Bombay High Court admits the constitutional challenge to Section 16(2)(c) of CGST i.e. default in payment of taxes by Supplier

The Hon'ble Bombay High Court in the case of Christie's India Private Limited v. Union of India & Ors. [Writ Petition (L) No. 16964 of 2025, order dated September 20, 2025] held that the constitutional validity of Section 16(2)(c) of the CGST Act, 2017, and the corresponding Maharashtra GST provision, warrants full consideration given conflicting judgments by different High Courts. The Court issued notice to the Attorney General and granted interim protection from GST recovery, subject to a conditional deposit by the Petitioner.

Facts:

Christie's India Private Limited ("the Petitioner") is an auction house. The Petitioner was subjected to a GST demand of ₹1 crore (plus interest and penalty) following an order dated February 28, 2025 by the Assistant Commissioner of Sales Tax, Maharashtra ("the Respondent"), under Section 16(2)(c) of the CGST Act and parallel state provisions.

The Petitioner contended that Section 16(2)(c) violates Articles 14, 19(1)(g), and 300A of the Constitution. They argued that similar provisions have recently been struck down by the Gauhati High Court. The Petitioner also argued that a co-noticee (5th Respondent) had already paid ₹21 lakhs toward the GST liability, and thus, the Revenue should not pursue full recovery from the Petitioner.

The Respondent contended that the State cannot be deprived of its dues by disputes among the taxpayers. The fact that one party paid ₹21 lakhs does not discharge the remaining liability or entitle the Petitioner to a blanket stay.

The Petitioner approached the High Court by writ petition under Article 226 challenging the order, liability, and constitutional vires of Section 16(2)(c) of the CGST Act.

Issue:

Whether Section 16(2)(c) of the CGST and MGST Act is constitutionally valid, and whether unconditional protection from recovery can be granted to a Petitioner based on partial payment by a co-noticee amid disputed liability?

Held:

The Hon'ble Bombay High Court in Writ Petition (L) No. 16964 of 2025 held as under:

· Observed the conflicting judgments of multiple High Courts, for instance the Hon'ble High Courts of Kerala, Patna and Madhya Pradesh have already upheld the vires of the impugned provisions whilst the Gauhati High Court, has, recently struck down this provision.

· Noted that, the Petitioner's entitlement to an unconditional stay is not established merely by a co-noticee's part-payment.

· Held that interim protection be granted to the Petitioner to the extent that Recovery proceedings arising from the impugned GST demand are stayed, provided the Petitioner deposits ₹20 lakhs in Court within six weeks.

· Clarified that, failure to deposit and intimate counsel will vacate the stay automatically, without further orders.

Our Comments:

The Hon'ble Kerala High Court in the case of M. Trade Links v. Union of India & Ors. [W.P.(C) No. 31559 of 2019, order dated June 6, 2024] held that the conditions imposed by Section 16(2)(c) and the corresponding GST rules/notifications restricting Input Tax Credit (ITC) are not unconstitutional or onerous.

Contrastingly, a departure is seen in the Gauhati High Court's recent landmark judgment in National Plasto Moulding v. State of Assam [WP(C) No. 2863 of 2022, order dated August 5, 2024]. The Gauhati HC held the requirements under Section 16(2)(c) and 16(2)(d), which make ITC dependent on tax payment by the supplier and filing of the return, respectively-imposed an unreasonable burden on bona fide purchasers who had fulfilled all their statutory obligations. Relying on the Delhi High Court's reasoning in On Quest Merchandising India (P.) Ltd. v. Government of NCT of Delhi [2017 SCC OnLine Del 11286], the Gauhati HC found that purchasers should not be penalized for the supplier's default where the recipient acted in good faith and maintained complete documentation. The Gauhati HC's judgment, therefore, prioritizes fairness and proportionality, marking a notable divergence from the Kerala and Madras line of cases.

Relevant Provision:

Section 16(2)(c) of the CGST Act, 2017

Section 16. Eligibility and conditions for taking input tax credit.-

"(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,-

(c) subject to the provisions of Section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply;…"

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED