Rajasthan High Court Upholds Section 16(2)(c) of CGST Act, Rejects Sumetco Alloys' Challenge

In a significant ruling that reinforces the conditional nature of Input Tax Credit (ITC) under the Goods and Services Tax regime, the Rajasthan High Court has upheld the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017. A Division Bench comprising Justice Arun Monga and Justice Ashutosh Kumar dismissed a writ petition filed by Sumetco Alloys Private Limited, which challenged both the provision and a demand of ₹56,44,08,265 raised for the financial years 2020-21 to 2023-24.

The Dispute: A ₹56 Crore ITC Demand

Sumetco Alloys, a manufacturer of pure lead and lead ingots based in Bhiwadi, Rajasthan, procured raw materials from suppliers in Haryana, Delhi, and Rajasthan, as well as through imports. Following an inspection on 20 March 2024, the State Tax authorities questioned purchases from certain suppliers whose registrations were later cancelled. Despite the petitioner producing ledgers, invoices, e-way bills, transport documents, and payment proofs, the Joint Commissioner of Commercial Taxes issued a show cause notice under Section 74 of the CGST Act, alleging wrongful availment of ITC based on fake invoices and bogus supplies. The order-in-original dated 10 April 2026 confirmed the massive demand.

Petitioner's Arguments: A Bona Fide Purchaser

Represented by Mr. Jatin Harjai, Sumetco argued that it was a bona fide purchaser that had complied with all conditions: possession of tax invoices, actual receipt of goods, payment through banking channels, and filing of returns. The company contended that ITC cannot be denied merely because of a supplier's default, over whom the purchaser has no control. Reliance was placed on judgments from the Tripura High Court in Sahil Enterprises v. Union of India and the Karnataka High Court in Instakart Services Private Limited v. Union of India , which had read down Section 16(2)(c) to protect bona fide recipients. Additionally, the petitioner challenged the invocation of Section 74, arguing that the show cause notice lacked allegations of fraud or suppression attributable to Sumetco, and that the proceedings suffered from breaches of natural justice, including the failure to issue a pre-notice intimation in Form GST DRC-01A and the same officer acting as investigator and adjudicator.

Respondents' Stand: Alternative Remedy and Valid Provision

The respondents, represented by a battery of lawyers including ASG Mr. Bharat Vyas and AAG Ms. Mahi Yadav, raised a preliminary objection on maintainability, arguing that the order dated 10 April 2026 was appealable under Section 107 of the Act. They submitted that none of the recognized exceptions to the rule of alternative remedy applied, and that the petitioner was seeking appreciation of disputed facts. On the constitutional challenge, they argued that Section 16(2)(c) was enacted with the legitimate object of protecting revenue and preventing evasion.

Court's Analysis: Conditions Are Cumulative, Not Alternative

The High Court conducted a detailed examination of Section 16(2), noting that it opens with a non obstante clause and is cast in the negative form. The conditions in clauses (a), (aa), (b), (ba), (c), and (d) are cumulative, and satisfaction of five does not dispense with the sixth. Clause (c) is expressly made subject to Section 41, which provides a mechanism for reversal of ITC where the supplier has not paid the tax, and subsequent re-availment once the default is cured. This mechanism, the court held, renders the denial under clause (c) contingent and reversible, not final and confiscatory.

The Bench further observed that the burden of proving eligibility for ITC lies on the claimant under Section 155, and that ITC is a contingent statutory entitlement, not a vested or constitutional right.

Supreme Court's Binding Precedent

Crucially, the court relied on the Supreme Court's decision in Bhandari Scrap Traders v. Union of India (2026 SCC OnLine SC 1570), which had dismissed a batch of petitions challenging Section 16(2)(c). The Supreme Court had affirmed the judgment of the Gujarat High Court in Maruti Enterprise v. Union of India , which upheld the provision and declined to read it down. The Rajasthan High Court noted that the Supreme Court's order was a speaking order that expressed "complete and respectful agreement" with the Gujarat High Court and expressly negated both the declaration of unconstitutionality and the plea of reading down.

On the alternative plea of reading down, the court held that even if the Tripura High Court's approach were assumed in the petitioner's favour, it would not help Sumetco in the present facts. The reading down propounded by the Tripura High Court operates only where the transaction is found to be bona fide, and expressly preserves the full rigour of Section 16(2)(c) where the transaction is found to be collusive or fraudulent. The Department here had invoked Section 74 on allegations of fake invoices and bogus supplies, which is precisely the class of case not protected by the reading down. The court emphasized that whether the allegations are made out is a matter for evidence and statutory appeal, not for writ proceedings.

Rejecting Procedural Challenges

The High Court also rejected the procedural challenges. On the failure to issue Form GST DRC-01A, the court noted that Rule 142(1A) had been amended from "shall" to "may", making pre-notice intimation an enabling facility, not a condition precedent. No prejudice was demonstrated, as the petitioner had been summoned, its director's statement recorded, and it had filed a detailed reply.

On the allegation of bias based on the same officer conducting investigation and adjudication, the court held that the GST Act itself vests both functions in the "proper officer". In the absence of any material suggesting personal interest or animus, the mere fact that the same officer performed both functions cannot constitute bias.

The court further held that the grievance regarding inadequate appreciation of the petitioner's reply is an error within jurisdiction, if at all, and can be fully examined by the appellate authority under Section 107.

Key Observations from the Judgment

"Section 16(2)(c) suffers from no constitutional infirmity . Secondly, the existence of the reversal and re-availment mechanism under Section 41 , read with Sections 73 and 74 , is a sufficient answer to the charge of arbitrariness ."

"The benefit of Input Tax Credit is a contingent statutory entitlement , rather than a vested right , much less a constitutional right ."

"Since the vires challenge fails, to permit bypassing Section 107 by labeling a grievance on merits as a breach of natural justice would render the appellate hierarchy , and the pre-deposit condition that Parliament has attached to it, nugatory."

Final Decision and Implications

The writ petition was disposed of with the following directions:

• The challenge to the constitutional validity of Section 16(2)(c) is rejected.
• The challenge to the show cause notice dated 26 September 2025 and the order-in-original dated 10 April 2026 is rejected.
• Liberty is granted to Sumetco to file an appeal under Section 107 within 30 days of the judgment being uploaded. The period spent in prosecuting the writ petition shall be excluded for limitation.
• The sum of ₹50 lakh deposited by Sumetco through Form GST DRC-03 shall be adjusted towards the statutory pre-deposit required under Section 107(6).

The decision reaffirms that ITC under the GST regime is strictly conditional on the supplier actually paying the tax to the government. Purchasers cannot claim credit merely by showing that they have complied with documentary requirements; they bear the risk of supplier default. The ruling also underscores the importance of exhausting statutory remedies, especially when disputed questions of fact are involved. This judgment is likely to have far-reaching implications for taxpayers who rely on ITC from suppliers whose registrations are subsequently cancelled or who default on tax payment.