When Sellers Default, Buyers Bear the Cost:
Supreme Court’s verdict on Input Tax Credit under GST
CA Kishore Harjani Head – Customs and GST, Taxmann Research & Development
CA Kishore Harjani Head – Customs and GST, Taxmann Research & Development
A long-standing constitutional challenge neared its conclusion on 24 July 2026, as the Supreme Court dismissed a batch of special leave petitions in the lead matter of Bhandari Scrap Traders v. Union of India [SLP(C) No 23931/2026]. A Bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva upheld the Gujarat High Court’s decision, thereby affirming the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’).
The Court itself described its position as being ‘in complete and respectful agreement with the views expressed by the High Court of Gujarat’, and accordingly dismissed the petitions.
1. The practical problem underlying the provision
Consider an honest business. It buys goods from a registered supplier, pays the full price along with the GST charged on the invoice, and takes delivery of the goods. It holds the tax invoice, it has received the goods, and it has filed its returns. Months later, the department knocks on its door not because the buyer did anything wrong, but because the supplier never deposited the collected tax with the Government. Under Section 16(2)(c), the buyer’s input tax credit (ITC) is reversed, and it is asked to pay the tax again out of its own pocket. This is the injustice, real or perceived, that has been litigated across the country.
2. Understanding the requirement under Section 16(2)(c)
Section 16 of the CGST Act lays down the conditions that a registered person must satisfy in order to claim the ITC. Clause (c) of sub-section (2) allows credit only if “the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit.” In other words, the buyer’s right to credit hinges on an act that lies entirely in the supplier’s control. Since the buyer has no independent machinery to verify whether the seller has paid the tax, this gap has repeatedly formed the basis for challenging the provision as arbitrary and as violating Articles 14, 19(1)(g), 265 and 300A of the Constitution of India.
3. The Nation Split: Two Streams of High Court Rulings
Before the Supreme Court intervened, the High Courts had divided into two camps. One line of decisions borrowed the reasoning developed under the Delhi Value Added Tax regime particularly the Delhi High Court’s ruling in On Quest Merchandising India Pvt. Ltd 2018 (10) G.S.T.L. 182 (Del.), which held that a bona fide buyer “cannot be expected to do the impossible” and that the department’s remedy lies against the defaulting seller, not the innocent purchaser.
In line with this reasoning, the Tripura, Karnataka and Gauhati High Courts read down Section 16(2) (c) so that it would apply only where the transaction was fraudulent or collusive. The other view, taken by the Gujarat High Court, refused to import the VAT-era logic into GST.
The competing positions are summarised below.
High Court Party and Citation
Tripura Sahil Enterprises (2026) 38 Centax 116 (Tripura)
Karnataka Instakart Services Pvt. Ltd. (2026) 42 Centax 48 (Kar.)
Gujarat Maruti Enterprise (2026) 42 Centax 256 (Guj.)
Gauhati Metal Syndicate (2026) 43 Centax 239 (Gau.)
Decision on section 16(2)(c) Outcome
Valid, but read down to apply only to fraudulent or collusive transactions
Read down, following Tripura and Gauhati
Valid; refused both to strike down and to read down
Applied the read-down precedent to protect a bona fide buyer
For the buyer
For the buyer
For the revenue
For the buyer
4. Holding the Line: The Gujarat High Court’s rationale
In its judgment Maruti Enterprise v. Union of India (2026) 186 taxmann.com 90 dated 1 May 2026, the Gujarat High Court declined to either strike down or read down the provision. Its reasoning rested on a few clear pillars.
First, ITC is “not a constitutional or vested right, but a statutory concession, subject to the conditions and restrictions prescribed under the Act”. Any such concession must be availed strictly on the terms attached to it. Since the scheme deliberately ties credit to “taxes paid”, the condition in clause (c) is a legitimate feature of that scheme, not an aberration.
Second, the Court rejected the charge of double taxation. Section 41(2), read with Rule 37A, requires the buyer to reverse the credit if the supplier fails to pay, but expressly allows the buyer to re-avail that very credit once the supplier subsequently deposits the tax. What follows, then, is reversal followed by restoration, not a permanent loss, so “the plea of double taxation would fail”.
Third, the buyer is not left without a remedy. The department can recover the unpaid tax from the defaulting supplier under Sections 73 and 74, and the purchaser can protect itself commercially, for instance through an indemnity clause in its contract.
Crucially, the Gujarat High Court drew a clear distinction from the Delhi VAT precedents. The VAT law had no equivalent of the reversal and re-availment mechanism and no destination-based settlement system like GST. Reading down the provision, the Court warned, “would trigger cascading fiscal consequences” and disturb the architecture of GST. It expressly parted ways with the Tripura High Court in Sahil Enterprises, noting thatthe Tripura High Court had not examined the interplay of Sections 41 and 53 read with Rule 37A. Even while ruling in favour of the revenue, however, the Court urged the Government to ease the burden on honest buyers by developing a real-time, technologydriven payment-verification mechanism and by acting promptly against erring suppliers.
5. A reasoned dismissal by the Supreme Court
What makes the Supreme Court’s order of 24 July 2026 significant is that it did not merely turn the petitioners away. Although the special leave petitions were dismissed without formally granting leave, the Court gave reasons for its decision. It noted that the detailed exercise undertaken by the Gujarat High Court had not been undertaken by the Tripura High Court in Sahil Enterprises. On that basis, it held that there was “no possibility of drawing parity” between a purchasing dealer under the CGST Act and a bona fide purchasing dealer under the Delhi VAT Act. The Court agreed that the buyer could re-avail the reversed credit once the supplier discharged the liability, and affirmed and upheld the impugned judgment.
6. Conclusion: To what extent does a reasoned SLP dismissal bind?
This is where the doctrine of merger comes into play. When the Supreme Court dismisses a special leave petition without granting leave, it exercises only its discretionary power under Article 136 of the Constitution of India, not its appellate jurisdiction.
As settled in Kunhayammed v. State of Kerala 2001 (129) E.L.T. 11 (S.C.) and reaffirmed by a larger Bench in Khoday Distilleries Ltd. 2019 (104) taxmann.com 25, the High Court’s judgment does not merge into such a dismissal.
The Gujarat judgment therefore technically remains a High Court judgment rather than a Supreme Court one. But that is not the end of the matter. The Supreme Court in Kunhayammed and Khoday Distilleries Ltd held that where the dismissal is a speaking order - one that records reasons - the statement of law it contains is a declaration of law under Article 141 of the Constitution of India, binding on all courts, tribunals and authorities throughout India, and its findings bind the parties by way of judicial discipline.
The order dated 24 July 2026 is precisely such a speaking order. It endorses the reasoning of the Gujarat High Court’s on merits. The practical effect, therefore, is that even without a formal merger, the validity of Section 16(2)(c) now stands settled by the Apex Court, and the contrary read-down rulings of the Tripura, Karnataka and Gauhati High Courts can no longer be relied upon.
At this juncture, it is also pertinent to note that the matter of Sahil Enterprises currently remains pending before the Supreme Court. Accordingly, unless and until the Supreme Court pronounces a contrary decision in Sahil Enterprises, the constitutional validity of Section 16(2)(c) remains settled and continues to hold the field, in light of the Supreme Court’s speaking order in Bhandari Scrap Traders.
For businesses, the takeaway is sobering one. Careful suppliers selection, continuous monitoring of supplier compliance, and building indemnity protection into contracts are no longer a good practice but they are a commercial necessity. The responsibility now lies with the Government: having succeeded in the legal battle, it would do well to take note of the Gujarat High Court’s own appeal, and spare the honest buyer the burden of another’s default.
