The Supreme Court ITC Ruling has upheld the Gujarat High Court’s decision confirming the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. The Court held that a registered purchaser can claim Input Tax Credit (ITC) only if the supplier has actually paid the tax to the government. A bench comprising Justice Sanjay Kumar and Justice Sanjeev Sachdeva dismissed a batch of Special Leave Petitions led by Bhandari Scrap Traders v. Union of India. The petitions challenged the validity of the provision that makes the supplier’s tax payment a mandatory condition for claiming ITC.
Petitioners’ Contentions
The petitioners argued that Section 16(2)(c) violates Articles 14, 19(1)(g), 265, and 300A of the Constitution. They claimed that the law unfairly penalizes genuine purchasers for the supplier’s failure to deposit GST.
Alternatively, they requested the Court to read down the provision. According to them, authorities should deny ITC only when the purchaser participates in fraud, collusion, or deliberate tax evasion.
The petitioners also pointed out that buyers cannot verify whether suppliers have paid GST because GSTR-3B remains inaccessible to recipients. They stated that they had fulfilled every statutory requirement by holding valid tax invoices, receiving the goods, and ensuring the transactions appeared in GSTR-2A and GSTR-2B. Therefore, they argued that authorities should not deny ITC for reasons beyond their control.
To support their arguments, they relied on judgments under the Delhi Value Added Tax Act, including On Quest Merchandising India Pvt. Ltd., Arise India Ltd., and Shanti Kiran India Pvt. Ltd.. These decisions protected bona fide purchasers from losing tax credit due to supplier defaults.
Gujarat High Court’s Reasoning
The Gujarat High Court rejected these arguments. It explained that the GST framework differs significantly from the earlier VAT regime. The Court observed that the Statement of Objects and Reasons of the CGST Act links Input Tax Credit directly to taxes actually paid. It concluded that actual payment forms the foundation of the ITC system.
The High Court also interpreted Section 16(2)(c) along with Sections 41, 53, and other related provisions. It held that these provisions create an integrated mechanism for granting and utilizing ITC.
Further, the Court distinguished the GST regime from the Delhi VAT framework. It noted that GST allows seamless credit transfers across States through the IGST settlement mechanism. If buyers claimed ITC without suppliers paying tax, States could transfer revenue they never received. Such a result would weaken the destination-based GST structure. Therefore, the Delhi VAT precedents could not apply to the CGST Act.
Supreme Court’s Findings
The Supreme Court agreed with the Gujarat High Court in every respect. It held that no valid ground existed to strike down Section 16(2)(c) or to read down its provisions.
The Court observed that the High Court had carefully examined the statutory framework governing ITC. It also highlighted the important differences between the Delhi VAT Act and the CGST Act.
The bench further referred to Sections 41, 73, and 74 of the CGST Act. These provisions allow a purchaser to reclaim previously reversed ITC after the supplier clears the outstanding tax liability. According to the Court, this safeguard distinguishes the GST framework from the earlier VAT laws.
Tripura High Court Decision Distinguished
The Court also examined a Special Leave Petition arising from the Tripura High Court’s decision in Sahil Enterprises v. Union of India. It found that the Tripura High Court had not conducted the same detailed statutory analysis as the Gujarat High Court. As a result, the Supreme Court refused to treat both judgments alike while deciding the validity of Section 16(2)(c).
Directions
The Supreme Court dismissed all the Special Leave Petitions. It affirmed the Gujarat High Court’s judgment and upheld the constitutional validity of Section 16(2)(c) of the CGST Act.
Significance
The Supreme Court ITC Ruling settles a major issue in GST litigation. The Court confirmed that a purchaser can claim Input Tax Credit only after the supplier pays the applicable tax to the government. It also refused to extend the principles developed under the Delhi VAT Act to the GST framework.
The judgment strengthens the view that ITC under GST is a statutory benefit linked to actual tax payment throughout the supply chain. The ruling will influence numerous pending disputes involving supplier defaults. It also highlights the need for businesses to perform thorough supplier due diligence before claiming Input Tax Credit.
