NGTP-Based ITC Denial to Bona Fide Buyers: GST Legal Safeguards

NGTP-Based Mass Adjudication in Karnataka: A Violation of Natural Justice and Statutory Safeguards under GST

Summary: The article examines alleged NGTP-based mass adjudication in Karnataka GST formations, where DRC-01A intimations and DRC-01 show-cause notices are reportedly issued to buyers based on internal “Non-Genuine Taxpayer” tags, with ITC denied and tax, interest and penalties demanded. It argues that NGTP tags are internal risk indicators rather than conclusive proof of fraud and states that Section 16(2)(c) cannot be mechanically applied against bona fide buyers where transactions are genuine and statutory conditions are fulfilled. The article discusses Sections 74 and 74A, asserting that fraud, wilful misstatement or suppression must be specifically established with tangible material and transaction-specific findings before imposing 100% penalty. It further emphasises natural justice, including disclosure of relied-upon material, reasonable hearing, verification of books and documents, and reasoned orders. It states that Commissioner or Joint Commissioner assignments cannot override statutory safeguards, limitation or independent application of mind. The article cites Instakart Services Pvt. Ltd. v. Union of India and Additional Commissioner Grade 2 & Anr. v. M/s Safecon Lifescience Private Limited, along with references to Gauhati and Tripura High Court rulings, in support of its position concerning bona fide purchasers and supplier defaults.

Introduction

In the last few months, a disturbing enforcement pattern has emerged across Karnataka’s GST formations—both State and Central. Relying heavily on internal “NGTP” (Non-Genuine Taxpayer) tags and bulk supplier lists, enforcement and administration officers are issuing DRC-01A intimations and DRC-01 show-cause notices to hundreds of bona fide buyers for financial years 2022-23, 2023-24 and now even 2024-25 and 2025-26. In many cases, the entire ITC on purchases from suppliers flagged as “non-existent” is denied in one stroke, with demands of tax, interest and 100% penalty running into ₹5–10 crore or more per taxpayer.

These proceedings are often initiated on the basis of a Commissioner’s assignment or Joint Commissioner’s instructions, with Commercial Tax Officers, Assistant Commissioners and Deputy Commissioners (Enforcement/Administration) issuing SCNs under Section 74 (and now Section 74A) within seven days, demanding immediate payment of tax and interest, and threatening to forward the file for adjudication if not paid. There is frequently no proper verification of books of account, no supply of tangible material relied upon, and no meaningful opportunity of hearing before massive demands are crystallised.

This article examines whether such mass, NGTP-driven adjudication is legally sustainable, whether it violates principles of natural justice and statutory procedure, and how recent High Court and Supreme Court rulings protect bona fide buyers from being made scapegoats for supplier defaults.

The factual matrix: How NGTP-based proceedings are being conducted

On the ground, the typical sequence now seen in Karnataka is as follows:

The department receives or prepares an internal NGTP list of suppliers alleged to be “non-existent” or “fake”.

Without independent verification of each transaction at the buyer’s end, officers invoke Section 67 and call buyers for “inspection”, often recording only an appearance entry without discussing invoices, e-way bills, transport documents, or payment trails.

Within days, DRC-01A is uploaded on the portal, followed by DRC-01 under Section 74 (or Section 74A for FY 2024-25 onwards), covering multiple years and multiple suppliers in a consolidated manner.

Taxpayers are given extremely short time—sometimes seven days—to pay tax and interest, with a threat that otherwise the matter will be sent for adjudication and heavy penalties imposed.

In several cases, ASMT-16 summaries and DRC-07 demands are also issued, sometimes even for periods where limitation may already be an issue, creating confusion and pressure on taxpayers who are unaware of the fine distinctions between scrutiny, assessment and adjudication.

The department rarely initiates parallel action against the defaulting suppliers themselves, even where there are dozens or hundreds of such suppliers. Instead, the entire burden is shifted downstream to bona fide buyers, many of whom had transacted when those suppliers were active, validly registered and visible on the GST portal.

The result is a wave of fictitious-looking demands, where tax, interest and 100% penalty are mechanically calculated on the entire purchase value from NGTP-tagged suppliers, often without any transaction-wise finding of sham or collusion.

Statutory framework: What the GST law actually requires

1. Section 16 and the conditions for ITC

Section 16(2) of the CGST/KGST Act lays down conditions for availing ITC, including possession of a tax invoice, receipt of goods/services, payment of tax to the government (Section 16(2)(c)), and filing of returns. However, multiple High Courts, including Karnataka, have now clarified that Section 16(2)(c) cannot be applied mechanically to deny ITC in every case of supplier default.

The Karnataka High Court has held that where the transaction is genuine, the buyer has complied with all statutory conditions, and there is no evidence of fraud or collusion, ITC cannot be denied merely because the supplier later failed to pay tax or was tagged as NGTP/non-existent. The provision must be read down to apply only to non-genuine or collusive transactions, not to punish bona fide purchasers for the seller’s misconduct.

2. Section 74 / 74A: Fraud, suppression and the burden of proof

For periods up to FY 2023-24, demands involving alleged fraud, wilful misstatement or suppression of facts are governed by Section 74, which requires the department to establish these elements specifically against the person from whom demand is sought. From FY 2024-25 onwards, Section 74A replaces Sections 73 and 74 with a unified regime, but the fundamental requirement remains: if the department seeks to impose 100% penalty on the ground of fraud/suppression, it must record clear, transaction-specific findings of fraud, wilful misstatement or suppression with intent to evade tax.

The Supreme Court, while dismissing the Revenue’s SLP in Additional Commissioner Grade 2 & Anr. v. M/s Safecon Lifescience Private Limited, has affirmed that ITC cannot be denied under Section 74 merely because the supplier’s registration was cancelled retrospectively or because of alleged irregularities further up the chain, absent specific findings of fraud, wilful misstatement or suppression against the purchaser. The department must produce tangible material and record reasoned findings; it cannot rely on assumptions or labels like “NGTP” as a substitute for evidence.

3. Natural justice: Opportunity, tangible material and speaking orders

Principles of natural justice under GST require:

• A proper show-cause notice that clearly states the grounds, periods, transactions and legal provisions invoked.
• Supply of all material relied upon (mismatch reports, inspection notes, NGTP lists, statements, etc.) so that the taxpayer can meaningfully respond.
• A reasonable opportunity of personal hearing, especially where large demands and penalties are proposed.
• A reasoned, “speaking order” that addresses the taxpayer’s submissions, examines documents such as invoices, e-way bills, bank statements and stock records, and records transaction-wise findings on genuineness, fraud and eligibility of ITC.

Where orders are passed in a copy-paste format, merely stating “supplier is NGTP, therefore ITC denied”, without any independent verification or specific findings, they are vulnerable to being set aside as violative of natural justice and beyond jurisdiction.

Why the current NGTP-driven mass adjudication is legally unsustainable

(a) NGTP tag is an internal risk indicator, not conclusive proof of fraud

The NGTP flag was designed as an internal analytics tool to identify high-risk suppliers for deeper verification. It is not a statutory finding of “non-existence” or “fraud” that can, by itself, justify denial of ITC to every buyer in the supply chain.

Karnataka High Court has explicitly disapproved of using NGTP tags as a ready-made justification to deny ITC without proper verification at the buyer’s end. Before knocking off ITC, the department must confront the buyer with the material relied upon, allow production of invoices, e-way bills, transport documents and bank evidence, and record specific findings on whether each transaction is non-genuine.

(b) Bona fide buyers cannot be punished for supplier defaults

A consistent line of judgments—Karnataka, Gauhati, Tripura and now affirmed by the Supreme Court—holds that a bona fide purchaser who has fulfilled all statutory conditions cannot be denied ITC or made to bear the tax liability solely because the supplier defaulted or was later cancelled.

The Karnataka High Court in Instakart Services Pvt. Ltd. v. Union of India read down Section 16(2)(c) and clarified that it applies only to non-genuine or collusive transactions, not to genuine buyers who have complied with the law. The Court emphasised that the burden lies on the department to first establish that the buyer’s transaction itself is fictitious or fraudulent, not merely that the supplier cheated the revenue.

In some cases, the Court has also directed that the department must first proceed against the defaulting sellers to recover tax, and can approach the buyer only in exceptional circumstances where collusion or sham is proved.

(c) Mechanical invocation of Section 74/74A without tangible material is impermissible

The Supreme Court’s dismissal of the Revenue’s SLP in the Safecon Lifescience matter reinforces that Section 74 proceedings require proof of fraud, wilful misstatement or suppression against the taxpayer, not just a supplier’s retrospective cancellation or an NGTP tag. The department must produce tangible material and record specific findings; it cannot rely on generalised allegations or internal labels.

Where SCNs and orders are issued in bulk, without transaction-wise analysis, without examining books of account, and without supplying the material relied upon, they fail the basic test of a valid adjudication under Section 74/74A and are liable to be quashed.

(d) Violation of limitation and procedural safeguards

For FY 2022-23 and earlier, the department must comply with the limitation periods under Sections 73/74 (generally 3 years for non-fraud and 5 years for fraud from the due date of the annual return, subject to extensions and specific fact situations). Where notices are issued beyond these periods, or where Section 74A is wrongly invoked for pre-FY 2024-25 periods, the proceedings suffer from a jurisdictional defect.

From FY 2024-25 onwards, Section 74A prescribes a uniform SCN deadline of 42 months from the due date of GSTR-9 and an order deadline of 12 months from the SCN (extendable by 6 months in exceptional cases). Even under this extended timeline, the department must follow due process: issue proper SCN, supply material, grant hearing, and pass a reasoned order.

Where officers, in haste to meet targets, issue DRC-01/DRC-07 within seven days, without verification and without proper opportunity, they effectively convert adjudication into a recovery drive, which is contrary to the scheme of the Act.

Commissioner’s assignment does not override statutory safeguards

It is often argued that because the Commissioner or Joint Commissioner has issued an assignment or instruction, the officer is bound to proceed in a particular manner. However, an administrative assignment cannot override the substantive provisions of the GST Act or the principles of natural justice.

The officer must still be the “proper officer” with jurisdiction over the taxpayer and the relevant period.

The officer must follow the correct provision (Section 73/74 for earlier years, Section 74A from FY 2024-25) and respect limitation periods.

The officer must independently apply his mind to the facts, verify books and documents, and record transaction-wise findings; he cannot act as a mere conduit for an internal NGTP list.

Where the assignment results in mechanical, bulk adjudication without application of mind, the resulting orders are legally unsustainable and can be challenged as arbitrary and violative of Article 14 and Article 265 of the Constitution.

The human cost: Bona fide businesses under siege

The practical impact of this enforcement model is severe:

• Genuine traders and manufacturers, who maintained proper invoices, e-way bills and bank trails, are suddenly faced with demands of ₹5–10 crore or more, with 100% penalty, for transactions that were perfectly legitimate at the time.
• Many taxpayers, unaware of the fine legal distinctions between ASMT, DRC-01, Section 73, 74 and 74A, miss deadlines or file inadequate replies, leading to ex-parte orders and coercive recovery.
• The department, instead of focusing on the root cause—the defaulting suppliers—shifts the entire burden downstream, effectively penalising compliance and discouraging honest business.

This is not enforcement; this is target-driven revenue extraction at the cost of legal certainty and taxpayer rights.

What the law requires: A roadmap for lawful adjudication

If the department genuinely suspects fraud or sham transactions, the law already provides a clear path:

1. Identify specific transactions and periods – Do not issue consolidated SCNs covering dozens of suppliers and multiple years without transaction-wise particulars.
2. Supply tangible material – Provide the taxpayer with the exact material relied upon: mismatch reports, inspection notes, statements, NGTP analysis, etc.
3. Verify books at the buyer’s end – Examine invoices, e-way bills, transport documents, stock records and bank payments; record what was produced and what discrepancies, if any, were found.
4. Record specific findings of fraud or collusion – If Section 74/74A is invoked with 100% penalty, the order must contain clear findings of fraud, wilful misstatement or suppression with intent to evade tax, supported by evidence.
5. Grant meaningful hearing – Allow reasonable time for reply and personal hearing, especially in large demands; do not force payment within seven days under threat of adjudication.
6. Pass a speaking order – Address the taxpayer’s submissions, explain why certain documents are accepted or rejected, and give transaction-wise conclusions on ITC eligibility.
7. Proceed against the supplier first – As held by Karnataka and other High Courts, the department should first recover tax from the defaulting seller; the buyer should be approached only where collusion or sham is established.

Until these steps are followed, mass NGTP-based adjudication will remain legally fragile and constitutionally suspect.

Recent case law supporting bona fide buyers

• Karnataka High Court – Instakart Services Pvt. Ltd. v. Union of India (2026): ITC cannot be denied to a bona fide purchaser merely because the supplier failed to deposit tax; Section 16(2)(c) read down to apply only to non-genuine or collusive transactions.
• Karnataka High Court – Safecon Lifescience line of cases: Department must first proceed against defaulting sellers; bona fide buyers cannot be subjected to coercive recovery without proof of fraud.
• Allahabad High Court (affirmed by Supreme Court) – Additional Commissioner Grade 2 & Anr. v. M/s Safecon Lifescience Private Limited (SLP dismissed, 2026): Section 74 proceedings require specific findings of fraud, wilful misstatement or suppression against the purchaser; supplier’s retrospective cancellation is not enough.
• Gauhati and Tripura High Courts: Similar protection to bona fide buyers, emphasising that supplier default alone cannot justify ITC denial.

These judgments collectively establish that the current practice of blanket ITC denial based on NGTP tags, without transaction-wise verification and specific findings of fraud, is contrary to law.

Conclusion: The present enforcement model is unlawful and must change

The present NGTP-driven, target-oriented adjudication in Karnataka—where bona fide buyers are dragged into massive demands without proper verification, without tangible material, and without meaningful opportunity—is not only contrary to the GST statute but also violative of natural justice and constitutional safeguards.

Commissioner’s assignments and Joint Commissioner’s instructions cannot legitimise proceedings that ignore limitation, bypass Section 74/74A requirements, and treat internal risk tags as conclusive proof of fraud. The Supreme Court and multiple High Courts have now made it clear: bona fide purchasers who have complied with the law cannot be punished for supplier defaults, and the department must produce tangible material and record specific findings before denying ITC or imposing 100% penalty.

For FY 2024-25 onwards, with Section 74A in force, the department has ample time (42 months for SCN, 12+6 months for order) to conduct proper, evidence-based adjudication. There is no justification for haste, coercion or mechanical demands.

It is time for the GST administration in Karnataka to course-correct: shift from target-driven recovery to law-driven enforcement, protect genuine businesses, and focus on the real defaulters—the suppliers who cheat the system—rather than making scapegoats of bona fide buyers.

Cases Discussed

• Additional Commissioner Grade 2 & Anr. v. M/s Safecon Lifescience Private Limited (Supreme Court), SLP dismissed, 2026
• Instakart Services Pvt. Ltd. v. Union of India (Karnataka High Court), (2026)