A GST notice alleging that ITC was claimed on supplies where the supplier failed to pay tax or file returns invokes Section 16(2)(c) of the CGST Act, which requires that the tax charged on the supply must have actually been paid to the government. The provision is constitutionally valid, but the Punjab and Haryana High Court has held that it cannot be used mechanically to make a purchasing dealer reverse credit merely because the selling dealer failed to deposit tax. The taxpayer’s defence is built on the genuineness of the transaction and on the department’s failure to independently verify the supplier’s default.
The Statutory Condition and the Burden
Section 16(2)(c) is a condition for availing ITC: the tax must have been paid to the government. Section 155 of the CGST Act places the burden of proving entitlement on the recipient. The department’s notice typically asserts that the supplier did not pay the tax or filed nil returns, and that the recipient’s credit is therefore inadmissible. The recipient must respond with evidence that the transaction was genuine and that the supplier’s default is not attributable to the recipient.
The No-Mechanical-Reversal Principle
The Punjab and Haryana High Court in the Shaurya Alloys line of cases upheld the validity of Section 16(2)(c) but held that ITC cannot be reversed mechanically merely because the supplier failed to deposit GST or filed nil returns. The Court required the department to examine the transaction and to establish a link between the recipient and the supplier’s default before denying the credit. The Allahabad High Court has similarly held that denial solely on the ground of the supplier’s default is not sustainable.
The Evidence Architecture
The recipient should build a transaction file: the purchase order, the invoice, the e-way bill, the transport documents, the payment through banking channels, the goods receipt note, the stock records and the consumption or onward sale of the goods. The recipient should also obtain the supplier’s confirmation of the transaction and, where possible, evidence that the supplier paid the tax or filed the return. The department’s assertion of supplier default should be tested: a notice that does not identify the specific default or the period is vulnerable.
The DRC-01C Route
Where the mismatch is between GSTR-3B and GSTR-2B, the department may issue a DRC-01C intimation under Rule 88D before a full show-cause notice. The recipient should respond within the prescribed time, explaining the mismatch and providing the reconciliation. A DRC-01C response that is not filed can lead to a DRC-01 demand.
What the Recipient Should Control
The supplier-default outcome depends on three variables: whether the transaction evidence demonstrates a genuine supply; whether the department has established a link between the recipient and the supplier’s default rather than relying on the default alone; and whether the response is filed within the applicable timeline at the DRC-01C or ASMT-11 stage. The recipient that controls these variables can rely on the no-mechanical-reversal principle to resist an automatic demand.
Call to Action: We advise taxpayers on supplier-default ITC notices, Section 16(2)(c) defence and transaction-evidence architecture. For an ITC-mismatch engagement, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.