CASE LAW UPDATE
VIRES OF SECTION 16(2)(c) CGST ACT – UPHELD
Gujarat High Court (Division Bench)
M/s Maruti Enterprise v. Union of India & Ors.
R/Special Civil Application No. 18080 of 2023 (with batch of 50+ connected matters)
Coram: Hon’ble Mr. Justice A.S. Supehia & Hon’ble Mr. Justice Pranav Trivedi
Pronounced on: 01 May 2026 (Reserved on: 21 April 2026)
1. ISSUE FOR CONSIDERATION
Whether Section 16(2)(c) of the CGST Act, 2017 – which denies Input Tax Credit (“ITC”) to a recipient where the supplier has failed to deposit the tax with the Government – is ultra vires Articles 14, 19(1)(g), 265 and 300A of the Constitution; alternatively, whether the provision is liable to be read down so as to exclude bona fide purchasers from its rigour.
2. CONCLUSION OF THE COURT
The Division Bench declined to declare Section 16(2)(c) ultra vires and declined to read it down. The provision is held to be constitutionally valid, clear, self-explanatory and unambiguous when read with Sections 41(2), 53, 73, 74 and 155 of the CGST Act and Rule 37A of the CGST Rules. The writ petitions, insofar as the challenge to vires is concerned, were dismissed; the Bench has directed the Registry to list the petitions for adjudication on merits, with all other contentions kept open.
3. KEY REASONING OF THE BENCH
(a) ITC is a statutory concession, not a vested right: Following ALD Automotive (P) Ltd. and Jayam & Co., ITC is an entitlement subject to strict statutory conditions – deposit of tax by the supplier being one such fundamental condition. Conditions in Section 16(2)(a), (b), (c) and (d) operate conjointly and not independently. The Revenue cannot be required to stop at clause (b).
(b) GST is destination-based – IGST settlement consideration: Under the GST regime, the originating State is required under Section 53 of the CGST Act to transfer the tax component utilised by the inter-State supplier to the destination State. If ITC is allowed without actual deposit of tax by the supplier, the originating State would be forced to transfer funds it never received – causing systemic revenue loss. This consideration was absent under the State VAT regime, where ITC was confined within the originating State.
(c) Distinguishing On Quest Merchandising (Delhi HC): Section 9(2)(g) of the DVAT Act and Section 16(2)(c) of the CGST Act are not pari materia. The DVAT Act had no equivalent of Section 41(2) (re-availment on subsequent payment), Section 53 (destination-based settlement), Section 155 (burden of proof on the recipient), or Rule 37A (procedural mechanism for reversal and re-claim). The reasoning in On Quest Merchandising, Shanti Kiran and Arise India cannot, therefore, be transplanted onto the GST regime.
(d) Disagreement with Tripura HC in Sahil Enterprises: The Tripura HC had read down Section 16(2)(c) by following On Quest Merchandising. The Gujarat HC respectfully disagreed, observing that the Tripura HC did not adequately consider the interplay of Sections 41 and 53 of the CGST Act with Rule 37A, nor the effect of Section 155 (burden of proof).
(e) Section 41(2) read with Rule 37A – the safety valve: The recipient is required to reverse ITC where the supplier defaults, but is entitled to re-avail the credit once the supplier deposits the tax. Rule 37A provides a grace period – ITC can be retained till 30 September of the following financial year, with reversal due by 30 November; interest accrues only on default beyond that date. The recipient is therefore not permanently deprived of credit; the framework balances revenue interest with that of the bona fide purchaser.
(f) Doctrine of Lex non Cogit Ad Impossibilia – not attracted: The Court held that the GST regime, with the in-built mechanism of reversal-and-re-availment, does not place an impossible burden on the purchaser. The recipient can also protect himself contractually by inserting suitable indemnity clauses against the supplier in commercial agreements.
(g) Doctrine of reading down – not applicable: Following the Supreme Court in Authorized Officer, Central Bank of India v. Shanmugavelu (2024) 6 SCC 641, reading down is a tool of last resort to salvage constitutionality – not to mitigate harshness. Section 16(2)(c) being clear, unambiguous and constitutionally sound, the doctrine cannot be invoked.
(h) No double taxation: ITC is not a vested right but a statutory concession. Where the statute itself provides for reversal and re-availment, and where the Government retains independent recovery powers against the supplier under Sections 73/74, the principle of double taxation is not attracted. Article 265 is not infringed.
(i) Burden of proof under Section 155: The recipient claiming ITC bears the burden of proving eligibility, which is intrinsically linked to the actual deposit of tax by the supplier. “Eligible” in Section 155 cannot be construed as turning on the unilateral act of the recipient.
4. JURISPRUDENTIAL ALIGNMENT
Followed / concurred with:
- Kerala HC – M. Trade Links v. Union of India, 2024 SCC OnLine (Ker.) 2744 (extensively quoted on the destination-based ITC architecture).
- Kerala HC – Nahasshukoor v. Assistant Commissioner, 2023 SCC OnLine (Ker.) 11369.
- Patna HC – Asha Enterprises v. State of Bihar, 2023 SCC OnLine (Pat.) 4395.
- Andhra Pradesh HC – Thirumalakonda Plywoods, 2023 SCC OnLine (A.P.) 1476.
- Bombay HC – Mahalaxmi Cotton Ginning, 2012 SCC OnLine (Bom.) 733.
- Madras HC – Baby Marine (Eastern) Exports, 2025 SCC OnLine (Mad.) 15588.
- Madhya Pradesh HC – Shree Krishna Chemicals, 2025 SCC OnLine (MP) 1301.
- Supreme Court – State of Karnataka v. Ecom Gill Coffee Trading Pvt. Ltd., (2023) 18 SCC 809 (on the burden of proof aspect).
Distinguished / declined to follow:
- Delhi HC – On Quest Merchandising India (P) Ltd. v. Govt. of NCT of Delhi (2017) 87 taxmann.com 179: distinguished on the architectural difference between DVAT and CGST.
- Supreme Court – Commr. of Trade & Tax, Delhi v. Arise India Ltd., 2022 (60) GSTL 215 (SC) and Shanti Kiran India (P) Ltd., (2025) 179 taxmann.com 665 (SC): both held to be confined to DVAT.
- Karnataka HC – Tallam Apparels, 2021 SCC OnLine Kar 15785: noted as set aside by SC in Ecom Gill Coffee Trading.
- Tripura HC – Sahil Enterprises v. Union of India: Gujarat HC respectfully disagreed and declined to follow. (Note: this introduces a clear divergence between Tripura HC and Gujarat HC on Section 16(2)(c).)
- Karnataka HC – Instacart Services Pvt. Ltd. v. Union of India; Gauhati HC – National Plasto Moulding v. State of Assam: both noted as having followed On Quest Merchandising without considering Ecom Gill Coffee Trading.
5. IMPORTANT FINAL OBSERVATIONS
Although the vires challenge was rejected, the Bench made the following significant observations of policy import:
- The Government is not destitute; it has ample statutory powers under Sections 73/74 to proceed against defaulting suppliers – it cannot shift the burden onto bona fide recipients.
- A balanced approach akin to the Axel Kittel doctrine (CJEU, C-439/04 & C-440/04) is needed – ITC may be denied only where the recipient “knew or ought to have known” of fraud; the bona fide recipient should be insulated.
- It is “high time” the Government undertakes a comprehensive re-evaluation – by way of legislative amendments, clarifications, and a real-time technology-driven tracking mechanism enabling verification of supplier-wise, invoice-wise tax payment.
- Government must take prompt and immediate steps to recover tax from erring suppliers, instead of compelling purchasers to pursue cumbersome alternate remedies.
- “We expect the Government to address the issue of genuine purchasers at the earliest.” (Para 89)