Why Buyers Cannot Be Penalized for Supplier’s GST Cancellation: Court Clarifies ITC Entitlement
1. Facts and Issue of the Case
In the ever-evolving landscape of the Goods and Services Tax (GST) regime in India, one of the persistent issues causing concern among genuine taxpayers is the denial of Input Tax Credit (ITC) due to the actions or status of suppliers. A key case recently addressed by the judiciary revolved around this very issue — whether a buyer can be denied ITC if the GST registration of the supplier is cancelled retrospectively.
The petitioner in this case had made a legitimate purchase from a registered supplier on 06.12.2018. Both parties — the seller and the buyer — were registered under GST at the time of the transaction. However, the twist in the tale came when the supplier’s GST registration was later cancelled retrospectively, with effect from 29.01.2020.
As a result of this retrospective cancellation, the department sought to deny ITC to the petitioner (buyer), arguing that the supplier was no longer a valid registrant and, therefore, the transaction was not eligible for input credit. This triggered a legal dispute, as the buyer contended that they had no role or control over the supplier’s subsequent non-compliance and cancellation.
Thus, the central issue for the court’s consideration was:
“Can a bona fide buyer be denied Input Tax Credit for a valid transaction merely because the supplier’s GST registration was cancelled at a later date?”
2. Observations by the Court and Tribunal
In its detailed deliberation, the High Court took a pragmatic and just approach in assessing the facts. The court emphasized that at the time of the transaction — i.e., on 06.12.2018 — both the buyer and the seller held valid GST registrations. The transaction, therefore, was legally valid and complied with the GST framework as it existed then.
The court also took note that the supplier’s registration was not cancelled ab initio (from the beginning) but was instead cancelled retrospectively from 29.01.2020, a full year after the transaction had taken place. This distinction was crucial. If the cancellation had been from inception, the supplier could have been treated as never having been registered. But that was not the case here.
According to the court, once a valid GST invoice has been issued by a supplier with an active GSTIN (Goods and Services Tax Identification Number) at the time of supply, and the buyer has made the payment and filed all required returns, the buyer’s right to claim ITC cannot be summarily denied due to a later administrative action taken against the supplier.
Further, the court firmly stated:
“No adverse inference can be drawn against the buyer.”
This was a significant observation as it underscored the principle of natural justice — one cannot be punished for the fault of another when one has complied with all legal obligations.
3. Law Applicable
Under the Central Goods and Services Tax Act, 2017, the conditions for availing Input Tax Credit are primarily laid down in Section 16. A recipient is eligible to claim ITC if:
- They possess a valid tax invoice.
- They have received the goods or services.
- The tax charged has been actually paid to the Government by the supplier.
- The recipient has filed the necessary returns.
The CGST Rules further prescribe that the buyer must ensure that the supplier’s GST details are accurate. However, the onus of ensuring payment of tax by the supplier does not logically or legally fall on the recipient, especially when the transaction has been duly recorded, and both parties were registered when the supply was made.
The issue of retrospective cancellation of GST registration is covered under Rule 21A of the CGST Rules, which gives the department the authority to cancel a registration with retrospective effect. However, this power must be exercised carefully and cannot be used to penalize innocent third parties — especially buyers who had no knowledge or control over the supplier’s subsequent actions.
Several tribunals and courts in India have reiterated that unless it is proven that the buyer was complicit in the fraud or misrepresentation, ITC cannot be denied for a legitimate transaction that was valid at the time it occurred.
4. Conclusion by the Tribunal or Court
The court’s final ruling was both fair and crucial for GST compliance jurisprudence. It was held that the buyer cannot be penalized for the retrospective cancellation of the supplier’s GST registration. The petitioner, having conducted a transaction with a valid GST-registered supplier, had followed all due procedures and hence deserved to retain the Input Tax Credit.
This judgment sets an important precedent:
- Genuine buyers are protected under GST law, even if their supplier becomes non-compliant at a later stage.
- The principle of fairness and equity must be upheld in tax administration.
- Buyers should not be burdened with the responsibility of monitoring the long-term compliance of suppliers beyond the point of sale.
For businesses, this ruling provides much-needed clarity and relief, especially in sectors with complex supply chains where monitoring every supplier’s GST status on an ongoing basis can be practically impossible.
✅ Key Takeaway for Taxpayers:
As long as a buyer ensures that the supplier was GST-registered at the time of transaction and fulfills all other conditions under Section 16 of the CGST Act, the buyer’s ITC claim remains valid — regardless of any retrospective cancellation of the supplier’s registration.
