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Introduction

As we all know in 2017, the GST regime was introduced with a vision to create a seamless and uniform taxation system, with a free flow of Input Tax Credit in a free flow manner. The main intention of providing ITC was that, taxes are not cascaded in other words, to avoid double taxation, hence it could be passed on efficiently across the value chain.

Nowadays it is in highlight, in GST the main issue faced by taxpayer is the dispute that is emerging under GST which pertains to denial of ITC to a purchaser due to non-compliance by the supplier.

Now the question arises, what is the mistake of buyer if supplier fails to deposit the tax?

In this article, I am going to discuss an amazing case law addressing this issue, a recent landmark ruling of a High Court, here name is anonymized for neutrality purposes but based on the facts provided, we will discuss the same, this case has reiterated a fundamental principle of natural justice and commercial certainty, in which a bona fide purchaser cannot be denied ITC merely because of the supplier’s default, especially when the buyer has acted diligently and made payments through banking channels.

This ruling is consistent with precedents like Suncraft Energy Pvt. Ltd. v. State of West Bengal as well as in the case of D.Y. Beathel Enterprises v. State Tax Officer.

Is it legal to deny purchaser to take GST ITC due-to non-compliance of supplier

Case Background

The petitioner, who is a registered taxpayer under GST had challenged the denial of Input Tax Credit amounting to around INR 28 lakhs which was claimed against seven tax invoices raised by M/s Bharti Airtel Ltd., a recognized telecom operator. The transactions also involved mobile recharge coupons supplied to the petitioner during the Financial Year 2017–18 (July 2017 to March 2018).

Despite the transactions were genuine, and were related to payments that were due and were made via banking channels, the State GST Authorities, through orders dated 22.10.2021 (by Deputy Commissioner, Sector-4, Meerut) which was later upheld by appellate order dated 24.06.2022 (Additional Commissioner, Commercial Tax, Meerut), denied the petitioner the ITC on the ground that the supplier allegedly failed to deposit the tax into the government treasury.

What dose Section 16 of the CGST Act, 2017 says on this?

“No registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless interalia tax charged in respect of such supply has been actually paid to the Government” 

This clause places a conditionality on the availability of ITC based on the supplier’s action, which is the actual remittance or payment of tax to government.

However, this has been the centre point and main issue which leads to more litigation and judicial scrutiny also, practically speaking, it plays a big role in oppressing purchaser, who has no control over the supplier’s post-supply conduct, this also questions on government initiative of “ease of doing business”.

What were the arguments of petitioner?

Coming back to the above case, the petitioner’s counsel raised the key submissions such as focusing on the genuineness of transactions, which means the tax invoices were issued by a valid GST-registered supplier (Bharti Airtel Ltd.), and the goods (recharge coupons) were received and utilized for business purposes, also showing the valid banking channel evidences where all the payments were made via verifiable banking channels, hence, no element of fictitious or fraudulent transaction existed in that case.

Petitioner rightly argued that there is his lack of control over the supplier, also the petitioner has no legal or practical mechanism to ensure that the supplier files GSTR-1, GSTR-3B, or deposits tax, hence here the buyer’s responsibility ceases upon full payment and receipt of supply.

Now I also want to quote two of the case laws which were quoted by precedent

First one is Suncraft Energy Pvt. Ltd. v. State of West Bengal (2023) where the Hon’ble Supreme Court held that denial of ITC without verifying the supplier’s conduct or providing remedial opportunity is arbitrary and violative of principles of natural justice, as by denying ITC, and no inquiry is being made against the supplier, resulting in the entire burden and consequences were unfairly transferred onto the purchaser is wrong thing.

Second one is D.Y. Beathel Enterprises v. STO (2022) where the Madras HC held that action must be initiated against the supplier and the buyer cannot be solely penalized.

Now let’s discuss the department’s stand on this!

The department had just one justification for its denial of ITC which was the main requirement of Section 16(2)(c) of CGST act, 2017.

The interpretation as per the department for this section was that this act has been clear in conditioning ITC availability on the tax being paid by the supplier, and in the absence deposition of tax by the supplier, the ITC claim becomes ineligible, as it is loss to the revenue, hence the non-payment is being flagged by the system (mismatch in GSTR-2A/2B) itself, and hence, the order is in accordance with the statute, here the department’s approach relied strictly on the input-output correlation via the GST portal, even in cases where the buyer may have the limited recourses.

High court’s observations on the case 

The Hon’ble Court appreciated the bona fides of the petitioner who had paid consideration along with GST via banking channels, hence there was no evidence of collusion or any type of bogus invoicing in this case 

The court also noted that, it is unjust and arbitrary as per their interpretation by holding the purchaser liable for supplier’s non-compliance, without first proceeding against the supplier for non-payment of taxes, as penalising the buyer for this non-compliance of supplier who is not filing or not paying the tax beyond their control.

Even in this case court relied on few judgments as I stated above i.e. in case of Suncraft Energy Pvt. Ltd., the Supreme Court observed, “…before denying ITC, the authorities must examine whether the supplier has indeed defaulted and whether the buyer had knowledge or involvement.”

On other hand in the case of D.Y. Beathel Enterprises, the Madras HC held that “…in the absence of any proceeding against the seller, the department cannot fasten liability on the purchaser alone.”

Hence the court adopted the governing rule of both the cases, stating that GST law must be implemented in a manner that preserves equity and proportionality, that means it should be fair for everyone.

Stating this, the court allowed the writ petition, the high court set aside the orders dated 22.10.2021 and 24.06.2022 and directed the department to revisit the matter after due inquiry from the supplier.

I chose this topic because I wanted to discuss how assessee won, even the things were written in statute, when his natural justice was questioned.

Now, let’s discuss the legal implications of this judgement along with the industry impact 

The ruling tells us that the buyer’s responsibility is to ensure that the supplier have a valid GST registration, Proper tax invoice is issued to him as per Rule 46, goods/services are actually received, and Payment is made through verifiable channels. Once these conditions are fulfilled, ITC should not be denied merely due to supplier’s non-compliance in filing GSTR-3B or depositing tax.

The judgment also discouraged a wrong and unjust interpretation of Section 16(2)(c), here the tax officers are urged to adopt a balanced approach by examining the supplier’s records, initiating proceedings against defaulting suppliers under Section 73/74, and ensuring that the buyer is not made a scapegoat.

This case promotes due diligence among buyers (e.g., checking GSTR-2A, obtaining vendor declarations), but within reasonable bounds. 

The period under dispute (FY 2017–18) was part of the initial GST rollout, where systemic and procedural glitches were common. This judgment may help resolve several similar litigations pending for early years.

Hence, denying credit due to the default made by third party, defeats the constitutional guarantee under Article 14 and Article 19(1)(g). Furthermore, such interpretations decreases the confidence on business and distorting the genuine trade practices.

The better approach would be to hold the supplier accountable under Section 122 (penalties) and Section 74 (fraud/suppression), allow provisional ITC in the hands of purchaser subject to outcome of investigation, and to introduce statutory protection (like in the erstwhile CENVAT Rule 9(1)(a) proviso) for buyers acting in good faith.

For protection of buyers, the Government can consider escrow-based payments similar to construction companies do for high-value supplies, bring the concept of indemnity bonds or insurance-based protection for ITC denial, or may be some Real-time invoice validation instead of post-facto mismatch rectification.

Conclusion

The High Court’s decision is a significant step towards fair implementation of GST law, respecting principles of equity, proportionality, and business practicality, by ensuring that bona fide purchasers are not punished for the supplier’s default, the Court has helped realign the ITC system with the foundational objectives of GST.

The judgment not only sets a judicial precedent but also nudges policymakers to revisit and refine the contours of Section 16(2)(c) for ensuring justice and certainty in indirect taxation.

***

The author can be contacted at aman.rajput@mail.ca.in

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Author Bio

CA Aman Rajput, Practicing Chartered Accountant Contact me at 8209604735 Email ID aman.rajput @ mail.ca.in Area of practice:- Income tax, Audit, Company/LLP Incorporation or closure, Business consultancy, cost management, Financing, Startups, MSME, Finance, Virtual CFO, GST and forensics a View Full Profile

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3 Comments

  1. ASHOK KUMAR KANUNGA says:

    Your HC case, matter is remanded back to authorities for fresh consideration. You have not mentioned full case- Name, Number and the state of HC. I am quoting the case no. – Writ Tax no 501/2023 dated 26-05-2025 of Allahabad High Court giving final judgment held that ” Tax Payment is Essential” & upheld section 16(2)(c).
    You have cited 2 judgments and both these cases are discussed in the case of Allahabad High court 501/2023. Hence you article is not correct. Except if any supreme Court judgement come in future. ph. no.080 42154492

  2. ASHOK KUMAR KANUNGA says:

    YOUR ARTICLE IS NOT CORRECT , TAX PAYMENT IS ESSENTIAL –Trendships Online Services Private Limited Vs Commissioner Commercial Taxes U.P. At Lucknow And Another CASE LAW NUMBER IS ANONYMIZED FOR NEUTRALITY PURPOSES
    PHONE 0 8 o 4 2 1 5 4 4 9 2

    1. CA Aman Rajput says:

      Here, I just analysed high court judgement, that is available in public records

      I can’t comment how you rushed to the conclusion that it’s correct or not, it’s unique case law on basis if which i expressed my opinion & Analysis

      Thanks & Regards

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