full circle and applied it authoritatively within the jurisdiction of one of India’s most commercially significant states. Instakart — a logistics arm of the Flipkart ecosystem — faced ITC denial because its suppliers had not remitted the collected GST.
The Court surveyed the entire landscape of jurisprudence, including the earlier Karnataka High Court decisions in Rajesh Jain (KVAT context), Onyx Designs (2019) and Jain Steels (2019), all of which had consistently protected bonafide recipients under the pre-GST VAT regime.
Critically, the Karnataka HC addressed the divergence among High Courts. Kerala, Patna, Madhya Pradesh, Madras and Andhra Pradesh High Courts had upheld Section 16(2)(c) without reading it down. The Karnataka HC respectfully disagreed with those decisions on two specific grounds:
First, none of those courts had considered or been made aware of the On Quest/Arise India/Shanti Kiran line of Supreme Court decisions. Had they done so, their conclusions might have been different.
Second, all those courts had overlooked the crucial principle that ITC exists to prevent double taxation — a point the Karnataka HC considered decisive.
The final order read down both Section 16(2)(c) CGST/KGST Act and Rule 36(4) CGST/KGST Rules to allow ITC to bonafide recipients who comply with all other conditions, regardless of supplier default.
Distilled Legal Principles for Practitioners
Drawing from all three decisions, the following propositions now represent settled or strongly persuasive law:
1. Bonafide Recipient is Protected: Where a recipient has (a) received a valid tax invoice from a registered supplier, (b) actually received the goods/services, (c) paid the GST amount to the supplier, and (d) filed its returns — ITC cannot be denied solely on account of the supplier’s failure to deposit tax.
2. Revenue Must Pursue the Defaulting Supplier: The proper remedy for the Revenue is to initiate proceedings against the defaulting supplier under the relevant provisions of the CGST Act, not to transfer the burden onto an innocent recipient.
3. Fraud/Collusion is the Exception: ITC denial is justified only where the Revenue can establish fraud, collusion or connivance between the recipient and the supplier. Mere non-payment by the supplier is not sufficient.
4. Section 73 Invocation is Itself an Admission: Where the Revenue issues a show-cause notice under Section 73 (and not Section 74), it implicitly concedes the absence of fraud — which severely undermines any ITC denial on grounds of supplier default.
5. DVAT Precedents Apply to GST: The Supreme Court’s approval of On Quest Merchandising and Shanti Kiran — both arising under the DVAT Act — is directly applicable to Section 16(2)(c) CGST, given the analogous nature of the provisions.
6. Double Taxation Without Sanction is Impermissible: Denying ITC to a recipient who has already paid GST and compelling it to pay again is double taxation without express statutory sanction, which is constitutionally impermissible.
Conclusion
The Instakart-National Plasto Moulding-Sahil Enterprises trilogy represents a significant maturation of GST jurisprudence on one of the most contentious ITC issues facing industry and trade. The courts have struck a carefully calibrated balance — upholding the constitutional validity of Section 16(2)(c) while firmly protecting bonafide recipients from its harsh literal application.
For tax professionals and advocates, these decisions provide a robust and well-reasoned toolkit. The arguments around practical impossibility of compliance, the principle against vicarious liability, the double taxation rationale and the Section 73 versus Section 74 distinction are all court-tested propositions that can be pressed across adjudication, first appeal, second appeal and writ proceedings.
It is important to note, however, that the issue is still live at the Supreme Court level in the GST context — the divergence among High Courts (Karnataka, Gauhati, Tripura on one side; Kerala, Patna, MP, Madras, AP on the other) makes it virtually inevitable that the Supreme Court will soon authoritatively settle the question under the CGST Act itself. Until then, the reading-down approach adopted in these three decisions, backed by the Supreme Court’s approvals in Arise India and Shanti Kiran, represents the strongest available legal position for taxpayers facing ITC denial under Section 16(2)(c).
The fundamental principle that law cannot compel a person to do the impossible — lex non cogit ad impossibilia — has found robust expression in these judgments. That is a principle as old as jurisprudence itself, and its application to the GST regime is both timely and just.
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