Section 16(2)(c) Stands, but Section 74 Cannot Stand on Assumptions

A Valid Law Does Not Make Every ITC Demand Valid

A law may be constitutionally valid, but every demand raised under it does not automatically become correct. The Department must still establish the facts, apply the relevant provisions and follow the prescribed procedure. Section 16(2)(c) of the CGST Act, 2017 requires the tax charged on a supply to have actually been paid to the Government. However, this condition does not permit denying input tax credit merely on the basis of a general statement that suppliers defaulted or their registrations were cancelled. The Department must identify the suppliers, specify the disputed invoices and credit amounts, disclose the supporting evidence and examine the purchaser's explanation. Where Section 74 is invoked, it must additionally explain what the purchaser did that amounts to fraud, wilful misstatement or suppression of facts to evade tax. A dispute over credit eligibility does not, by itself, establish fraudulent conduct.

This distinction was central to Treco Wire India Private Limited Versus Additional Commissioner Central Tax Delhi North & Ors. - 2026 (10) TMI 295 - DELHI HIGH COURT. The Delhi High Court, comprising Justices Anil Kshetarpal and Bharat Parashar, decided W.P.(C) No. 583/2026. The petitioner, a copper-wire manufacturer, underwent a GST audit covering 01.07.2017 to 31.03.2021. The Department questioned credit relating to purchases from suppliers whose registrations were allegedly cancelled retrospectively, with effect from dates before the invoices. The petitioner disputed the allegation, maintaining that the purchases were genuine and that the suppliers held active registrations when the transactions took place. The controversy therefore required an examination of the specific purchases and the supporting evidence, rather than reliance on cancellation alone.

An audit memo dated 23.07.2023 and an audit report dated 27.07.2023 were followed by a show-cause notice dated 22.09.2023. The adjudication order dated 15.01.2024 confirmed ITC liability of Rs.3,34,21,261, together with interest and an equivalent penalty. It also imposed a separate interest demand of Rs.50,30,256 for alleged payments to suppliers beyond 180 days. The petitioner challenged both Section 16(2)(c)'s constitutional validity and the legality of the adjudication. These were two separate questions: whether the statutory condition was valid, and whether the Department had lawfully established the particular demand. Rejection of the constitutional challenge answered the first question; it did not remove the need to examine the evidence, reasoning and statutory basis supporting the demand, especially the invocation of Section 74 of the CGST Act, 2017.

Payment to the Supplier Is Not the Same as Payment to the Government

Section 16(2)(c) of the CGST Act, 2017 requires, subject to the applicable statutory framework, that the tax charged on a supply must actually have been paid to the Government, either in cash or through utilisation of admissible input tax credit. Paying GST to the supplier and the supplier paying that tax to the Government are two different events. For example, a purchaser may pay an invoice of Rs. 1,18,000, comprising goods valued at Rs. 1,00,000 and GST of Rs. 18,000. The bank record establishes payment to the supplier, but does not, by itself, establish that the supplier discharged the corresponding tax liability. This creates a practical difficulty for the purchaser, who ordinarily does not control the supplier's tax payments. Nevertheless, payment to the supplier cannot automatically be treated as satisfaction of the statutory requirement of payment to the Government.

The constitutional validity of this condition had already been examined in Maruti Enterprise Through Its Authorized Partner, Jigneshbhai Bharatbhai Tarpara, Bhandari Scrap Traders Through Its Prop. Gopalbhai Champaklal Sharma Versus Union Of India & Ors. - 2026 (5) TMI 127 - GUJARAT HIGH COURT. The Supreme Court subsequently considered that ruling in Bhandari Scrap Traders Versus Union of India & Ors. - 2026 (7) TMI 1839 - SC Order. The Supreme Court explained that the Delhi VAT legislation and the GST framework were materially different; protection available to a purchasing dealer under the former could not simply be carried into GST without examining its statutory conditions. It also referred to the mechanism permitting re-availment of reversed credit after the supplier discharges the tax liability. Through a reasoned order, the Supreme Court expressly agreed with and upheld the Gujarat High Court's conclusion in Maruti Enterprise Through Its Authorized Partner, Jigneshbhai Bharatbhai Tarpara, Bhandari Scrap Traders Through Its Prop. Gopalbhai Champaklal Sharma Versus Union Of India & Ors. - 2026 (5) TMI 127 - GUJARAT HIGH COURT. This was therefore not merely a dismissal of special leave petitions without an explanation.

Accordingly, Treco Wire rejected the request to strike down Section 16(2)(c) or interpret it so as to generally exempt bona fide purchasers from its operation. However, upholding the condition did not automatically establish that the particular ITC demand was correct. The Department still had to identify the disputed transactions, examine the purchaser's evidence and establish the statutory basis for recovery. Similarly, possession of an invoice, payment through banking channels or an assertion of good faith could not automatically satisfy every condition for credit. The position is therefore balanced: the purchaser must establish entitlement under the applicable law, while the Department must substantiate any proposed denial through proper examination and reasoned adjudication.

An ITC Demand Must Identify the Suppliers and Purchases in Dispute

Where an ITC demand is based on retrospective cancellation of suppliers' registrations, the Department must identify the affected purchases. It must give the supplier's name and GSTIN, invoice dates, the date the cancellation took effect, the disputed credit amount, and supporting evidence. These details explain which purchases are disputed, why the credit is being denied, and how the demand was calculated. They are essential to the demand, not merely additional information.

In Treco Wire, the adjudication order repeated the audit objection without providing these supplier-wise details. It broadly alleged that the suppliers' registrations had been cancelled before the invoices. However, it did not identify the suppliers and invoices, specify the relevant cancellation dates or explain the credit amount attributable to each supplier. The allegation therefore lacked the facts necessary to support it. It also prevented the purchaser from effectively answering the demand.

For example, a manufacturer may purchase material from several suppliers during a year. A statement that "credit from cancelled suppliers is inadmissible" does not identify which purchases require explanation. Supplier-wise details allow the purchaser to check the allegation against its purchase register, transport documents and stock records, and verify the calculation. The taxpayer should not have to guess which transactions form the basis of the demand

Retrospective Cancellation Alone Does Not Decide ITC Eligibility

Retrospective cancellation of a supplier's registration may justify an inquiry into earlier purchases. However, the Department must explain how that cancellation affects the purchases for which credit is disputed. It must examine the relevant dates, supporting documents and the purchaser's explanation. Cancellation alone cannot replace an examination of the actual transactions.

For example, a registration cancelled later with effect from an earlier date may raise doubts about whether the supplier existed or actually supplied the goods. These questions must be answered through evidence. The purchaser may produce delivery records, transport documents, stock entries, and records showing the goods' use in manufacturing. The Department may have evidence contradicting those records. The officer must consider both sides and explain why the disputed credit is admissible or inadmissible.

This does not make retrospective cancellation irrelevant or guarantee credit to every purchaser. The Tribunal must examine genuine supporting evidence, and a fictitious purchase cannot become genuine merely because the supplier's registration appeared active. ITC eligibility must be decided on the facts and applicable statutory conditions, not merely on the cancellation entry.

Section 74 Requires More Than an Allegation of Ineligible Credit

For the periods governed by Section 74, the provision addresses specified tax or ITC defaults arising by reason of fraud, wilful misstatement or suppression of facts to evade tax. These requirements distinguish it from ordinary determination under Section 73. The question whether credit is inadmissible is therefore separate from the question whether the purchaser engaged in conduct attracting Section 74. An officer cannot answer the second question merely by asserting an affirmative answer to the first.

The adjudication in Treco Wire contained no specific finding explaining how the petitioner committed fraud, made a wilful misstatement or suppressed material facts with intent to evade tax. The allegation concerning cancelled suppliers did not establish these ingredients against the purchaser. Reproducing statutory expressions cannot replace identifying the conduct, evidence, and reasoning supporting them. This mattered particularly because the order imposed a penalty equal to the disputed ITC, in addition to recovery and interest.

Two situations illustrate the distinction. A purchaser may have received goods under documented transactions, while a dispute subsequently arises about the supplier's compliance. Alternatively, evidence may show that the purchaser knowingly obtained invoices without receiving goods. Both require examination, but their implications differ materially. A supplier-related discrepancy does not automatically establish the purchaser's deliberate wrongdoing. Section 74 must rest on findings concerning the person against whom its consequences are imposed.

The Order Must Explain Why the Taxpayer's Defence Was Rejected

An opportunity to submit a reply serves little purpose unless the taxpayer's main arguments and supporting records are examined. In Treco Wire, the petitioner stated that the purchases were genuine, the suppliers held active registrations when the transactions occurred, and the required records had been supplied. However, the adjudication order did not show that it had examined and answered these arguments. Keeping a reply on file is not enough; the order must explain why it rejected the material submissions.

The officer need not reproduce every document or answer every sentence. However, the order must address the points that could affect the decision. If receipt of goods is disputed, transport and delivery records must be examined. If cancellation dates are relied upon, their connection with the disputed invoices must be explained. If fraud is alleged, the supporting facts must be identified. Merely stating that the reply is "unacceptable" does not provide these reasons.

A clear order also helps the Department defend its decision and enables the appellate authority to examine whether it is correct. An unexplained conclusion leaves doubt about whether the relevant evidence was considered at all. The purchaser must support its claim with evidence, and the officer must explain the decision on that evidence. Both responsibilities must be fulfilled

The Demand Must Be Supported by Its Own Evidence and Findings

The Department relied on an earlier order dated 24.09.2025 in W.P.(C) No. 14428/2025 [Treco Wire India Pvt. Ltd Through Its Director Versus The Commissioner Of Central Goods And Service Tax And Ors - 2025 (9) TMI 1691 - DELHI HIGH COURT], involving the same petitioner. However, that order did not decide whether the demand presently challenged was valid. The Department still had to support the demand through the notice, evidence and findings in the current proceedings. The taxpayer's involvement in earlier litigation did not remove that requirement.

The judgment also noted differences in the dates appearing in the adjudication records. However, the order was not set aside merely because of those differences. The decisive defects were more fundamental: the absence of transaction-specific particulars and findings establishing the requirements of Section 74. The decision should therefore not be understood as granting relief merely for clerical mistakes.

The principle is limited but clear. An incorrect date does not necessarily invalidate every order, nor is earlier litigation always irrelevant. However, an earlier court order cannot replace the evidence and findings needed to support the demand under challenge.

Fresh Examination Does Not Mean ITC Has Been Allowed

The Order-in-Original dated 15.01.2024 and consequential proceedings were set aside, and the matter was sent back for a fresh decision. The authority had to issue proper notice, give the petitioner an effective opportunity to be heard, examine its reply and documents, and explain its findings. If the demand continued to rely on retrospective cancellation, the authority had to identify the suppliers and disputed purchases and examine the supporting evidence.

The authority also had to separately determine whether the facts justified proceedings under Section 74. The Tribunal directed the petitioner to appear on 08.10.2026 and asked the authority to endeavour to pass a fresh order within eight weeks of that appearance. This required genuine reconsideration, not merely rewriting the earlier order to reach the same result.

The Tribunal did not give a final decision on the petitioner's entitlement to ITC. The Tribunal also did not conclusively decide the separate interest dispute concerning payments beyond 180 days through an independent constitutional ruling. The Tribunal set aside the defective order, but it did not finally allow the disputed credit or cancel all possible liabilities. The outcome would depend on the fresh adjudication conducted in accordance with law

Shaurya Alloys Also Requires Evidence Before Denial of ITC

Two days after Treco Wire, the Punjab and Haryana High Court decided Shaurya Alloys Pvt Ltd, Ms Bhumi Steel Traders, Shaurya Alloys Pvt Ltd, Vijay Kumar, M/s Saraswati Steels, Rohit Steel Industries, M/s Shree Vardhman Infrahomes Private Limited, Ms Jai Maa Alloys, Baba Metal Co. Versus Union Of India And Others. - 2026 (10) TMI 296 - PUNJAB AND HARYANA HIGH COURT, together with 423 connected writ petitions. Both judgments recognise that upholding Section 16(2)(c) does not automatically render every ITC demand valid or establish fraud by the purchaser. The disputed transactions and the purchaser's evidence must be examined, and proceedings under Section 74 must have a proper factual basis. Since I have already discussed Shaurya Alloys in a separately published detailed article entitled -Supplier Default and the Buyer's ITC - Liability Must Be Established, Not Assumed on the Tax TMI Portal on 05.10.2026, I consider only its connection with Treco Wire here.

The main difference is the scope of the decisions. Treco Wire examined a particular adjudication order. Paragraph 103 of Shaurya Alloys laid down broader guidelines covering investigation, supply of relied-upon documents, the purchaser's responsibility to prove eligibility under Section 155, recovery from suppliers, application of the law relevant to each tax period, personal hearing and reasoned decisions. These guidelines do not remove the conditions of Section 16(2)(c) or guarantee ITC. Although not binding in Delhi, they may provide useful guidance during fresh adjudication, subject to the applicable law and the directions in Treco Wire.

The relief granted was also different. Treco Wire set aside the adjudication order and consequential proceedings. Shaurya Alloys required reconsideration without setting aside the existing orders, which would depend on the fresh decisions. It also prohibited fresh coercive recovery under the disputed notices or orders until those decisions. Neither judgment finally allowed the disputed credit. Together, they confirm that the statutory conditions remain applicable, but denial of ITC and allegations of fraud must be supported by evidence and explained through reasoned findings.

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