Sep 12 2026
13 min read
When the Supplier Defaults, Should the Buyer Pay Twice?
Inside the Section 16(2)(c) ITC Battle and the Sahil Enterprises Case
A review of GST Laws judicial rulings and their impact on buyer protection.
Few provisions in India's GST law have generated as much litigation, and as much genuine hardship, as Section 16(2)(c) of the CGST Act. On paper, it looks like a routine anti-evasion clause: a buyer can claim Input Tax Credit (ITC) only if the tax charged on the supply has “actually been paid to the Government.” In practice, it has turned honest, GST-compliant businesses into collateral damage whenever their supplier pockets the tax instead of depositing it.
The Supreme Court's decision to stay the Tripura High Court's pro-buyer ruling in Union of India vs M/s Sahil Enterprises (5 September 2026) has brought this long-running conflict back into sharp focus. This article walks through the Sahil Enterprises case, surveys the full run of High Court judgments that have sided with buyers, sets these against the judgments that have gone the other way, and then makes the case for why bona fide buyers deserve protection once they have paid GST to their supplier in good faith.
M/s Sahil Enterprises, a Tripura-based dealer in rubber products, bought goods from a registered supplier between July 2017 and January 2019. It paid the supplier the full invoice value, including GST of roughly ₹1.11 crore, through proper banking channels, and claimed ITC in its returns. The supplier duly reported the outward supply in GSTR-1, so the transaction showed up correctly on the buyer's side. But the supplier then filed “Nil” GSTR-3B returns, meaning it never actually deposited the collected tax with the government.
When this came to light, the department did not go after the defaulting supplier. Instead, it blocked Sahil's electronic credit ledger and issued a notice under Section 73, demanding that Sahil repay the ITC, along with interest and penalty, purely because the supplier had defaulted.
Sahil challenged this before the Tripura High Court, arguing that it had no way of knowing, checking, or controlling whether its supplier would eventually deposit the tax. On 6 January 2026, the High Court agreed. It held that:
• Section 16(2)(c) is not unconstitutional. The Court declined to strike it down under Articles 14, 19(1)(g), 265, or 300A.
• But it cannot be applied mechanically. The provision must be read down so that it only bites when the transaction itself is not genuine, or where there is fraud or collusion between buyer and seller.
• A buyer cannot be asked to do the impossible. There is no mechanism by which a purchaser can verify, in advance, whether a supplier will eventually deposit tax with the government.
• Denying credit to a genuine buyer amounts to double taxation, since the buyer has already paid the tax component once, to the supplier, and would now have to pay it again, to the government.
The Court set aside the demand and directed that the ₹1.11 crore of ITC be restored.
The Union of India challenged this ruling before the Supreme Court. On 5 September 2026, a bench of Justices J.B. Pardiwala and K.Vinod Chandran issued notice on the department's appeal and stayed the operation of the Tripura High Court's judgment. This is an interim order, not a final verdict. It does not overturn the reasoning in Sahil Enterprises; it simply pauses the relief while the Supreme Court examines the correctness of the High Court's approach. Given that several other High Courts have taken conflicting positions on the same question, this appeal is widely expected to become the vehicle through which the Supreme Court finally settles the law on Section 16(2)(c).
Sahil Enterprises did not emerge in a vacuum. It sits at the end of a fairly long line of reasoning that began under the old VAT regime and has continued into GST. Here is the fuller picture.
Delhi High Court, 26 October 2017. This is the foundational judgment, decided under Section 9(2)(g) of the Delhi VAT Act, which denied input credit where the selling dealer failed to deposit tax. The Delhi High Court held that a buyer who checks a supplier's registration and holds a valid tax invoice cannot reasonably be expected to also track whether that supplier actually deposits the tax collected. It read down the provision so it would not apply to genuine, non-collusive purchasers. The Supreme Court later dismissed the department's special leave petition against this ruling in Commissioner of Trade and Taxes, Delhi vs Arise India Limited (10 January 2018), letting the Delhi High Court's reasoning stand. This reasoning was reinforced again in Commissioner, Trade and Tax, Delhi vs Shanti Kiran India (P) Ltd. (9 October 2025), where the Supreme Court reiterated that a genuine purchaser should not be penalised for a registered seller's default.
Madras High Court, 24 February 2021. Here, buyers had paid tax to their sellers, but the department went straight after the buyers when the sellers failed to remit it. The Madras High Court sent the matter back, holding that the department must first examine and, where appropriate, recover from the defaulting seller before burdening the buyer.
Calcutta High Court, 2 August 2023. ITC was reversed simply because certain invoices did not show up in GSTR-2A. The Calcutta High Court held that GSTR-2A was only a facilitative reference tool during the relevant period, that mismatch alone proves nothing, and that credit cannot be denied to a genuine buyer unless collusion with the supplier is shown. This ruling was later upheld by the Supreme Court, which declined to interfere.
Gauhati High Court, August 2024. Following the Delhi High Court's VAT-era reasoning, the Gauhati High Court read down Section 16(2)(c) itself for the first time under GST, holding that the provision cannot be used against bona fide purchasers, while leaving the door open for the department to act against genuinely collusive transactions.
Karnataka High Court, 9 February 2026. The Karnataka High Court went a step further and read down both Section 16(2)(c) and Rule 36(4), holding that a recipient who has met every other condition under Section 16(2) should not lose credit purely because of a supplier's lapse.
Tripura High Court, 6 January 2026. As discussed above, this decision is the most detailed of the group. It expressly invoked the principle lex non cogit ad impossibilia (the law does not compel the impossible) and framed the issue as one of double taxation.
Taken together, these rulings share a common thread: the buyer's conduct, not the supplier's, should determine whether credit is available. Where the buyer has a valid invoice, has received the goods or services, has paid through the banking system, and is not colluding with the supplier, the loss caused by the supplier's default should fall on the department's recovery machinery against the supplier, not on the innocent buyer.
To be fair to the department's position, several High Courts have refused to read down Section 16(2)(c), and this is precisely why the question needs Supreme Court resolution.
• Thirumalakonda Plywoods vs Assistant Commissioner (Andhra Pradesh High Court, 18 July 2023) upheld the provision as a valid statutory condition.
• Aastha Enterprises vs State of Bihar (Patna High Court, 18 August 2023) held that payment to the supplier is a private, contractual act and is simply not the same thing as payment to the government exchequer.
• Nahasshukoor vs Assistant Commissioner and M. Trade Links vs Union of India (Kerala High Court, 2023 and 4 June 2024) both treated ITC as a conditional statutory benefit, not an absolute right, and upheld the provision.
• Maruti Enterprise vs Union of India (Gujarat High Court, 1 May 2026) is the most recent and most direct rejection of the Tripura approach. The Gujarat High Court held that GST cannot simply be equated with the old VAT scheme, that Section 41 and Rule 37A already give a buyer a route to re-avail credit once the supplier eventually pays, and that the burden of proving eligibility rests squarely on the buyer under Section 155.
This split, Tripura, Gauhati and Karnataka on one side, Gujarat, Kerala, Patna, Andhra Pradesh and, on this specific point, Madhya Pradesh and Madras (in later, distinct rulings) on the other, is exactly the kind of conflict that only the Supreme Court can resolve nationally. The stay in the Sahil Enterprises appeal is the first concrete sign that this resolution is now underway.
Setting aside which way the law will ultimately settle, there are strong practical and constitutional reasons to protect a genuine buyer who has already paid GST to a registered supplier.
A purchaser can check a few things before a transaction: whether the supplier is validly registered, whether the invoice is properly issued, and whether goods or services were actually received. What a purchaser cannot see is the supplier's electronic cash ledger, its GSTR-3B filing status, or its internal decision to divert collected tax instead of depositing it. Denying credit for something entirely outside a party's control runs against a basic principle of fairness that courts have repeatedly invoked: the law does not demand the impossible.
GST is designed as a value-added tax precisely so that tax is collected once at each stage, and credited forward. If a buyer pays GST to a supplier as part of the invoice price, and is later forced to reverse that credit and pay the tax again in cash, the government effectively ends up trying to collect the same tax twice: once, unsuccessfully, from the defaulting supplier, and once, successfully and unfairly, from the innocent buyer.
A buyer who insists on a proper tax invoice, pays through the banking system, and files accurate returns is doing everything the law asks of a diligent taxpayer. If that buyer can still lose ITC purely because a third party misbehaved, there is little incentive left to be careful about documentation, since diligence offers no real protection.
The supplier is the one who collected the tax and failed to deposit it. It is the supplier's registration, records, and assets that the department should be pursuing, through recovery proceedings, registration cancellation, or prosecution. Recovering the shortfall from the buyer is administratively easier for the tax department, but easier is not the same as lawful or fair.
As the Delhi High Court noted in the VAT-era foundational ruling later approved by the Supreme Court, Article 14 is violated not only when equal parties are treated unequally, but also when clearly unequal situations, an honest buyer caught out by someone else's fraud, and a buyer who is actively colluding in that fraud, are treated exactly the same way. A blanket application of Section 16(2)(c), without asking whether the buyer was genuine, fails this basic test.
Provisions like Section 74 (for fraud, suppression, and wilful misstatement) exist precisely to deal with collusive transactions. If the department suspects collusion, it already has the legal tools to invoke them and to build a case. There is no real need to fall back on a blunt, blanket reading of Section 16(2)(c) that catches honest buyers along with dishonest ones.
Section 41 and Rule 37A allow a buyer to temporarily reverse credit where a supplier has not filed GSTR-3B, and to re-avail that credit once the supplier eventually pays. This shows that even Parliament recognised that a supplier's delay should not mean permanent loss for the buyer. The logical extension of that recognition is that where the supplier never pays, and is shown to be the wrongdoer, recovery should stay focused on the supplier rather than shifting permanently to the buyer.
Until the Supreme Court settles this conflict, businesses should not assume that either line of cases will automatically protect them. The safer approach is to build a strong bona fide record from day one:
• Keep original, complete tax invoices showing the supplier's GSTIN, invoice number, date, and tax breakup.
• Preserve e-way bills, delivery challans, and goods-receipt records to prove that the goods or services were genuinely received.
• Make all payments to suppliers through traceable banking channels, and retain proof.
• Save GSTR-2A/2B records and screenshots of supplier registration status at the time of the transaction.
• Where a notice is received solely on the ground of supplier default, insist that the department first show what action, if any, has been taken against the supplier.
• Distinguish, in any reply, between proceedings under Section 73 (no allegation of fraud) and Section 74 (fraud alleged), since this affects both the limitation period and the burden of proof.
The Sahil Enterprises appeal now sits at the centre of one of GST's most consequential unresolved questions. The Tripura, Gauhati, and Karnataka High Courts have taken the view that a genuine, diligent buyer should not have to guarantee a stranger's tax compliance. The Gujarat, Kerala, Patna, and Andhra Pradesh High Courts have taken the stricter statutory view that ITC is a conditional benefit, and that Parliament is entitled to make actual payment to the government a hard condition for claiming it.
Both sides have real force. But the better outcome, and the one that fits most comfortably with GST's stated purpose of seamless, cascading-free taxation, is a rule that protects honest buyers while leaving the department free to pursue genuinely fraudulent or collusive transactions with full force. A buyer who has paid tax in good faith should not be turned into an unpaid insurer for a supplier's dishonesty. The Supreme Court's eventual ruling in the Sahil Enterprises matter is likely to decide exactly where that line gets drawn for the whole country.
Team of Tax Experts of Complytax Intelligent Solutions Private Limited
This article is for general informational purposes only and does not constitute legal or tax advice. Readers dealing with an actual ITC dispute should consult a Tax Experts of www.complytax.in or any tax professional, since outcomes will depend on the specific facts, the jurisdiction, and how the law develops after the Supreme Court's final ruling.
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