GST ITC and NGTP Tagging: Can Genuine Buyers Be Forced to Prove Their Supplier’s Supplier?

1. Background: The NGTP Tag and Its Fallout on ITC Claims

Under the GST regime, a growing pattern has emerged in field investigations: once the department classifies an upstream seller as NGTP (non-genuine, non-existent, or not doing business from the registered place), officers frequently proceed to unsettle Input Tax Credit (ITC) in the hands of downstream recipients—without first substantiating that those recipients were part of any fraudulent arrangement.

The usual sequence is:

  1. An upper-tier entity is branded as NGTP/non-existent.
  2. The immediate recipient’s ITC is questioned and reversed.
  3. Every subsequent link in the supply chain is treated with suspicion.

This happens even where the assessee can fully substantiate his own transactions—invoice, payment, movement of goods, accounting, and onward supply—but is still asked to prove the internal dealings of entities far up the chain with whom he never had a contract or relationship.

Core concern: NGTP risk flags are increasingly being treated as conclusive evidence against downstream assessees, shifting the burden of investigation away from the department and onto genuine buyers.

2. The Core Controversy in a Simple Chain Example

2.1 Illustrative transaction structure

Consider a modified example:

  • Entity X is later treated as non-existent.
  • X is said to have supplied goods to A.
  • A sells those goods to B through a valid tax invoice, and B pays value plus GST through banking channels.
  • B then sells the goods to C under a tax invoice, and C also pays value plus tax through proper banking modes.

Subsequently, the department concludes that X is a sham entity. On that basis alone, it starts doubting the purchase by A, then questions A’s sales to B, and consequently challenges B’s sales to C.

From this, the department often takes the following steps:

  • Calls upon B and C to produce details relating to X, including its existence, business activities and logistics.
  • When B and C cannot produce records of X—an entity with which they had no contractual privity—the department treats that inability as a sufficient ground to:
    • Deny or reverse ITC,
    • Invoke Section 74, and
    • In some cases, initiate harsh proceedings including cancellation or treating the assessee as part of a bogus chain.

This approach essentially converts:

“X is bogus” → “Therefore A is doubtful” → “Therefore B and C must be penalised unless they disprove the entire chain.”

Such a chain-presumption is at odds with both legal principles on burden of proof and the commercial realities of how trade operates.

2.2 Who should bear which burden?

  • A is responsible for explaining his purchase from X.
  • B must demonstrate that his purchase from A was genuine.
  • C must establish that his purchase from B was genuine.

The duty to prove that X never supplied to A, or that A deliberately entered a fictitious arrangement with X, rests on the department and on A—not on B or C.

3. Why Requiring B or C to Prove X’s Transactions Is Legally and Practically Unreasonable

3.1 Factual impossibility

B and C virtually have no access to the internal documentation of X, such as:

  • Purchase records of X,
  • Stock books of X,
  • Transport contracts and goods movement records of X,
  • Bank statements and financial ledgers of X,
  • Site inspection details of X’s alleged business premises.

Requiring downstream buyers to produce this material amounts to imposing an impossible evidentiary burden on persons who were never party to the earlier leg of the transaction.

3.2 Distortion of statutory requirements

Under GST, the conditions for a recipient to avail ITC are anchored on:

  • Possession of a valid tax invoice,
  • Actual receipt of goods or services,
  • Tax charged by the supplier,
  • Reflection and matching as per returns, and
  • Compliance with other statutory conditions.

Nowhere does the law say that each assessee must verify, certify, or audit:

  • The supplier’s supplier,
  • Or the entire upstream ancestry of the goods,
  • Or the tax discipline of remote entities in the chain.

Transforming ITC eligibility into a requirement to vouch for unknown upstream dealings goes far beyond what the statute prescribes.

3.3 Rewarding weak investigation

Frequently, when X is classified as non-existent, the tougher investigative work should focus on:

  • Tracing the persons who operated X,
  • Examining A’s role and conduct vis-à-vis X,
  • Establishing whether A’s supplies to B were also sham,
  • Recovering tax from the real beneficiary of the fraud.

Instead, the easier path is often chosen—focus on the available, traceable recipients (B and C), propose large ITC reversals with Section 74 interest and penalty, and side-step detailed examination of the actual fraudulent operators.

This practice effectively shifts the risk and cost of departmental inaction onto genuine assessees.

4. Judicial Responses: Protection for Bona Fide Recipients

4.1 Retrospective cancellation and ITC denial

Courts have increasingly taken a measured view on whether ITC can be denied solely due to supplier irregularities.

  • In Himalaya Communication Pvt. Ltd. v. Union of India, the Himachal Pradesh High Court held that ITC cannot be disallowed merely because the supplier’s registration was retrospectively cancelled. The authority must:
    • Scrutinise the genuineness of the actual supply transaction, and
    • Consider the documentation and evidence furnished by the purchaser.

The Court emphasised that retrospective cancellation is not an automatic eraser of all past supplies. The authority must apply its mind to whether the specific supply to the assessee actually took place.