Supreme Court Issues Notice on Constitutionality of Section 16(2)(c) of the CGST Act — ITC Denial Based on Supplier Default Challenged
- The Supreme Court of India (Bench: Justice K.V. Viswanathan and Justice Vijay Bishnoi) has issued notice in SLP (C) No. 18577/2026 filed by M/s Prime Metals, Alwar (Rajasthan), challenging the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. The petitioner had earlier approached the Rajasthan High Court (D.B. Civil Writ Petition No. 3729/2026) seeking, inter alia, a declaration that Section 16(2)(c) of the CGST Act is ultra vires the Constitution of India, along with quashing of a Show Cause Notice dated 25.06.2025 and Original Order dated 17.12.2025 passed by the adjudicating authority. The High Court dismissed the writ petition on 29.04.2026 by invoking the doctrine of alternative remedy available under Section 107(1) of the CGST Act.
- The core legal issue brought before the Supreme Court concerns the interpretation and constitutional validity of Section 16(2)(c) of the CGST Act, which makes availability of Input Tax Credit (ITC) in the hands of a registered recipient conditional upon the actual payment of tax by the supplier to the Government — either in cash or through utilisation of admissible ITC. The petitioner’s counsel contended before the Supreme Court that a literal reading of this provision effectively mandates the assessee to perform an impossible act, as what transpires at the supplier’s end is entirely beyond the control or knowledge of the purchasing taxpayer. This raises a fundamental question of law as to whether ITC of a bona fide recipient can be denied solely on account of default or non-compliance by the supplier.
- The petitioner specifically argued that the facts of the present case make the constitutional challenge even more compelling: the immediate/preceding supplier of M/s Prime Metals had, in fact, duly paid the tax to the Government, and the denial of ITC was premised on the alleged default or fake status of a supplier one step further removed in the supply chain — an entity with whom the petitioner had no direct transaction. It was contended that holding an innocent recipient liable for the tax defaults of a remote, unknown, or fraudulent entity in the supply chain is constitutionally impermissible and amounts to penalising a taxpayer for acts entirely outside their control.
- The Rajasthan High Court had, before dismissing the writ petition, relied on the settled legal position that no writ petition lies against a mere Show Cause Notice, as affirmed by the Supreme Court in M/s. Trillion Lead Factory Private Ltd. v. Superintendent of Central Tax [SLP (C) No. 7101/2026, decided on 27.02.2026]. The High Court further noted that a statutory appellate remedy under Section 107(1) of the CGST Act was available to the petitioner before the Appellate Authority, and placed reliance on the Division Bench judgment of the Rajasthan High Court in Tanushree Logistics Pvt. Ltd. v. State of Rajasthan [D.B. Civil Writ Petition No. 17550/2022, decided on 07.12.2022] to hold that the existence of an effective alternative remedy under the CGST Act disentitles a writ court from entertaining the petition.
- The Supreme Court, however, took cognisance of the petitioner’s submission that since the challenge was not merely to the Show Cause Notice or the adjudication order, but also expressly to the constitutional validity of Section 16(2)(c) of the CGST Act — a question of law of general public importance — the High Court was not justified in relegating the petitioner solely to the alternative remedy of statutory appeal, which is not the appropriate forum to adjudicate constitutional challenges. The Supreme Court has directed that a copy of the petition be served upon the Additional Solicitor General and counsel for the State, and has listed the matter for hearing on 29th May 2026. This development is of significant relevance to GST practitioners, as the outcome may have far-reaching implications for the ITC rights of registered recipients who are bona fide purchasers and have fulfilled their own compliance obligations.
