ITC Reversal for Supplier Default: Telangana High Court Steps In on Section 16(2)(c) Dispute
Background: Challenge to Section 16(2)(c) and ITC Denial
A cluster of writ petitions before the Telangana High Court has brought renewed focus on the validity and implementation of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. The assessee in these matters, including Megha Engineering and Infrastructure Limited Vs Union of India, has questioned the legality of denying input tax credit (ITC) to a recipient where the supplier has failed to deposit GST with the Government.
The principal grievance is that Section 16(2)(c) makes ITC entitlement dependent on the supplier’s payment of tax to the exchequer, even though the assessee has already discharged the tax component to the supplier along with consideration for the supply. This, according to the petitioners, results in:
- An excessive and unreasonable burden on the recipient
- Punishment of a bona fide purchaser for circumstances beyond its control
- Departure from the basic GST architecture as a consumption-based tax with seamless credit
- Situations of double taxation where tax has been collected from the assessee but not remitted by the supplier
These issues are particularly acute where the department proceeds directly against the recipient, seeking ITC reversal rather than first pursuing the defaulting supplier.
Proceedings Before the Telangana High Court
Batch of Writ Petitions and Prima Facie View
A batch of writ petitions (W.P. Nos. 6880, 6883, 6897, 6899, 6903 and 6933 of 2025) has been filed before the Telangana High Court challenging departmental actions denying ITC and demanding reversal from the recipient on account of supplier default.
During the preliminary hearing, the Court:
- Issued Rule nisi and called for the records
- Directed notice to the respondents, including the Central Board of Indirect Taxes and Customs (CBIC)
- Granted three weeks’ time to file counters
- Directed that the writ petitions be listed after three weeks
On the question of interim protection, the Court examined whether it was legally permissible for the department to straightaway demand ITC reversal from the assessee without first initiating or exhausting remedies against the defaulting supplier.
Taking note of a prima facie illegality in proceeding solely against the recipient, the Court ordered that no coercive steps be taken pursuant to the impugned Orders-in-Original (O.I.Os) until the next date of hearing.
Important: The interim protection reinforces the judicially recognized principle that in ordinary circumstances, recovery should first be attempted from the supplier, and proceedings against the recipient should be reserved for exceptional cases.
Reliance on Calcutta High Court: Suncraft Energy Precedent
Suncraft Energy Private Limited v. Assistant Commissioner, State Tax, Ballygunge Charge
The learned Senior Counsel appearing for the petitioners placed significant reliance on the Division Bench judgment of the Calcutta High Court in Suncraft Energy Private Limited v. Assistant Commissioner, State Tax, Ballygunge Charge.
In that case, the Calcutta High Court criticised the authorities for ignoring:
- Tax invoices furnished by the assessee
- Bank statements demonstrating payment of consideration and GST to the supplier
The Court held that the department’s action in directly seeking reversal of ITC from the recipient, without first pursuing the selling dealer, was arbitrary. The High Court emphasised that: