Bhandari Scrap Traders Vs Union of India & Ors. (Supreme Court of India)
The matter arose from a batch of writ petitions before the Gujarat High Court challenging the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act). The petitioners contended that the provision, which conditions entitlement to Input Tax Credit (ITC) upon actual payment of tax by the supplier to the Government, was arbitrary, ultra vires, and violative of Articles 14, 19(1)(g), 265, and 300A of the Constitution. Alternatively, they sought that the provision be read down so that it would apply only to fraudulent, collusive, or conniving transactions, and not to bona fide purchasers. Their grievance was that ITC was denied solely because suppliers failed to deposit tax collected from purchasers.
Read HC Judgment in this case: Gujarat HC Upholds Section 16(2)(c) Denial of ITC on Supplier Tax Default
Before the High Court, the petitioners relied on the statutory scheme under Sections 16 to 21, 41, 49 and 53 of the CGST Act and the CGST Rules, 2017, arguing that recipients had no statutory or practical means to verify whether suppliers had actually paid tax through Form GSTR-3B. They submitted that clauses (a), (aa), (b), and (ba) of Section 16(2) already established the genuineness of transactions, whereas clause (c) introduced a condition entirely outside the purchaser’s control. They further contended that bona fide purchasers and fraudulent purchasers were treated alike, that denial of ITC resulted in double taxation, shifted the supplier’s tax burden to the recipient, retrospectively deprived recipients of reflected ITC, and compelled performance of an impossibility. Reliance was placed on decisions including On Quest Merchandising India (P.) Ltd., Arise India Ltd., Shanti Kiran India (P.) Ltd., Tallam Apparels, Sahil Enterprises, and the European Court of Justice decision in Axel Kittel.
