In a significant development concerning the ongoing controversy surrounding Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, the Supreme Court, vide order dated 29 May 2026 in M/s Prime Metals v. Central Board of Indirect Taxes and Customs & Ors. (SLP (C) No. 18577/2026), declined to interfere with the Rajasthan High Court’s decision dismissing the writ petition on the ground of availability of an alternate statutory remedy. However, the Court expressly left open all legal remedies available to the petitioner, including issues relating to the validity of Section 16(2) of the CGST Act.
The dispute arose from denial of Input Tax Credit (ITC) allegedly on account of non-compliance with the conditions prescribed under Section 16(2)(c), which mandates that tax charged in respect of a supply must have been actually paid to the Government. The provision has been the subject matter of extensive litigation across the country, particularly in cases where bona fide recipients are denied ITC due to default by suppliers over whom they exercise no control.
The Supreme Court observed that, on the peculiar facts of the case, it was not inclined to interfere with the impugned judgment. At the same time, it granted liberty to the petitioner to file a statutory appeal within eight weeks along with the requisite pre-deposit and directed that such appeal shall not be dismissed on the ground of limitation. Importantly, the Court recorded that issues relating to the validity of Section 16(2) of the CGST Act would remain open for consideration before the appropriate forum.
The order assumes significance because the Supreme Court had earlier issued notice in the matter on 22 May 2026, leading many stakeholders to expect an authoritative pronouncement on the constitutional validity and practical operation of Section 16(2)(c). However, the Court ultimately chose not to adjudicate the constitutional challenge at this stage and instead relegated the petitioner to the statutory appellate mechanism.
Consequently, the larger question that continues to trouble GST jurisprudence remains unresolved: whether a genuine purchaser who has received goods or services, paid consideration and tax to the supplier, and complied with all statutory requirements can nevertheless be denied ITC solely because the supplier, or even suppliers further up the supply chain, failed to discharge tax liability. Since taxpayers have no statutory mechanism to verify actual tax payment by suppliers beyond the information available on the GST portal, the provision continues to be criticised as imposing an impossible burden on bona fide recipients.
While the Supreme Court’s order does not pronounce upon the validity of Section 16(2)(c), it equally does not endorse the Revenue’s position. The constitutional challenge therefore remains alive and may ultimately require authoritative determination by the Supreme Court in an appropriate case. Until then, uncertainty surrounding denial of ITC for supplier defaults is likely to continue, leaving taxpayers and tax administrators dependent on evolving High Court jurisprudence and fact-specific adjudication.
