Shaurya Alloys v. State of Punjab: P&H High Court Bars Mechanical Section 16(2)(c) ITC Reversal

In a monumental judgment delivered on October 1, 2026, a Division Bench of the Punjab and Haryana High Court (comprising Hon'ble Chief Justice Ashwani Kumar Mishra and Hon'ble Justice Rohit Kapoor) in Shaurya Alloys Pvt. Ltd. v. State of Punjab and Another (CWP No. 34296 of 2024 and 423 connected petitions) fundamentally reshaped the indirect tax litigation landscape surrounding Input Tax Credit (ITC) denial under Section 16(2)(c) of the Central Goods and Services Tax (CGST) Act, 2017. While following the Supreme Court precedent in Bhandari Scrap Traders to uphold the constitutional validity of the provision, the High Court decisively halted the Revenue's practice of issuing automatic demand orders against purchasing dealers.

"The condition under Section 16(2)(c) cannot be invoked in a routine or mechanical manner against a purchasing dealer merely because the selling dealer has defaulted in depositing tax, or because the selling dealer's registration has been cancelled retrospectively... An inquiry must be conducted by the proper officer based on credible material connecting the recipient to the alleged non-payment or fraud."
— Punjab and Haryana High Court in Shaurya Alloys Pvt. Ltd. (Para 101)

The High Court established 14 binding operational guidelines that all adjudicating authorities in the Central GST Commissionerates, Punjab, Haryana, and the Union Territory of Chandigarh must strictly comply with before initiating or sustaining any recovery under Section 16(2)(c). Setting aside hundreds of summary assessment orders, the Court remanded the entire batch for fresh adjudication.

The Facts

The dispute in Shaurya Alloys Pvt. Ltd. and its companion matters arose from widespread anti-evasion drives and automated scrutiny notices issued across Punjab, Haryana, and Chandigarh under Sections 73 and 74 of the CGST and respective SGST Acts:

1. Bona Fide Purchases: The petitioners were registered manufacturers and traders who purchased raw materials (including iron, steel scrap, chemicals, and textiles) from registered suppliers against valid tax invoices, transit e-way bills, and physical weighment slips.
2. Bank Payments with Tax: The purchasers made full payment of the invoice value, including the applicable GST, through banking channels (RTGS, NEFT, and account payee cheques) within the statutory 180-day window under Section 16(2) second proviso.
3. Subsequent Vendor Defaults: Months or years later, departmental audits or intelligence reports revealed that certain tier-1 or tier-2 supplying dealers had defaulted in filing Form GSTR-3B, paid short taxes, or had their registrations cancelled retrospectively by the department on allegations of issuing bogus invoices.
4. Summary Demand Orders: Relying solely on third-party intelligence alerts and portal mismatches, the proper officers issued Show Cause Notices (SCNs) and summary demand orders (Form DRC-07) directing the purchasing dealers to reverse the claimed ITC along with 18 percent annual interest and equivalent penalty under Section 74, without examining the actual delivery of goods or pursuing the defaulting vendors.
5. Writ Batch: Aggrieved by these unilateral demands, 424 taxpayers approached the Punjab and Haryana High Court challenging the constitutional validity of Section 16(2)(c) and seeking the quashing of the mechanical assessment orders.

The Law

The adjudication centered on the interplay between statutory conditions for ITC availment and constitutional standards of procedural fairness:

• Section 16(2)(c) (The Tax Payment Condition for ITC): Mandates that no registered person shall be entitled to the credit of any input tax in respect of any supply unless the tax charged has been actually paid to the Government, either in cash or through utilization of admissible input tax credit.
• Section 155 (Burden of Proof): Stipulates that where any person claims that they are eligible for input tax credit under the Act, the burden of proving such claim lies on such person.
• Section 73 and Section 74 / Section 74A (Determination of Tax): Defines statutory procedures for recovery of unpaid or short-paid tax and wrong availment of credit, distinguishing non-fraudulent defaults from wilful suppression and fraud.
• Doctrine of Impossible Performance (Lex Non Cogit Ad Impossibilia): The common-law maxim that the law does not compel a person to do that which is impossible, specifically compelling a buyer to control or guarantee the subsequent statutory tax deposit of an independent third-party vendor.

Arguments

1. Petitioner Contentions

Senior Counsel appearing for the taxpayers presented four primary legal submissions:

• Impossible Burden: A purchasing dealer possesses no administrative machinery, statutory power, or constitutional jurisdiction to verify whether a supplier has remitted the collected tax into the government exchequer. Requiring the buyer to insure the state against vendor tax default violates Article 14 and Article 19(1)(g).
• Reliance on Judicial Precedents: The petitioners cited the Calcutta High Court judgment in Suncraft Energy Pvt. Ltd., the Madras High Court decision in D.Y. Beathel Enterprises, and the landmark VAT-era Supreme Court affirmation in Arise India Ltd., arguing that recovery proceedings must first be exhausted against the defaulting supplier before demanding reversal from the recipient.
• Retrospective Cancellation Fallacy: Cancelling a supplier's GST registration with retrospective effect cannot invalidate transactions undertaken during a period when the supplier was actively registered on the government portal and holding a valid GSTIN.

2. Revenue Contentions

The Senior Standing Counsel for the Union of India and State Governments contended:

• ITC as a Statutory Concession: Input Tax Credit is not an inherent or fundamental right, but a statutory concession conferred by the legislature subject to strict, cumulative compliance with all four clauses of Section 16(2).
• Binding Supreme Court Authority: The Revenue heavily relied on the Supreme Court's ruling in Bhandari Scrap Traders v. Union of India (July 2026) and Division Bench decisions of Gujarat (Maruti Enterprise) and Kerala (M. Trade Links), arguing that Section 16(2)(c) is constitutionally inviolable and economic hardship to the buyer cannot override statutory language.
• Chain of Credit Integrity: Under the destination-based consumption model of GST, credit cannot flow to a downstream buyer if no revenue has entered the public exchequer.

3. Court Analysis and Distinction

The Division Bench carefully analyzed the conflicting jurisprudence:

• While bound by the Supreme Court in Bhandari Scrap Traders to uphold the constitutional validity of Section 16(2)(c), the Bench emphasized that upholding statutory validity does not grant the executive an unbridled license to enforce the provision arbitrarily.
• The Court ruled that Section 16(2)(c) must be read harmoniously with the statutory scheme of assessment, Section 155, and the principles of natural justice.
• A vendor's default or retrospective cancellation constitutes an administrative trigger for inquiry, but does not ipso facto establish that the purchasing dealer acted fraudulently or received no goods.

The 14 Binding Guidelines of the High Court

In Paragraph 103 of the judgment, Hon'ble Chief Justice Ashwani Kumar Mishra and Justice Rohit Kapoor laid down 14 mandatory operational directives binding all GST proper officers:

The Decision

The Division Bench of the Punjab and Haryana High Court disposed of the 424 writ petitions with the following operative directions:

1. Constitutional Validity Upheld: The challenge to the constitutional vires of Section 16(2)(c) of the CGST and SGST Acts was rejected, aligning with the Supreme Court's ruling in Bhandari Scrap Traders.
2. Mechanical Orders Quashed: All impugned adjudication orders, demand notices, and recovery proceedings passed mechanically without following procedural due process were set aside.
3. Matters Remanded for Fresh Adjudication: The cases were remanded back to the respective proper officers to re-adjudicate each matter afresh strictly in compliance with the 14 Guidelines formulated in Paragraph 103.
4. Binding Standard for Future Proceedings: The Court directed the Principal Chief Commissioners and Commissioners of Central GST, Punjab, Haryana, and UT Chandigarh to circulate these guidelines across all field formations to ensure uniform, non-arbitrary implementation.

Practical Takeaways for Taxpayers and Practitioners

The Shaurya Alloys ruling provides an indispensable defense framework for businesses facing Section 16(2)(c) scrutiny:

• Build an Evidentiary Dossier: Whenever a Section 16(2)(c) mismatch arises, compile a complete compliance dossier: tax invoice, e-way bill, weighment slip, lorry receipt (LR), bank payment proof showing tax component, and delivery acknowledgment.
• Challenge Boilerplate Notices: If an SCN merely states that "your supplier did not file GSTR-3B" or "supplier registration is cancelled," reply by invoking Guideline 1, 3, and 4 of Shaurya Alloys, requiring the department to disclose specific foundational facts linking your business to any wrongdoing.
• Demand Proof of Supplier Recovery: Under Guideline 6 and 7, call upon the adjudicating authority to state what steps have been undertaken to recover the tax from the defaulting vendor before seeking coercive recovery from the recipient.
• Seek Cross-Examination: If the department alleges fake billing based on a vendor's statement given to DGGI, formally request cross-examination under Guideline 12.

Related Resources

Conclusion

The judgment in Shaurya Alloys Pvt. Ltd. v. State of Punjab represents a milestone in balancing statutory revenue recovery with constitutional protections for genuine businesses. By refusing to let Section 16(2)(c) operate as a blunt, mechanical instrument of arbitrary taxation, the Punjab and Haryana High Court has established that genuine purchasers who fulfill their commercial and legal obligations cannot be penalized for vendor infractions without rigorous, evidence-backed inquiry.