GST: High Court Shields Buyer ITC, Bars Recovery Without Action Against Seller

The petitioner, M/s Instakart Services Private Limited, challenged the constitutional validity of Section 16(2)(c) of the CGST Act, 2017, and subsequent demand notices issued by the GST authorities. The Revenue had denied Input Tax Credit (ITC) to the petitioner and sought to recover the same, along with interest and penalties, on the grounds that the tax collected by the selling dealers had not been actually deposited into the Government treasury.

The petitioner argued that they were a bona fide purchaser who had fulfilled all legal requirements, including making full payments (including tax) to the sellers via banking channels and ensuring the goods were physically received. They contended that punishing a genuine buyer for the administrative or criminal default of a seller over whom they have no control—is arbitrary and violates their fundamental rights.

Main Issue: Whether ITC can be denied to a bona fide purchaser under Section 16(2)(c) CGST Act due to the seller’s failure to deposit tax, and whether the Revenue must first proceed against the defaulting seller.

HC Held: The Karnataka High Court, presided over by Hon’ble Mr. Justice S.R. Krishna Kumar, disposed of the petition in favor of the assessee by following the precedents set by the Gauhati and Tripura High Courts. The Court held that while the Revenue has the power to investigate, it cannot take “coercive steps” or deny ITC to a purchaser who has acted in a bona fide manner. The Bench ruled that the Department must first proceed against the defaulting selling dealers to recover the tax. Only in exceptional circumstances such as proof of collusion between the buyer and seller, or if the seller is found to be non-existent or untraceable—can the Revenue look to the buyer for recovery. Therefore, the Court set aside the demand notices and directed the authorities to follow the established “seller-first” recovery protocol, ensuring that genuine businesses are not penalized for the misconduct of third parties.

To Read Full Judgment, Download PDF Given Below