A recipient may pay a supplier, receive goods or services, hold a tax invoice and claim input tax credit, only to receive a demand later because the supplier failed to pay tax or comply with return obligations. This is a difficult GST dispute because Section 16(2) places conditions on credit while commercial reality limits a buyer's control over a supplier's treasury conduct.
A reply should neither assume that payment to the supplier ends the matter nor accept automatic reversal without examining the evidence and the department's recovery steps. The immediate task is to prove the transaction thoroughly and identify whether the alleged default is the supplier's, the recipient's, or both.
Assemble the recipient's proof
Section 16 requires attention to the invoice, receipt of goods or services, tax payment condition and filing compliance, read with the applicable period's statutory framework. The recipient should assemble purchase orders, tax invoices, e-way bills or delivery documents, goods receipt notes, service deliverables, bank payment proof, ledger accounts, vendor registration details, GSTR-2B reflection where relevant, GSTR-3B workings and communications seeking supplier correction.
A defensible vendor-control record also helps: onboarding verification, periodic compliance checks, contract clauses on GST default, payment holdback where contractually permitted and prompt escalation when a mismatch appears. Credit litigation is not improved by discovering at reply stage that no one ever checked the vendor file.
What the courts have said
In Suncraft Energy Private Limited v. Assistant Commissioner, State Tax, Ballygunge Charge, decided on 2 August 2023, the Calcutta High Court dealt with reversal sought from a purchasing dealer based on mismatch between its credit claim and supplier reporting. The Court held, on the facts before it, that the authorities had not first proceeded against the supplier and set aside the demand, leaving further action in accordance with law. The judgment supports a targeted objection where a genuine purchaser is pursued without adequate inquiry into the selling dealer's default.
The recipient must still prove the underlying purchase. In State of Karnataka v. Ecom Gill Coffee Trading Private Limited, decided on 13 March 2023 under the Karnataka VAT legislation, the Supreme Court held that invoices and payment by cheque alone did not discharge the purchasing dealer's burden where the genuineness of transactions was challenged. That was not a GST Section 16 decision, but it is a serious warning by analogy: prove actual supply through transport, receipt, stock or consumption evidence, not merely invoice formality.
Service Tax-era assistance, with limits
Input credit disputes under the CENVAT regime can assist on procedure, although they do not override the express GST condition regarding tax paid to Government. In a decision authored by me, the Bench examined input service credit in Hindalco Industries Limited v. Commissioner of GST and Central Excise, Belapur, CESTAT Mumbai, Final Order No. A/85978/2024 dated 24 July 2024. The Bench held that credit could not be denied on an allegation outside the show cause notice and examined the demonstrated relationship between the services and business activity.
Applied mutatis mutandis, the procedural point remains relevant: if a GST notice alleges only supplier default, an order should not deny credit on a new theory about non-receipt without putting that case to the recipient. The recipient should nevertheless file receipt evidence at the outset rather than wait for the dispute to widen.
Three mistakes to avoid
Do not rely solely on portal reflection when physical supply evidence is available. Do not ignore vendor correspondence after a mismatch is detected. Do not frame the reply as though the supplier's default can never affect credit; address the statutory condition while demonstrating good-faith purchase, proof of receipt and the appropriate recovery sequence.
AGS Consulting assists businesses and counsel with supplier-default ITC notices, evidence review and structured responses to reversal proposals. For a review of the notice and transaction record, contact AGS Consulting.
FAQs
Is an invoice enough to defend ITC when a supplier defaults?
No. The recipient should provide evidence of actual receipt, payment, accounting and relevant return or portal records, together with steps taken regarding the supplier mismatch.
Can the department proceed directly against the purchaser?
The answer depends on the statutory period and facts. Decisions such as Suncraft Energy support scrutiny of whether the supplier was first examined where the purchaser demonstrates a genuine transaction.
Why is Ecom Gill Coffee relevant if it was not a GST case?
It is an analogous Supreme Court authority on proof of genuine purchases. It should not be presented as deciding GST Section 16 liability.
Can CENVAT credit decisions determine GST supplier-default disputes?
No. They may assist on procedural fairness and notice scope, but the GST conditions and evidence govern the recipient's credit claim.