Overview

In a significant ruling with far-reaching consequences for GST-registered businesses across India, the Supreme Court has dismissed a batch of Special Leave Petitions challenging the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (“CGST Act”). By dismissing the petitions in Bhandari Scrap Traders vs. Union of India & Ors. and connected matters, the Supreme Court has affirmed the judgment of the Gujarat High Court in Maruti Enterprise vs. Union of India & Ors., which upheld the provision that denies Input Tax Credit (ITC) to a purchasing dealer where the supplier has failed to actually deposit the corresponding tax with the Government.

This development settles at least for now one of the most contentious and litigated issues under the GST regime: whether a bona fide purchasing dealer can be denied ITC purely because the seller failed to remit tax collected from the purchaser, a factor entirely outside the purchaser's control.

The Core Legal Question

Section 16(2) of the CGST Act lays down six cumulative conditions that must be satisfied before a registered person can claim ITC. These include possession of a valid tax invoice, actual receipt of goods or services, and under clause (c) the requirement that the tax charged on the supply has “actually been paid to the Government” by the supplier, subject to Section 41.

Petitioners across the group of matters including traders, exporters, and other GST-registered businesses argued that Section 16(2)(c) is arbitrary and unconstitutional because it makes ITC contingent on an act (payment of tax) entirely within the supplier's domain and beyond the purchaser's verification or control. They contended the provision violates Articles 14 (equality), 19(1)(g) (freedom of trade), 265 (no taxation without authority of law), and 300A (right to property) of the Constitution, and sought either that the provision be struck down or “read down” to exclude genuine, bona fide purchasers from its rigour limiting its application only to fraudulent or collusive transactions.

The Gujarat High Court's Reasoning

A Division Bench of the Gujarat High Court, in a common judgment disposing of over 45 connected petitions with Special Civil Application as the lead matter, rejected these challenges and upheld Section 16(2)(c) in its entirety.

Petitioners' Key Arguments

The petitioners, represented by senior counsel argued that:

1. Genuineness is already secured by clauses (a), (aa), (b) and (ba), making clause (c) an unjustified extra hurdle.
2. Purchasers cannot verify a supplier's tax deposit, as the supplier's GSTR-3B is inaccessible to the recipient.
3. Denial of ITC on this ground amounts to double taxation and unfairly shifts the supplier's burden onto an innocent purchaser, violating Article 14.
4. Reliance was placed on the Delhi High Court's On Quest Merchandising (affirmed in Arise India and Shanti Kiran), and the Tripura High Court's Sahil Enterprises, both of which read down analogous provisions.
5. The maxim Lex Non Cogit Ad Impossibilia and the ECJ's Axel Kittel ruling were invoked to argue ITC can be denied only where fraud was known or ought to have been known.

Revenue's Key Arguments

The State, represented by Advocate General Mr. Kamal Trivedi, and the Union of India countered that:

1. Section 16(2)(c) must be read with Sections 41(2) and 155; Section 41(2) allows re-availment of reversed credit once the supplier pays, so denial is not permanent.
2. Rule 37A of the CGST Rules operationalizes this reversal-and-reavailment mechanism.
3. Section 155 places the burden of proving ITC eligibility on the claimant.
4. The DVAT Act has no equivalent to Section 41(2), Rule 37A, or Section 155, making On Quest Merchandising inapplicable.
5. GST is destination-based; Section 53 obliges the originating State to transfer tax it never received, so diluting clause (c) would disrupt inter-State fiscal balance.
6. ITC is a statutory concession, not a vested right, and mere hardship cannot invalidate a provision.

The Court's Conclusion

The Gujarat High Court found the language of Section 16(2)(c) to be clear and unambiguous, and held that all clauses of Section 16(2) from (a) to (d) must be read conjointly, not independently, meaning satisfaction of clauses (a) and (b) alone does not entitle a dealer to ITC. Distinguishing the Delhi High Court's On Quest Merchandising line of cases (and respectfully disagreeing with the Tripura High Court's Sahil Enterprises judgment), the Bench held that the CGST framework through Section 41(2) and Rule 37A already ensures that purchasers are not permanently deprived of credit, since it is restored once the supplier pays the tax. The Court also relied on the Supreme Court's decision in State of Karnataka vs. Ecom Gill Coffee Trading Pvt. Ltd., which had held that the burden of proof for claiming ITC is not discharged merely by producing invoices or proof of payment to the supplier.

Accordingly, the Court declined to either strike down or read down Section 16(2)(c), holding it neither unconstitutional nor unduly onerous.

Notably, while ruling against the petitioners, the Bench added an important observation directed at the Government: it acknowledged the genuine hardship faced by bona fide purchasers and urged the Government to undertake legislative and technological reforms including a real-time tracking mechanism to verify supplier tax payments against specific invoices so that honest recipients are better insulated from defaults by their suppliers, and to expedite recovery action against defaulting suppliers rather than leaving purchasers to bear the practical burden.

The Supreme Court's Verdict

The matter reached the Supreme Court through multiple Special Leave Petitions, including Bhandari Scrap Traders vs. Union of India & Ors. A Bench comprising Justice Sanjay Kumar and Justice Sanjeev Sachdeva heard the petitioners, led by counsel including Mr. Uchit Sheth and Mr. Malak Manish Bhatt.

The petitioners drew the Court's attention to the fact that a separate SLP arising from the Tripura High Court's decision in Sahil Enterprises vs. Union of India which had read down Section 16(2)(c) had already been entertained by the Supreme Court. However, the Bench distinguished that matter, noting that the Tripura High Court had not undertaken the same detailed analysis carried out by the Gujarat High Court, particularly the comparison between the DVAT Act and CGST Act from paragraph 42 onwards, and the scheme of ITC availment set out in paragraph 56 of the Gujarat judgment.

The Supreme Court held that this distinction demonstrated there was no basis to draw parity between purchasing dealers under the CGST Act and purchasers under the DVAT Act in relation to ITC where the supplier fails to pay tax. It further noted the Gujarat High Court's reliance on Sections 41, 73, and 74 of the CGST Act, which allow a purchasing dealer to re-avail, reversed ITC once the supplier discharges the tax liability. Expressing “complete and respectful agreement” with the Gujarat High Court's reasoning, the Supreme Court dismissed the Special Leave Petitions and affirmed the impugned judgment.

Conclusion

The Supreme Court's dismissal of the SLPs in Bhandari Scrap Traders marks a significant, if not entirely final, milestone in the long-running litigation over Section 16(2)(c) of the CGST Act. For now, the message to GST-registered businesses is clear: possession of a valid invoice and proof of having paid the supplier is not, by itself, sufficient to secure Input Tax Credit. Unless and until the pending SLP arising from the Tripura High Court's contrary view is decided, taxpayers would be well advised to strengthen supplier due diligence, monitor GST return reconciliations proactively, and consider contractual safeguards to mitigate the risk of ITC denial arising from a supplier's non-compliance.