Analysis of the Recent Karnataka High Court Ruling: M/s Instakart Services Private Limited vs. The Union of India and Ors. [WP No. 4917 of 2021 (T-RES); Judgment Dated 09.02.2026]
The judgment of the High Court of Karnataka in M/s Instakart Services Private Limited v. Union of India & Others (W.P. No. 4917 of 2021, decided on 9 February 2026) marks a notable development in the jurisprudence on input tax credit under the GST regime, particularly in the context of denial of credit in cases involving supplier default. In the present case, the writ petition was filed under Article 226 of the Constitution of India, challenging the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, and the Karnataka Goods and Services Tax Act, 2017. The petitioner sought a declaration that the said provision is arbitrary and unconstitutional, being violative of Articles 14 and 19(1)(g), as well as Articles 265 and 300A of the Constitution, and has accordingly prayed that it be struck down.
While the Court upheld the constitutional validity of Section 16(2)(c) of the CGST/KGST Acts, it nevertheless granted substantive relief to the petitioner in order to prevent its application in cases involving bona fide transactions. In this context, the judgment draws a distinction between bona fide purchasers and those involved in fraudulent arrangements, holding that denial of ITC in the former case would amount to penalising a taxpayer for the default of another, thereby offending Articles 14 and 265 of the Constitution.
Accordingly, the Court held that Section 16(2)(c) must be applied only in cases where the transaction is found to be non-genuine or tainted by collusion, and not where the recipient has acted in good faith and fulfilled all statutory obligations within its control. In doing so, the judgment marks an important step in shaping a more equitable ITC framework under GST, ensuring that the burden of tax compliance is not disproportionately shifted onto compliant taxpayers. The relevant facts and operative findings of the Court are provided below:
Background of the Case:
The petitioner is engaged in providing logistics services to various sellers transacting through the online marketplace of Flipkart Internet Private Limited. The scope of its services includes packaging, freight, delivery, warehousing, and comprehensive end-to-end logistics support in relation to goods supplied by such sellers to their customers.
The petitioner has filed the present writ petition challenging the constitutional validity of Section 16(2)(c) of the CGST/KGST Acts and Rule 36(4) of the CGST/KGST Rules on various grounds, and contended that the impugned provisions place an onerous and impractical burden on recipients seeking input tax credit by requiring them to ensure payment of tax by the suppliers and timely filing of returns, obligations that are clearly beyond the control of the petitioner and similarly placed recipients. The Petitioner further submitted that these provisions run contrary to the scheme of the Act, as they effectively shift the responsibility of compliance from the supplier to the recipient, thereby rendering them arbitrary and violative of Articles 14, 19(1)(g), 265 and 300A of the Constitution of India.
The petitioner also sought a reading down of the impugned provisions so as to permit availment of ITC by bona fide recipients who have complied with all other requirements under Section 16(2), notwithstanding any default or non-payment of tax by the suppliers.
The dispute arose when the tax authorities initiated proceedings under Section 73 of the Act on the ground that certain suppliers of the petitioner had failed to remit the GST collected from the petitioner to the Government. Despite the absence of any allegation of fraud, collusion, or misrepresentation on the part of the petitioner, a show cause notice dated 7 January 2021 was issued seeking reversal of the ITC amounting to a substantial sum, along with interest and penalty, which was subsequently confirmed by an order dated 17 May 2022.
Aggrieved by the denial of ITC, despite having fulfilled all conditions within its control and having made payment of tax to the suppliers, the petitioner approached the High Court under Article 226. The core grievance was that Section 16(2)(c), by making ITC contingent upon the supplier’s compliance, imposed an impossible and onerous burden on bona fide recipients, effectively penalising them for defaults committed by third parties and thereby violating constitutional guarantees under Articles 14, 19(1)(g), 265, and 300A.
High Court’s Reasoning & Order:
In adjudicating the present case, the High Court of Karnataka undertook a careful examination of the scheme of input tax credit under the GST framework and acknowledged that the provision, on its plain terms, makes the entitlement to ITC contingent upon the actual payment of tax by the supplier to the Government.
The Court was aligned with the view taken by the Division Bench of the Tripura High Court in the case of M/s Sahil Enterprises Vs. Union of India and others – W.P.(C) 688/2022 dated 06.01.2026 and it was of the considered opinion that the present petition also deserves to be disposed of in terms of the said judgment as well as the earlier judgment of the Gauhati High Court in National Plasto Moulding’s case. In the M/s Sahil Enterprises, the Tripura High Court held that the impugned provisions were not violative of Articles 14, 19(1)(g), 265 and 300A of the Constitution of India, and further held that Section 16(2)(c) ought not to be interpreted to deny ITC to purchasers in a bonafide transaction like the petitioner and it should be read down and applied only where the transaction is found not be bonafide or is a collusive fraudulent transaction to defraud the Revenue.
Reliance was also placed by the Karnataka High Court in the case of On Quest Merchandizing India, wherein it was held that in the event the selling dealer fails 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. Further reliance was placed in a batch of petitions including Arise India’s case, as well as the Shanthi Kiran’s case wherein the Apex Court affirmed the decision of the Delhi High Court in On Quest Merchandizing India’s case.
The Karnataka High Court also placed reliance on the case of Onyx Design’s, wherein it was held that the benefit of input tax cannot be deprived to the purchaser dealer, if the purchaser dealer satisfactorily demonstrates that while purchasing goods, he has paid the amount of tax to the selling dealer. If the selling dealer has not deposited the amount in full or a part thereof, it would be for the revenue to proceed against the selling dealer.
Accordingly, the Karnataka High Court disposed of the writ petition in the present case by placing reliance on the decisions of the Gauhati High Court in National Plasto Moulding and the Tripura High Court in M/s Sahil Enterprises case. The High Court further read down Section 16(2)(c) of the CGST/KGST Acts and Rule 36(4) of the CGST/KGST Rules to the extent that input tax credit would be available to bona fide recipients, such as the petitioner, who have complied with all other conditions under Section 16(2), notwithstanding any default or non-payment of tax by the suppliers.
Thus, the significance of the Karnataka High Court’s ruling lies in the manner in which it employs the doctrine of “reading down.” Instead of declaring Section 16(2)(c) of the CGST Act unconstitutional, the Court held that the provision should not operate against bona fide recipients who have acted in good faith and fulfilled all compliance requirements within their control. In doing so, the Court preserved the validity of the statutory framework while simultaneously ensuring that genuine taxpayers are not subjected to undue hardship due to the default of suppliers. This balanced interpretation reflects judicial restraint, as the Court refrained from invalidating the provision altogether and instead harmonised it with principles of fairness and reasonableness.
However, it is equally important to note that a divergent line of judicial opinion exists across other High Courts, which have declined to adopt such a restrictive interpretation. The High Court of Kerala, in the case of M. Trade Links v. Union of India, upheld the validity of Section 16(2)(c) without reading it down by emphasising legislative competence to impose conditions on the availment of input tax credit. It held that input tax credit is not an absolute right, but a benefit or concession subject to statutory provisions. Similarly, the High Court of Patna in Aastha Enterprises v. State of Bihar, the High Court of Madhya Pradesh in Shree Krishna Chemicals v. Union of India, the High Court of Andhra Pradesh in Thirumalakonda Plywoods v. Assistant Commissioner, and the High Court of Madras in the case of Baby Marine (Eastern) Exports v. Union of India, reiterated this position.
Our Understanding:
In light of the above, the judicial landscape on the interpretation of Section 16(2)(c) of the CGST Act remains clearly divided. This divergence reflects a broader tension in tax jurisprudence between strict statutory compliance and the need to mitigate hardship arising from factors beyond the taxpayer’s control. Accordingly, in the absence of a conclusive judicial determination, the issue is likely to persist as a source of continued litigation and interpretational uncertainty, particularly for bona fide recipients who remain vulnerable to denial of input tax credit on account of defaults attributable to their suppliers.
While the Karnataka High Court has upheld the constitutional validity of the provision, it has significantly limited its scope by reading it down in line with earlier judicial precedents, including those of the Tripura High Court and the Gauhati High Court. In doing so, the Court has reaffirmed that the entitlement to input tax credit cannot be denied mechanically in all cases of supplier default, particularly where the recipient has acted bona fide and fulfilled all statutory conditions within its control.
From a practical standpoint, the judgment provides important relief to genuine taxpayers by clarifying that denial of input tax credit on account of supplier non-compliance must be restricted to cases involving fraud, collusion, or non-genuine transactions. This interpretation aligns with the broader scheme of GST, which is intended to avoid cascading of taxes and ensure a seamless flow of credit.
At the same time, the decision does not dilute the safeguards available to the tax authorities in cases of abuse or tax evasion. Instead, it draws a balance between protecting revenue interests and preventing undue hardship to compliant taxpayers. Going forward, this judgment is likely to play a significant role in guiding both departmental action and litigation strategy in cases involving ITC disputes linked to supplier default.
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Case Analysis by – Vipin Upadhyay & Aditya Bhattachrya – Partner and contributed by – Akriti Sharma – Associate
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