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GST: Why Denial of ITC to buyer for fault of supplier: section 16(2)(c) of the GST Acts is unconstitutional?

Across the country taxable persons under the CGST/SGST Acts,2017 (GST Acts for short) are facing scathing nature of section 16[2] [c] of the said Acts by way assessments completed U/s. 73 of the said Acts. Assessment orders are being passed by the proper officers empowered under the GST Acts based on the portal scrutiny in cases where suppliers have failed to file returns or failed to remit tax on certain supplies and so much so ITC already availed by the respective buyers on the said supplies is reversed. Assessments levying tax (reversal of alleged ineligible ITC), interest thereon and penalty are being completed relying on the mismatch between the GSTR 2A and GSTR 3B. Assessments for the year 2017-18 are in a completion mode whereas for the subsequent years are in the pipe line. Correspondingly High Courts, all over the country are being flood with writ petitions challenging the constitutional validity of section 16[2][c] of the GST Acts.

Present stage of litigation

Way back in May,2019, the Hon’ble High Court of Delhi has admitted a writ petition challenging constitutional validity of section 16[2][c] of the GST Acts in Bharti Telemedia Vs. Union of India (W.P[C] No.6293 of 2019) which is still pending for disposal. Thereafter numerous writ petitions were filed before various High Courts. By 20.09.2021 itself, 36 writ petitions were reported to be pending across nine High Courts in the country. While so, the Union of India had filed transfer petitions under Article 139A read with Article 142 of the Constitution of India seeking transfer of two Writ Petitions to the Supreme Court, i.e., (i) Writ Petition No. 9443/2020 titled ‘M/s. Cummins Technologies vs Union of India’ pending before the High Court of Madhya Pradesh at Indore and (ii) Writ Petition No.7767 /2020 titled ‘M/s. SPL Infrastructure Private Limited v. Assistant Commissioner of State Tax, Narasannapeta and Ors‘ pending before the High Court of Andhra Pradesh at Amaravati. Through these transfer petitions the Union of India had requested the Supreme Court for transfer of the aforementioned writ petitions along with other writs of identical nature pending in other high courts to the apex court from the respective high courts and to dispose the same by the supreme court itself to avoid possible divergent decisions by various High Courts.

However, the Hon’ble apex court was not inclined to entertain these transfer petitions, for the reason that various High Courts are already seized of the matters. So much so, the apex court as its order No. Transfer Petitions(Civil) Nos.1481 &1482/ 2021/20.09.2021 has requested the High Court of Madhya Pradesh, Indore Bench to dispose of the Writ Petition No.9443/2020, pending adjudication before it, as early as possible and preferably within a period of two months’ time. Other High Courts were also directed to follow suit.

However, unfortunately the writ petition pending before High Court of Madhya Pradesh at Indore bench become infructuous and therefore closed by the Hon’ble Court by its Order dated: 12.01.2022.  So much so, we have to wait for the outcome of the writ petitions pending before various courts all over the country including a batch of cases before the High Court of Delhi with the lead case as Bharti Telemedia Vs. Union of India (W.P[C] No.6293 of 2019). The hearing in this batch of cases is seen in an advanced stage.

Why section 16[2] [c] is unconstitutional?

A. Obviously, GSTR-3B is a self-declared return filed on a monthly basis under Section 39 of the GST Acts. GSTR-3B contains details of inward and outward supplies of goods or services or both, input tax credit availed, tax payable, tax paid etc. GSTR-2A is an auto-populated, dynamic, read-only document containing details of inward supplies, based on details of outward supplies filed by the supplier.

Conditions for Availing Credit

B. Usually all taxable persons registered under the GST Acts are availing ITC in GSTR-3B as per the GST law and based on valid tax invoices received from their suppliers and payments including the tax were made without fail. They are in possession of all the tax invoices and have filed all their returns. While so, the proper officers who are reversing the ITC for violation of the provision contains in section 16[2] [c] of the GST Acts are blindly relying on data obtained from GSTR -2A & GSTR-3B without conducting any independent and proper verification of the facts of the cases independently. In fact, GSTR-2A based on GSTR-1 of the supplier is not a document proving payment of tax. GSTR-3B is the tax return. As such reliance on a document (GSTR-2A), which is not conclusive proof of non-payment of tax for imposing undue burden on the taxable persons is absolutely illegal and unfair. Instead the GST officers should have verified if the suppliers have paid the taxes through GSTR-3B.

Violative of Article 14

C. By extending application of Section 16(2)(c) to deny credit to innocent purchasers, the GST Officers are treating both the guilty purchasers who collude with sellers to claim false credit and innocent purchasers equally. Therefore, Section 16(2)(c) which is giving unfettered powers to the Officers to treat innocent and guilty purchasers alike are violative of Article 14 of the Constitution. Furthermore, by doing so the proper officers are shifting the incidence of tax from the supplier to the recipient, which is highly arbitrary an dimpermissible. Apparently it is an arbitrary exercise of power to deny credit to the purchasing dealer for the default of selling dealer over whom the purchasing dealer has no control.

D. In P. Royappa v State of Tamil Nadu, (1974) 4 SCC 3, it was held that “equality is antithetic to arbitrariness. In fact, equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14”.

Doctrine of Impossibility

E. It is pertinent to note that GSTR-2A is an auto-generated dynamic document based on GSTR-1 filed by the suppliers. GSTR-2A is a read-only document and a tax payer under the GST Acts cannot edit or modify the data in it. Therefore, any missing invoice details on GSTR-2A is due to supplier’s failure to furnish the correct details against which the purchaser is not in a position to compel his suppliers to file their returns or other statutory forms.

F. Therefore, in fact, through the provisions of section 16(2)(c) the State is compelling the recipient tax payers to do something which is impossible. This is clear in violation of the legal maxims ‘Lex non cogit ad impossibilia’ (Law does not contemplate something which cannot be done) or ‘Impotentia excusat legem’ (Inability excuses the law). There are a convoy of judicial rulings upholding the fundamental principle of the maxim ‘Lex non cogit ad impossibilia’. The Supreme Court in the case of State of MP Vs. Narmada Bachao Andolan [(2011) 7 SCC 639], applied this maxim and held that thus, where the law creates a duty or a charge and the party is disabled to perform it without any fault on his part and has no control over it, the law will in general excuse him. In Arise India Ltd. Vs. Commissioner of Trade and Taxes [TS-314-HC-2017(Del)-VAT], the Delhi High Court has held that there was need to restrict the denial of ITC only to the selling dealers who had failed to deposit the tax collected by them and not punish bona fide purchasing dealers. The latter cannot be expected to do the impossible. It is trite that a law that is not capable of honest compliance will fail in achieving its objective. If it seeks to visit disobedience with disproportionate consequences to a bona fide purchasing dealer, it will become vulnerable to invalidation on the touchstone of Article 14 of the Constitution. The applicability of the aforesaid maxim has been approved by this Court in Raj Kumar Dey v. Tarapada Dey(1987) 4 SCC 398 : (AIR 1987 SC 2195) and Gursharan Singh v. NDMC, (1996) 2 SCC 459 : (1996 AIR SCW 749 : AIR 1996 SC 1175).”

Facility for Matching Credit Not Implemented 

G. The matching of input tax credit is envisaged under section 42 of the Acts. The manner in which the matching as envisaged under Section 42 is prescribed through Rule 69. As per Rule 69, the matching is to be done after the due date for furnishing the return in FORM GSTR-3. On a perusal of Rule 69, it is evident that the matching process depends on filing of GSTR-1, GSTR-2 and GSTR-3. The first proviso to Rule 69 is as follows:-

Provided that where the time limit for furnishing FORM GSTR-1 specified under section 37 and FORM GSTR-2 specified under section 38 has been extended, the date of matching relating to claim of input tax credit shall also be extended accordingly:” (emphasis supplied)

H. The matching process as envisaged under Section 42 will become active only on filing of GSTR-1, GSTR-2 and GSTR-3. Till date, GSTR-2 and GSTR-3 are not made live. Therefore, the matching process is not operational. It is also pertinent to note that by Finance Bill,2022  Sections 42,43 and 43A are proposed to be omitted from the statute so as to do away with credit matching. Therefore, it is evidently clear that in the absence of matching envisaged under Section 42 being made active, it is illegal and arbitrary for the department to disallow the credit claimed by the tax persons and to assess the same with interest thereon.

Availing Credit Subject to GSTR-1/GSTR-2A Subsequently Inserted (Non-Retroactivity)

I. The condition that invoice or debit note details have to be furnished by the supplier in his GSTR-1 and the same is communicated to the recipient was introduced vide amendment to Section 16(2) by inserting clause (aa) to Section 16(2). The provision was only given effect to on 01.01.2022, with no retrospective application. Section 16(2)(aa) is as follows:

Section 16 (1) ……………………



(aa) the details of the invoice or debit note referred to in clauses (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;

J. Restrictions on availing input tax credit based on data in GSTR-1 filed by suppliers is introduced in the GST Acts through Rule 36(4), which is a classic example of rules being brought in first and subsequently section being inserted to give legal sanctity to the rule. Rule 36(4) was introduced through Central Goods and Services Tax (Sixth Amendment) Rules, 2019 w.e.f. 09.10.2019. The rule restricts the proportion of credit that can be availed when GSTR-1 has not been filed by the suppliers. Rule 36(4) as it was introduced is extracted below for easy reference:

36. (1)…………………………………

(2) ……………………………………..


(4) Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded Input tax credit to be availed by a registered person in respect of invoices or debit notes, the details of which have not been uploaded by the suppliers under sub-section (1) of section 37, shall not exceed 20 per cent of the eligible credit available in respect of invoices or debit notes the details of which have been uploaded by the suppliers under sub-section (1) of section 37”

K. Rule 36(4) had thereafter been amended and eligible credit is restricted to 10% and thereafter 5%. However, it is to be noted that this rule was introduced w.e.f. 09.10.2019 and the section itself brought into force w.e.f. 01.01.2022. In fact, the restriction/condition that, ITC is available only if the supplier has reported the details in his GSTR-1 which is auto-populated in the GSTR-2A of the recipient did not exist during FY 2017-18.

L. Here, it is relevant to rely on CBIC Circular No: 59/33/2018-GST Dated 04.09.2018 in which it is stated as follows:

2.3. In view of the difficulties being faced by the claimants of refund, it has been decided that the refund claim shall be accompanied by a print-out of FORM GSTR-2A of the claimant for the relevant period for which the refund is claimed. The proper officer shall rely upon FORM GSTR-2A as an evidence of the accounts of the supply by the corresponding supplier in relation to which the input tax credit has been availed by the claimant. It may be noted that there may be situations in which FORM GSTR-2A may not contain the details of all the invoices relating to the input tax credit availed, possibly because the supplier’s FORM GSTR-1 was delayed or not filed. In such situations, the proper officer may call for the hard copies of such invoices if he deems it necessary for the examination of the claim for refund. It is emphasized that the proper officer shall not insist on the submission of an invoice (either original or duplicate) the details of which are present in FORM GSTR-2A of the relevant period submitted by the claimant.” (emphasis supplied)

Why Denial of ITC to buyer for fault of supplier is unconstitutional

M. That apart, CBIC Circular No: 125/44/2019 GST dated 18.11.2019 also assumes significance in the present matter, the relevant part of which is extracted below for easy reference: – 

Guidelines for refunds of unutilized Input Tax Credit

36. Applicants of refunds of unutilized ITC, i.e. refunds pertaining to items listed at (a), (c) and (e) in para 3 above, shall have to upload a copy of FORM GSTR-2A for the relevant period (or any prior or subsequent period(s) in which the relevant invoices have been auto-populated) for which the refund is claimed. The proper officer shall rely upon FORM GSTR-2A as an evidence of the accountal of the supply by the corresponding supplier(s) in relation to which the input tax credit has been availed by the applicant. Such applicants shall also upload the details of all the invoices on the basis of which input tax credit has been availed during the relevant period for which the refund is being claimed, in the format enclosed as Annexure-B along with the application for refund claim. Such availment of ITC will be subject to restriction imposed under sub-rule (4) in rule 36 of the CGST rules inserted vide Notification No. 49/2019-CT dated 09.10.2019. The applicant shall also declare the eligibility or otherwise of the input tax credit availed against the invoices related to the claim period in the said format for enabling the proper officer to determine the same. Self-certified copies of invoices in relation to which the refund of ITC is being claimed and which are declared as eligible for ITC in Annexure – B, but which are not populated in FORM GSTR-2A, shall be uploaded by the applicant along with the application in FORM GST RFD 01. It is emphasized that the proper officer shall not insist on the submission of an invoice (either original or duplicate) the details of which are available in FORM GSTR-2A of the relevant period uploaded by the applicant.

N. Another circular relevant herein is CBIC Circular No: 135/05/2020 – GST dated 31.03.2020. The relevant para of the circular is extracted below:

Guidelines for refunds of Input Tax Credit under Section 54(3)

5.1.In terms of para 36 of circular No. 125/44/2019-GST dated 18.11.2019, the refund of ITC availed in respect of invoices not reflected in FORM GSTR-2A was also admissible and copies of such invoices were required to be uploaded. However, in wake of insertion of sub-rule (4) to rule 36 of the CGST Rules, 2017 vide notification No. 49/2019-GST dated 09.10.2019, various references have been received from the field formations regarding admissibility of refund of the ITC availed on the invoices which are not reflecting in the FORM GSTR-2A of the applicant. 

 5.2 The matter has been examined and it has been decided that the refund of accumulated ITC shall be restricted to the ITC as per those invoices, the details of which are uploaded by the supplier in FORM GSTR-1 and are reflected in the FORM GSTR-2A of the applicant. Accordingly, para 36 of the circular No. 125/44/2019-GST, dated 18.11.2019 stands modified to that extent.

O. On the basis of the aforementioned circulars, it is clear that for the periods between 2017 to 2019, if the supplier has not furnished the details in his GSTR-1, the proper officers had the option of calling for hard copies of the invoices for verification or the recipients had the option of submitting self-certified copies of invoices not submitted by the suppliers in FORM RFD-01.

P. It is also evident from Circular No: 135/05/2020 – GST dated 31.03.2020 that the government itself intents to restrict credit based on GSTR-2A only from the date of insertion of Rule 36(4), i.e. 10.2019. In the absence of any retrospective application, mismatch between GSTR-3B and GSTR-2A can be a valid ground for restricting ITC only after 09.10.2019 even as per the intention of the government.

Action to be Initiated Against Supplier First 

Q. The Hon’ble High Court of Madras in M/s. D.Y. Beathel Enterprises v The State Tax Officer,P. (MD) No 2127 of 2021 dated 24.02.2021 has held that the department should proceed against the selling dealer first in cases where the supplier has collected tax from the purchasing dealer. In fact, State is empowered to collect or recover taxes. The state cannot shred away from its duty to collect tax nor can it pass on its duty to the taxpayers. By passing the buck of enforcing tax payment to purchasers, the state is shredding away from its duties.

R. In this regard, the press release by the CBIC dated 04.05.2018 is also relevant. Through the press release the CBIC has made it clear that there shall not be an automatic reversal of input tax credit from the buyer on non-payment of tax by the seller. It was clarified even though recovery from the buyer is an option available in certain exceptional cases, the department shall recover from the seller in normal circumstances. The relevant paragraph of the press release is produced below for easy reference:

(iv) No automatic reversal of credit: There shall not be any automatic reversal of input tax credit from buyer on non-payment of tax by the seller. In case of default in payment of tax by the seller, recovery shall be made from the seller however reversal of credit from buyer shall also be an option available with the revenue authorities to address exceptional situations like missing dealer, closure of business by supplier or supplier not having adequate assets etc.”

S. From the above press release it is evident that the intention of the CBIC is to recover from the supplier in cases of default and to use the power to recover from the purchasing dealer in exceptional circumstances alone.

T. The Hon’ble High Court of Delhi in Quest Merchandising India Pvt Ltd., Arise India Ltd & Ors. v Government of NCT of Delhi & Ors., 2017 (10) TMI 1020 (relating to VAT period) – Delhi High Court, held that “In the event that the selling dealer has failed to deposit the tax collected by him from the purchasing dealer, the remedy for the Department would be to proceed against the defaulting selling dealer to recover such tax and not deny the purchasing dealer the ITC. Where, however the Department is able to come across material to show that the purchasing dealer and the selling dealer acted in collusion then the Department can proceed under Section 40A of the DVAT Act.”

Unjust Enrichment

U. It is interesting to note that, while the option to recover from the supplier is open to the department, the Revenue stands to have unjust enrichment on the same taxable transaction by collecting tax from the buyer and the seller. Here, it is worth to note that, there is no provision for refunding amount collected from the recipient in cases where the Revenue successfully recovers the unpaid tax from the supplier who had defaulted.

ITC – A Vested Right

V. ITC is a vested right and the same had been held in a catena of decisions of various courts. The Hon’ble Apex Court in Eicher Motors Ltd v Union of India, 1999 (106) E.L.T 3 (SC) has recognized the provision for facility of credit as a vested right. The credit earned under the GST Act is property of the taxable persons and therefore the denial of ITC is in violation of Article 300A of the Constitution of India. Article 300A provides that no person shall be deprived of his property save by authority of law.

Violative of Article 19(1)(g) 

W. Denial of credit to a taxable person severely affects his ability to do business. In fact, dealers depend heavily on the credit available to them under the Act for discharging their tax liability. If the eligible credit is blocked or is made to reverse credit already taken, it affects the business operations of such taxable persons. If the department initiates coercive proceedings against them, it again affects the business operations of such persons. Therefore, the action of the department relying on the provisions of section 16(2)(c) is violative of Article 19(1)(g) of the Constitution of India which gives all the citizens of India the right to practice any profession, or to carry on any occupation, trade or business. 

Author/Blogger:  Aji V. Dev, Advocate, High Court of Kerala at Aji V. Dev & Associates, Ernakulam, Kochi, available at

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I am Aji V. Dev, a practising lawyer in the High Court of Kerala, Ernakulam. I hail from Vallicodu- Kottayam a beautiful village near to Pathanamthitta in the Kerala state of India, where undulating hills decorated by tall trees and lush green vegetation descends to the paddy fields in a rhythmic wa View Full Profile

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June 2024