Rajasthan High Court Rejects Challenge To GST Provision Requiring Supplier Tax Payment For ITC
The Rajasthan High Court has upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, holding that actual payment of tax by the supplier is a valid condition for availing Input Tax Credit (ITC).
A Division Bench of Justices Arun Monga and Ashutosh Kumar dismissed Sumetco Alloys Private Limited's challenge to Section 16(2)(c) as well as its challenge to a Rs. 56.44 crore GST demand for the financial years 2020-21 to 2023-24. The judges observed:
“..Section 16(2)(c) suffers from no constitutional infirmity. Secondly, the existence of the reversal and re-availment mechanism under Section 41, read with Sections 73 and 74, is a sufficient answer to the charge of arbitrariness”
Sumetco manufactures pure lead and lead ingots. It challenged a demand of Rs. 56,44,08,265 after the Department alleged that it had wrongly availed ITC on purchases from certain suppliers.
The company contended that the purchases were genuine and supported by tax invoices, bank payments, e-way bills, transport documents and other records. It argued that ITC could not be denied merely because of a supplier's default when it had fulfilled its own obligations.
The Department alleged that the transactions involved fake invoices, bogus supplies and multi-layered paper transactions without actual movement of goods. It issued a show cause notice under Section 74, followed by the demand order dated 10 April 2026.
The High Court held that the conditions under Section 16(2) are cumulative and that ITC is a contingent statutory entitlement rather than a vested or constitutional right. It noted that Section 41 provides for reversal of ITC where the supplier has not paid the tax and permits re-availment once the supplier discharges the liability.
Relying on the Supreme Court's decision in Bhandari Scrap Traders v. Union of India, the High Court rejected Sumetco's plea to read down Section 16(2)(c) to protect bona fide purchasers. It held that the Supreme Court had already upheld the provision and rejected a similar plea.
The Bench also rejected Sumetco's contention that its transactions were bona fide, holding that the issue involved disputed questions of fact. Since the Department had invoked Section 74 on allegations of fake invoices and bogus supplies, the Court held that the matter required examination of evidence and could not be decided in writ proceedings.
It rejected the challenge to the Section 74 proceedings. It held that the 33-page show cause notice contained specific allegations of fraud and suppression. It further held that issuance of Form GST DRC-01A was not mandatory after Rule 142(1A) was amended to replace “shall” with “may”.
The judges also rejected the plea of bias based on the same officer having conducted the investigation and adjudicated the matter, observing that the GST law permits the “proper officer” to perform both functions.
As Sumetco had received the notice, filed a detailed reply and been granted a hearing, the Bench held that any grievance regarding appreciation of its reply could be raised in a statutory appeal under Section 107. It said:
“...Since the vires challenge fails, to permit bypassing Section 107 by labeling a grievance on merits as a breach of natural justice would render the appellate hierarchy, and the pre-deposit condition that Parliament has attached to it, nugatory”
Accordingly, the High Court disposed of the writ petition and granted Sumetco 30 days to file an appeal. It directed the Department to give Sumetco credit for the Rs. 50 lakh it had deposited through Form GST DRC-03 towards the statutory pre-deposit.
For the Petitioner: Jatin Harjai with Palak Gupta and Bimal Jain.
For the Respondents: Bharat Vyas, ASG-Sr. Adv., with Mahi Yadav, AAG; Chelsi Agarwal, AAAG; Yuvraj Singh Rajawat; Devesh Yadav, CGC; and Anima Chaturvedi.