Input tax credit conditions remain valid, but supplier-cancellation demands require transaction-specific evidence and findings of statutory fraud.
Section 16(2)(c) of the CGST Act remains a valid condition for input tax credit, and a recipient's bona fide conduct does not override a supplier's failure to discharge tax liability. Section 74 demands, however, require disclosed transaction-specific material and reasoned findings that wrongly availed or utilised credit resulted from fraud, wilful misstatement, or suppression of facts with intent to evade tax. General assertions based on retrospective cancellation of supplier registrations, without supplier identities, invoice details, cancellation particulars, credit attribution, or supporting material, do not establish the statutory prerequisites or permit an effective response.
Issues: (i) Whether Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 is constitutionally valid and should be read down to protect bona fide recipients where suppliers fail to pay tax; (ii) Whether the demand adjudication under Section 74 of the Central Goods and Services Tax Act, 2017, founded on retrospective cancellation of supplier registrations without transaction-specific particulars or findings on fraud, wilful misstatement or suppression, was valid.
Issue (i): Whether Section 16(2)(c) of the Central Goods and Services Tax Act, 2017 is constitutionally valid and should be read down to protect bona fide recipients where suppliers fail to pay tax.
Analysis: Section 16(2)(c) forms part of the statutory conditions governing entitlement to input tax credit. Binding Supreme Court precedent had upheld the provision and declined to read it down on the basis of a recipient's bona fides where the supplier failed to discharge tax liability.
Conclusion: The constitutional challenge to Section 16(2)(c) was rejected. The issue was decided against the assessee.
Issue (ii): Whether the demand adjudication under Section 74 of the Central Goods and Services Tax Act, 2017, founded on retrospective cancellation of supplier registrations without transaction-specific particulars or findings on fraud, wilful misstatement or suppression, was valid.
Analysis: Section 74 requires a disclosed factual basis demonstrating that wrongly availed or utilised input tax credit resulted from fraud, wilful misstatement or suppression of facts with intent to evade tax. The adjudication contained only a general assertion concerning cancellation of suppliers' registrations and omitted supplier identities, invoice details, cancellation dates, supplier-wise input tax credit, and material supporting the alleged cancellation. It also failed to address the defence that the transactions were genuine and the suppliers were registered at the relevant time. These omissions deprived the demand of its factual foundation and denied an effective opportunity to meet the case.
Conclusion: The impugned adjudication was invalid for want of necessary factual and statutory findings. The issue was decided in favour of the assessee.
Final Conclusion: Although the statutory condition under Section 16(2)(c) remains valid, liability under Section 74 can be determined only upon disclosed transaction-specific material and reasoned findings establishing the statutory prerequisites.
Ratio Decidendi: A demand under Section 74 must rest on a disclosed transaction-specific factual foundation and reasoned findings demonstrating fraud, wilful misstatement or suppression of facts; general assertions concerning supplier registration cancellation are insufficient.