When Your Supplier Does Not Pay GST: 14 P&H HC Guidelines in Simple Words

Summary: In Shaurya Alloys Pvt. Ltd. & Ors. v. Union of India & Ors. the Punjab and Haryana High Court upheld Section 16(2)(c) of the CGST Act while issuing fourteen practical guidelines for GST officers examining input tax credit claimed by purchasers where suppliers have not paid tax or their registrations have subsequently been cancelled. These guidelines require investigation before a notice, disclosure of relied-upon evidence, properly stated allegations of fraud, consideration of purchase and transport records, coordination of recovery against defaulting suppliers, avoidance of duplicate tax recovery and reasoned orders following an opportunity of hearing. This guide by Vipin Jain explains the judgment in simple language, including what taxpayers should do and avoid, historical distinctions affecting ITC and Rule 37A, and a documentary compliance checklist. The ruling does not automatically protect fictitious transactions or eliminate the claimant’s burden to establish entitlement to credit.

Brief: Many businesses are receiving GST notices asking them to give back input tax credit (ITC) because their supplier did not deposit the tax with the Government. On 1 October 2026, the Punjab & Haryana High Court laid down 14 guidelines that GST officers must follow in such cases. This article explains those guidelines in plain words, with simple dos and don’ts for business owners.

The ITC Problem Explained With a Simple Example

Suppose you buy goods worth ₹10,00,000 from a supplier. The supplier charges GST of ₹1,80,000. You pay the full ₹11,80,000 through the bank, receive the goods, and claim ₹1,80,000 as input tax credit (ITC) in your return.

A year later, you get a notice from the GST department. It says your supplier never deposited that ₹1,80,000 with the Government, or that the supplier’s GST registration has been cancelled from an earlier date. The department asks you to pay back the ₹1,80,000, with interest, and sometimes with a penalty.

You have already paid the tax once, to the supplier. You had no way of checking whether the supplier deposited it. This is exactly the situation the High Court dealt with in Shaurya Alloys Pvt. Ltd. & Ors. v. Union of India & Ors., where 424 such cases were decided together.

What the High Court Decided on ITC Reversal

The law itself is valid. Under Sec. 16(2)(c) of the CGST Act, you get ITC only if the tax has actually reached the Government. The Court did not strike down this rule and did not soften it. But the officer cannot take back your ITC automatically. The supplier’s default, or the later cancellation of its registration, is not enough by itself. The officer must first check why the supplier did not pay, whether your purchase was genuine, and whether the tax can be recovered from the supplier. Officers must follow 14 guidelines. These apply to GST officers of the Central Government, Punjab, Haryana and Chandigarh. Businesses in other States can still refer to the judgment, but officers there are not bound by it in the same way. Fake bills get no protection. If the bills are fake, the goods were never received, or you were part of a fraud with the supplier, the ITC will be denied.

Key GST Terms Explained in Simple Language

Guidelines 1–3: Checks Required Before Issuing a GST Notice

Guideline 1: A red flag alone is not enough

What the Court said. The officer must not take back ITC in a routine or mechanical way. Three things are only a starting point for an inquiry, not a reason by themselves to deny your ITC:

• the supplier\’s registration being cancelled later, even from an earlier date;
• the supplier showing nil or low tax in its return; or
• an alert, a report or a complaint about the supplier.

What it means for you. The department can look into your purchase when one of these red flags appears. It cannot simply demand the ITC back because of the red flag. It must find something more.

One point to keep clear: if your supplier has not filed GSTR-3B by 30 September after the year ends, Rule 37A still requires you to reverse the ITC yourself. That is a separate rule, and this guideline does not change it.

✓ Do: read the notice carefully and check whether it gives any reason other than the supplier’s problem. If it does not, say so clearly in your reply.

✕ Don’t: panic and pay just because an alert or a cancellation has been mentioned.

Guideline 2: The officer must do homework first

What the Court said. Before sending you a notice, the officer must study the material and record, in writing, four things:

• the supplier’s details, the bill numbers, the months involved and the amount of ITC;
• exactly what the supplier did wrong: paid no tax at all, paid less tax, or paid using credit that was itself not valid;
• why and how the supplier failed to pay; and
• what action has been taken against the supplier to recover the tax, and where it stands.

What it means for you. You are entitled to a clear, bill-wise case, not a lump-sum figure. The officer must also have tried, or at least checked, recovery from the supplier.

✓ Do: ask for a bill-wise list of the ITC being questioned, and ask what action has been taken against the supplier.

✕ Don’t: accept a vague statement such as “supplier is non-compliant” without details.

Guideline 3: There must be a link to you

What the Court said. The investigation should find some direct link between you and the supplier’s wrongdoing before a notice is sent to you.

What it means for you. Showing that the supplier did something wrong is not the same as showing that you did. Examples of a link the department may look for are payments routed to some other account, or money withdrawn in cash soon after you paid.

✓ Do: always pay the supplier through the bank, into the supplier’s own account, against specific bills. Reply to summons and give documents when asked during an inquiry.

✕ Don’t: pay suppliers in cash or through third parties, and don’t ignore summons from the department.

Guidelines 4–5: What a GST Show Cause Notice Must Disclose

Guideline 4: The notice must show its evidence

What the Court said. The notice must give the details recorded under Guideline 2, name the suppliers, and explain how the ITC is said to be wrong. The documents the department relies on must be given to you. These include alert notices, inspection reports, panchnamas, statements of other people, and e-way bill, vehicle, toll and bank data.

What it means for you. You cannot properly answer a case if you have not seen the evidence. You are entitled to see it, except where the department lawfully claims privilege for a document.

✓ Do: ask in writing for all relied-upon documents as soon as you get the notice. Check the vehicle and toll data against your own e-way bills and transport papers.

✕ Don’t: file a final reply without the documents. If you must reply, say clearly that the documents have been asked for and that you will add to your reply later.

Guideline 5: Fraud must be shown against you, not just the supplier

What the Court said. Some notices are issued under Sec. 74 (or Sec. 74A for newer years), which deal with fraud or deliberate hiding of facts. Such a notice must itself state the facts that show fraud by you. Simply writing the words “fraud” or “suppression” is not enough. The department cannot fill the gap later through an affidavit or an explanation. The supplier’s fraud cannot be put on you unless the notice shows facts linking you to it.

What it means for you. These notices carry a longer time limit and a heavier penalty, so the law requires stronger grounds. If the notice says nothing about what you did, it is weak.

There is a caution. In Tata Steel, the Supreme Court cancelled such a notice but allowed the department to issue a fresh, proper notice within the time still available. So a weak notice may be followed by a better one.

✓ Do: ask your adviser to check the time limits for each year, and to point out in the reply that the notice states no facts of fraud by you.

✕ Don’t: rely only on this objection. Always answer the facts of the case as well.

Guidelines 6–9: Evidence, Supplier Recovery and Applicable Law

Guideline 6: You must prove your purchase, and the officer must look at your proof

What the Court said. The responsibility to prove that you are entitled to ITC stays with you. You can prove it with the tax invoice and proof that the goods or services actually reached you, such as e-way bills, transport receipts, weighbridge slips, and stock and consumption records. The officer must consider these papers and deal with them in the order.

What it means for you. This is the most important guideline for a business. The judgment does not remove your responsibility. It only makes sure your papers are not ignored. A bill and a bank payment show that a transaction was recorded. They do not show that goods were received.

✓ Do: keep a separate file for each purchase with the invoice, e-way bill, transport receipt (LR), weighbridge slip, goods-received entry, stock register entry and the bank payment.

✕ Don’t: rely on the invoice and payment alone, or hand over a heap of papers without linking them to each bill.

Guideline 7: A cancelled registration must be looked at closely

What the Court said. If the department relies on the supplier’s registration being cancelled from an earlier date, the officer must check why it was cancelled, from what date, and whether that reason has anything to do with your particular purchase.

What it means for you. A registration cancelled only because the supplier stopped filing returns says little about your purchase. A registration cancelled because it was obtained by fraud may say much more. Courts have also long held that a buyer can rely on a registration that was valid on the day of the purchase.

✓ Do: check and save the supplier’s GST registration status on the GST portal at the time of purchase, with the date. Ask the officer for the reason and date of the supplier’s cancellation.

✕ Don’t: assume that a cancellation automatically means you lose the ITC. Equally, don’t ignore it.

Guideline 8: Recover from the supplier, and don’t collect the same tax twice

What the Court said. The department’s power to recover the tax from the supplier is important and cannot be ignored. The officer must record what action has been taken against the supplier, and must coordinate with the supplier’s officer if the supplier is under a different Central or State office. If the tax has already been recovered from the supplier, or the supplier has paid it, that must be taken into account so that the same tax is not collected twice. You can then take the credit again where the law allows it.

What it means for you. If the supplier later pays, you should not end up paying the same tax a second time. Taking the credit again is not automatic in every case, because some taxes paid in fraud cases cannot be claimed back as credit.

✓ Do: ask the officer whether the supplier has been proceeded against and whether any tax has been recovered from it. Keep track of the supplier’s later payments.

✕ Don’t: pay a demand without asking that any recovery from the supplier be adjusted.

Guideline 9: The law of that year applies

What the Court said. The officer must apply the law as it stood in the month or year of your purchase. GST rules changed in stages, and a rule introduced later cannot be applied to an earlier period.

What it means for you. For older years, the law gave you no way of knowing whether your supplier paid, and no way of getting the credit back once the supplier paid later. The officer must keep this in mind. That does not mean you automatically win for older years, but it is a strong point in your favour.

✓ Do: mark each disputed bill with its month, and ask your adviser which period’s law applies.

✕ Don’t: accept a notice that applies a new rule to an old year.

Guidelines 10–14: Hearing, Reasoned Orders and Other Protections

Guideline 10: Your registration cannot be cancelled just because your supplier’s was

What the Court said. Your own GST registration cannot be cancelled, and certainly not from an earlier date, only because you bought from a supplier whose registration was later cancelled. The officer needs an independent legal ground and must follow the proper procedure of notice, reply and order.

What it means for you. Cancellation of registration can stop your business and affect your own customers’ ITC. The Court found this was being done in many cases without proper grounds.

✓ Do: reply in writing to any notice proposing cancellation of your registration, and check your registration status on the portal regularly.

✕ Don’t: ignore a cancellation or suspension notice in the hope that it will sort itself out.

Guideline 11: A fair hearing

What the Court said. You must be given a personal hearing. If the department relies on statements of other people, such as the supplier’s proprietor, and you ask to question them (cross-examination), the officer must decide your request by a written, reasoned order.

What it means for you. You do not get cross-examination in every case. But if the department’s case depends on someone’s statement, your request carries weight and cannot be brushed aside.

✓ Do: ask for the hearing in writing, attend it, and if you want to question someone, name the person and explain why.

✕ Don’t: make a general request to question everyone, and don’t skip the hearing.

Guideline 12: A proper, reasoned order

What the Court said. The final order must set out the facts and reasons, deal with your reply and documents, and give a clear finding on each condition of ITC that is disputed. In a fraud case, it must give a clear finding of fraud by you.

What it means for you. An order that ignores your documents, or simply repeats the notice, can be challenged in appeal.

✓ Do: write your reply point by point: invoice, receipt of goods, tax paid by the supplier, returns filed, and payment to the supplier. This makes any gap in the order easy to see.

✕ Don’t: file a general reply. A general reply invites a general order.

Guideline 13: Money deposited during an inquiry

What the Court said. If you deposited money during an investigation, whether through Form DRC-03 or otherwise, the department still has to issue a proper notice with full facts. Whether the deposit was voluntary, and what it counts as, will be decided on the facts of each case.

What it means for you. Businesses often deposit money during an inquiry under pressure or to be safe. That deposit does not mean you have admitted the demand. But how you described it at the time will matter later.

✓ Do: when depositing, give a covering letter stating the date, the circumstances, and that the payment is made under protest or pending verification, if that is the case.

✕ Don’t: describe the deposit as acceptance of liability unless you really mean it.

Guideline 14: From when these rules apply

What the Court said. The guidelines apply to all cases still pending with GST officers, and to all new cases.

What it means for you. If your case is still with the officer, at any stage, these guidelines apply to it. If an order has already been passed against you, the judgment’s reasoning can be used in your appeal.

GST ITC Compliance Checklist for Businesses

Documents to keep for every purchase

• Tax invoice from the supplier
• Supplier’s GST registration status on the portal, saved on the date of purchase
• E-way bill, with the vehicle number
• Transport receipt (LR) or courier record
• Weighbridge slip, where goods are weighed
• Goods-received entry and stock register entry
• Record of how the goods were used or sold
• Bank payment to the supplier’s own account, linked to the bill, within 180 days
• For services: the contract or work order, and proof that the work was done

Every month

• Match your ITC with GSTR-2B and follow up any bill the supplier has not reported
• Check whether your regular suppliers are filing GSTR-3B
• Reverse ITC under Rule 37A where required, and take it back once the supplier files

When a notice comes

1. Note the date of the notice and the last date to reply.

2. Check the months and years involved, and which period’s law applies to each.

3. Ask in writing for all the documents the department relies on, and a bill-wise list.

4. Ask what action has been taken against the supplier and whether any tax has been recovered.

5. Collect your purchase file for each disputed bill.

6. Reply point by point and bill by bill, attaching the documents.

7. Ask for a personal hearing in writing, and for cross-examination where a third person’s statement is used.

8. Check the final order for a clear finding on each point you raised. If it is missing, discuss an appeal with your adviser.

In a contract with a new or large supplier, consider a clause requiring the supplier to file returns and pay tax, with a right to hold back payment or recover your loss if it does not. This gives you your own remedy against the supplier.

Key Takeaways on GST ITC and Supplier Defaults

The law has not changed. ITC is still allowed only if the tax actually reaches the Government. The guidelines control how officers act; they do not give you ITC automatically. The burden is still on you. You must prove that your purchase was real. Good records are your best protection. Fraud is not protected. Fake bills, goods not received, or working with a supplier to cheat will still lead to denial of ITC, with penalty. Rule 37A still applies. From 26 December 2022, if your supplier has not filed GSTR-3B, you must reverse the ITC until it does. The guidelines are addressed to Central GST officers and to the GST officers of Punjab, Haryana and Chandigarh, within the High Court’s area. In other States, the judgment can be cited but is not binding in the same way. Every case is different. These guidelines decide how your case must be handled, not whether you will win. Take professional advice on your own facts.

Case referred: Shaurya Alloys Pvt. Ltd. & Ors. v. Union of India & Ors., Punjab & Haryana High Court, decided 1 October 2026, 2026 (10) TMI 296. The guidelines are in Para 103 of the judgment.

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Author: Vipin Jain | FCA · LLB | +91 92126-40900 | [email protected]