The Rajasthan High Court has upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act), which makes the actual payment of tax by the supplier to the Government an essential condition for the recipient to claim Input Tax Credit (ITC).
The Division Bench comprising Justice Arun Monga and Justice Ashutosh Kumar delivered the ruling while dismissing a challenge filed by Sumetco Alloys Private Limited against a substantial GST demand of approximately ₹56.44 crore relating to financial years 2020-21 to 2023-24.
The judgment is significant for businesses claiming ITC because it reiterates that compliance by the supplier forms part of the statutory conditions governing ITC entitlement.
Background of the Case
Sumetco Alloys Private Limited, engaged in the manufacture of pure lead and lead ingots, challenged proceedings initiated by the GST Department concerning ITC claimed on purchases from certain suppliers.
According to the taxpayer, the transactions were genuine and were supported by tax invoices, banking transactions, e-way bills, transportation records and other documentary evidence. The company argued that it had paid the purchase consideration, including GST, to its suppliers and had fulfilled all obligations expected from a genuine purchaser.
The Department, however, alleged that some of the transactions involved fake invoices, bogus supplies and layered transactions without actual movement of goods. Proceedings were consequently initiated under Section 74 of the CGST Act, resulting in a demand of ₹56.44 crore.
The taxpayer approached the High Court challenging both the demand and the constitutional validity of Section 16(2)(c).
Section 16(2)(c) and Eligibility for ITC
Section 16 of the CGST Act prescribes the conditions that must be satisfied before a registered person can avail ITC.
Section 16(2)(c) requires that the tax charged in respect of the supply must have been actually paid to the Government, either in cash or through utilisation of eligible ITC, subject to the statutory framework.
The petitioner argued that a genuine purchaser should not lose ITC merely because the supplier subsequently failed to discharge its tax liability.
The High Court, however, rejected the constitutional challenge and held that the conditions prescribed under Section 16(2) operate cumulatively. The Court treated ITC as a statutory and conditional entitlement, rather than an unconditional or vested right.
Bona Fide Purchaser Defence Must Be Raised in Appeal
One of the important aspects of the judgment concerns the taxpayer’s argument that it was a bona fide purchaser and therefore should not be penalised for a supplier’s alleged default.
The High Court did not accept this argument as a ground for exercising writ jurisdiction in the present circumstances.
The Bench observed that the Supreme Court’s decision in Bhandari Scrap Traders v. Union of India had already considered the validity of Section 16(2)(c) and rejected a similar attempt to read additional protection for bona fide purchasers into the statutory provision.
The Rajasthan High Court therefore declined to rewrite the statutory conditions prescribed by Parliament.
The Court also observed that whether the purchases were genuinely made, whether goods actually moved and whether the taxpayer was involved in any fraudulent arrangement were matters requiring examination of evidence.
Accordingly, such factual issues were considered more appropriately suited to the statutory adjudication and appellate process rather than determination through writ proceedings.
Section 41 Provides a Reversal and Re-Availment Mechanism
The High Court also referred to the mechanism contained in Section 41 of the CGST Act, read with Sections 73 and 74.
The Court noted that the GST framework contemplates reversal of ITC where the supplier has not paid the corresponding tax, with a mechanism for re-availment once the statutory requirements are subsequently satisfied.
The Bench considered this mechanism relevant while rejecting the argument that Section 16(2)(c) was arbitrary or unconstitutional.
Thus, the existence of a statutory reversal and re-availment mechanism was treated as an important answer to the taxpayer’s challenge to the provision.
High Court Declines to Re-examine Disputed Facts
The taxpayer had produced various documents to demonstrate the genuineness of the transactions. However, the Department had made serious allegations concerning bogus invoices and absence of actual movement of goods.
The High Court held that these competing claims involved disputed questions of fact.
Since the Department had issued a detailed show cause notice containing allegations of fraud and suppression and the taxpayer had already submitted its reply and received an opportunity of hearing, the Court found no sufficient ground to interfere with the proceedings under Article 226 of the Constitution.
The Court observed that dissatisfaction with the manner in which the taxpayer’s reply was appreciated does not automatically amount to a violation of natural justice.
Appeal Under Section 107 Is the Appropriate Remedy
Another important observation relates to the statutory appellate mechanism.
The High Court held that once the constitutional challenge failed and the taxpayer had participated in the adjudication proceedings, any grievance concerning the appreciation of evidence or merits of the demand should ordinarily be pursued through an appeal under Section 107 of the CGST Act.
The Court cautioned against using writ proceedings to bypass the statutory appellate hierarchy merely by describing a dispute regarding the merits of an order as a violation of natural justice.
The Court nevertheless granted the taxpayer 30 days to file an appeal and directed that the ₹50 lakh already deposited through Form GST DRC-03 should be given credit towards the statutory pre-deposit.
Other Issues Considered by the Court
The High Court also rejected the argument that issuance of Form GST DRC-01A was mandatory in the circumstances of the case. The Court noted the amendment to Rule 142(1A), under which the relevant provision uses the expression “may” instead of “shall.”
The Court also declined to interfere on the ground that the same officer had been involved in investigation as well as adjudication, observing that the GST framework permits the designated proper officer to undertake the relevant statutory functions.
Key Takeaways for GST Taxpayers
The judgment carries several practical implications for businesses:
- Supplier tax payment remains an important statutory condition for ITC.
- Possession of a tax invoice alone may not conclusively establish ITC eligibility.
- Businesses should maintain substantial documentary evidence supporting the genuineness of purchases.
- E-way bills, transport documents, payment records, purchase orders, delivery records and reconciliation statements can be important in defending ITC claims.
- A taxpayer disputing a GST demand on factual grounds should generally pursue the statutory appellate remedy where adjudication has already taken place.
- The bona fide purchaser argument should be properly raised and supported before the competent appellate authority where factual examination is required.
Conclusion
The Rajasthan High Court’s decision in Sumetco Alloys Private Limited v. Union of India reinforces the statutory nature of Input Tax Credit under the GST regime. The Court has upheld Section 16(2)(c) and confirmed that actual payment of tax by the supplier forms part of the statutory conditions governing ITC.
At the same time, the judgment highlights the importance of the statutory appellate mechanism. Where a taxpayer disputes allegations concerning bogus invoices, movement of goods, supplier defaults or the genuineness of transactions, those factual issues may require detailed examination of evidence before the appropriate appellate authority.
For businesses, the decision underlines the importance of vendor due diligence, proper documentation, reconciliation of ITC and timely response to GST notices.
Case: Sumetco Alloys Private Limited v. Union of India
Case No.: D.B. Civil Writ Petition No. 9323/2026
Court: Rajasthan High Court
Key Provision: Section 16(2)(c), CGST Act, 2017
GST Demand: ₹56.44 cror