GST on Recipient for “Non-Existent” Supplier: Legal Position & Case Law

One‑Sided GST Liability on Recipient Where Supplier Is Alleged “Non‑Existent” – Legal Inconsistency, Correct Position, and Key Case Law

1. Introduction – The Problem of One‑Sided Liability on Recipient

In many investigations, the department brands the supplier as “non‑existent” or bogus, denies ITC to the recipient, yet simultaneously demands full GST on the recipient’s outward supplies without reconciling the factual theory adopted. This creates a one‑sided liability that is conceptually inconsistent with GST as a value‑added tax and is increasingly under judicial scrutiny.

2. Core Inconsistency in the Department’s Stand

When the department alleges that the supplier is non‑existent and no actual supply has taken place, it is effectively treating the inward supply itself as sham and invoices as mere accommodation entries for availing ITC. On that premise, denial of ITC as “fake ITC” is argued under sections 16, 74, 122, 132, etc.

However, on the same set of facts, insisting that the recipient’s outward supplies (purportedly arising from those very inputs) are real and fully taxable, without independently proving purchases/stock, amounts to taking mutually contradictory factual positions. Either there were no real goods (pure paper transaction), in which case outward supplies based on that non‑existent stock are also doubtful; or there were real goods and real supplies, in which case blanket denial of ITC purely on supplier‑side grounds becomes vulnerable where the recipient is bona fide.

3. Three Conceptual Baskets of Liability

(A) Pure “Fake ITC / Accommodation Bill” Case

In this category, the department seeks to prove that:

• The supplier is fictitious or non‑existent.
• There was no movement of goods; only invoices were issued to enable ITC or evasion.
• The objective was to pass on fraudulent credit.

In such cases, denial of ITC with interest and penalty under sections 16(2), 74, 122, 132 can be sustained as fraudulent ITC, provided cogent evidence exists. But once the department itself says there were no real inputs or stock, it cannot mechanically compute outward tax only from book entries without independently establishing real outward supplies through evidence like stock variation, transport records, third‑party statements or bank trail.

If real outward supplies are not separately proved, treating the entire purchase side as sham while still taxing outward supplies arising from that supposed stock is factually arbitrary and open to challenge for lack of coherent fact‑finding.

(B) Bogus Invoices but Real Trading (Unaccounted Purchases)

In some cases, the department’s own theory is more nuanced:

• The named supplier “X” and its invoices are bogus/non‑existent.
• But the recipient actually dealt in physical goods, sourced from other or unaccounted channels.

Here, denial of ITC on invoices of “X” may stand because those documents do not correspond to genuine purchases. At the same time, outward supplies made by the recipient to its customers are independently taxable under section 9, as the taxable event is the supply by the recipient, regardless of whether the inward leg was from a compliant or unaccounted source.

In such situations, the department must clearly plead and substantiate that real trading occurred and that the dispute is only about the genuineness/identity of the supplier and documentation, not about the existence of goods or supplies. Courts expect this factual distinction to be maintained rather than mixing it with pure “paper transaction” cases.

(C) Bona Fide Recipient – Supplier Later Found Non‑Existent / Defaulting

The most litigated basket is where:

• Supplier was registered and reflected as such on the GST portal at the time of transaction.
• Recipient possesses tax invoices, e‑way bills, GR/LR, stock and transport records, and has paid value plus tax through banking channels.
• Later, the supplier’s registration is cancelled (sometimes retrospectively) or he is found non‑existent or in default in filing GSTR‑1/3B or paying tax.

In McLeod Russel India Ltd. v. Union of India (Gauhati HC, 09.12.2025), the Court held that ITC cannot be denied to a bona fide buyer merely because the supplier failed to upload invoices or file returns, and read down section 16(2) (aa) to avoid shifting the entire burden of supplier’s default onto the purchaser. The Court expressly observed that denying ITC to a compliant purchaser for supplier‑side lapses causes cascading and is contrary to the GST design.

Similarly, in M/s Sahil Enterprises v. Union of India (Tripura HC, 06.01.2026), the Court upheld the constitutional validity of section 16(2)(c) but read it down, ruling that ITC denial is permissible only in non‑bona fide, collusive or fraudulent transactions; bona fide purchasers cannot be asked to ensure that the supplier has actually deposited tax.

In M/s Gargo Traders v. Joint Commissioner (State Tax) & Ors. (Calcutta HC, 12.06.2023), it was held that ITC cannot be denied solely because the supplier’s registration was cancelled retrospectively, where at the time of transaction the supplier appeared as a valid registered person on the government portal and tax was paid through banking channels. The Court found such denial unfair to innocent recipients and inconsistent with section 16.

These rulings, following the Supreme Court’s approval of the DVAT ratio in Arise India Ltd. / Quest Merchandising, reinforce the principle that bona fide purchasers cannot be denied ITC merely due to supplier‑side defaults; the remedy lies against the defaulting supplier, not by imposing a one‑sided burden on the buyer.

4. Statutory Framework and Constitutional Angle

Sections 16 and 17 govern ITC eligibility and conditions, while sections 73, 74, 122 and 132 address recovery, penalties and offences in cases of wrongful ITC or tax evasion. Courts have clarified that these provisions must be applied in a manner that preserves GST as a destination‑based value‑added tax rather than a cascading levy.

The Gauhati High Court in McLeod Russel stressed that shifting the incidence of tax from defaulting supplier to compliant purchaser by denying ITC results in double taxation and runs contrary to the architecture of GST. The Tripura and Gauhati decisions have also held that a construction of section 16(2)(c)/(aa) which penalises bona fide buyers for supplier’s lapses is arbitrary, imposes an impossible burden, and offends Articles 14 and 19(1)(g), warranting reading down to cover only non‑genuine, collusive or fraudulent transactions.

5. Judicial Trend Protecting Bona Fide Buyers – Key Decisions

6. Drafting Logic – Exposing the “One‑Sided” Contradiction

In replies to SCN and in appeals, your structure can be:

1. Facts & Department’s Allegation

• • Record that the department has branded the supplier as non‑existent/bogus and denied ITC as fake.
  • Note that, simultaneously, demand is raised on outward supplies declared by you, without reconciling the factual basis of stock and purchases.

2. Conceptual Contradiction

• • Argue that if inward supplies are treated as non‑existent (no goods, only paper), the department must explain how it computes outward quantity/turnover in absence of real stock; merely relying on book entries while discarding the very purchases generating that stock is arbitrary.
  • Conversely, if the department implicitly accepts that real goods moved (e‑way bills, transport records, stock registers, customer confirmations), then treating you as bona fide, ITC cannot be denied merely because of supplier’s later default or retrospective cancellation, as held in McLeod Russel, Sahil Enterprises and Gargo Traders.gstdost+2

3. Either–Or Pleading

• • Either the entire chain is a bogus accommodation entry with no real supply: then ITC denial may be considered, but outward tax can be levied only if separate, cogent evidence of real outward supply is brought on record.
  • Or actual goods and supplies did exist, in which case, applying the McLeod Russel, Sahil Enterprises, Gargo Traders and Arise India line, ITC to a compliant and bona fide buyer cannot be denied purely for supplier‑side defaults.

4. GST as Value‑Added Tax – No Double Taxation

• • Cite Gauhati HC’s observation that denying ITC after tax has been paid at the previous leg results in cascading and is contrary to the fundamental structure of GST.
  • Emphasise that punishing a bona fide buyer for another’s fault has been condemned by High Courts and the Supreme Court as arbitrary and disproportionate.

5. Constitutional Grounds

• • Rely on Tripura and Gauhati HC reasoning that a reading of section 16(2)(c)/(aa) which denies ITC to genuine buyers despite full compliance violates Articles 14 and 19(1)(g), and must be read down to target only non‑genuine, collusive, or fraudulent transactions.

6. Prayer / Relief

• • In bona fide cases, seek quashing of ITC denial and consequential interest/penalty, relying on McLeod Russel (Gauhati HC), Sahil Enterprises (Tripura HC), Gargo Traders (Calcutta HC) and the DVAT line approved by the Supreme Court.
  • Without prejudice, if the authority still insists that the supplier was fictitious and the entire input side is non‑existent, demand that they first establish independent evidence of actual outward supplies and cannot treat book entries as conclusive while simultaneously disowning the foundational purchase transactions.

 Author’s Conclusion

A departmental approach that denies ITC on the footing that the supplier and inward supplies are non‑existent, yet insists on full tax on outward supplies without coherent proof of real stock and trading, amounts to a one‑sided and logically inconsistent imposition of liability. The emerging judicial consensus from Gauhati, Tripura and Calcutta High Courts, read with the Supreme Court’s Arise India line, clearly moves towards protecting bona fide buyers and limiting harsh consequences to truly non‑genuine or collusive cases. In this landscape, carefully drafted replies that expose the factual contradiction and press the “either–or” logic, backed by these authorities, have a strong footing to challenge such one‑sided demands as arbitrary, disproportionate and contrary to the basic architecture of GST as a value‑added tax.