Tax Vista

Your weekly tax recap

Edn. 266 - 15th December 2025

Kasi Viswanathan V

Has Section 16(2)(aa) effectively been Read Down?

The petitioner challenged the constitutional validity of the provisions contained in Section 16(2)(aa) of the CGST/AGST Act, 2017. The High Court read down the provision to the extent that in case of the supplier acting truant, the purchaser ought to be given an opportunity to prove his bona fides before denial of ITC. Such bonafide may be demonstrated and verified by the tax invoices and other documents. The Court clarified that this reading down would operate only until the CBIC comes out with practical solution to the problem posed by making the availability of ITC to the bonafide purchaser contingent on factors which are totally in the hands of a supplier and not the purchaser.

The decision is founded on the following key observations & views of the Court:

(1) A tax (GST) imposed by the Government is a tax on the buyer - making the seller a mere collecting agency,

(2) The object and purpose of GST Act is to avoid any cascading effect of taxation, and

(3) The restriction is quite iniquitous because an onerous burden is placed on purchasing dealer.

A significant aspect of this decision is that it did not condition the grant of relief on outcomes at the supplier's end. The relief was completely based on actions and records at the recipient's end. In other words, it did not state that relief will be available if tax has been actually paid by supplier and the issue lies only in reporting of the invoice, or whether action has been taken at supplier's end. Instead, it only focused on whether purchaser is bonafide and he has paid tax to supplier, the collection agent. This focus on activities exclusively within the control of purchaser is the differentiating factor in the present decision vis-à-vis other leading decisions on the topic allowing ITC for genuine purchases.

The decision would have been more comprehensive, had it also noted and examined Section 155 of CGST Act, which places the burden of proving eligibility to ITC on the purchaser. The other views and observation (1) and (2) of High Court are also debatable.

Further, seeds are already sown in the original provision viz., section 16(2)(c) which mandates that the tax charged in respect of supply has been actually paid to the Government. Therefore, reading down impacts not only the amended provision (aa) but also clause (c). Although the (same) Gauhati High Court was earlier faced with a challenge to the constitutional validity of section 16(2)(c) and(d) of CGST Act, 2017 in National Plasto Moulding [2024-VIL-804-GAU] the issue was not expressly decided. In contrast, other High Courts [Kerala, Patna and MP] have upheld the validity of section 16(2)(c), while the matter is pending before other High Court [For e.g., Bombay High Court in Christie's India in WP(L) No. 16964 OF 2025].

Against this backdrop, reading down only section 16(2)(aa) while keeping intact other clauses necessarily means that even after establishing bonafide through documents, there will still be a requirement to fulfill the condition that supplier has paid tax. Alternatively, reading down will have to be extended to other clauses, which may be a difficult proposition considering those clauses were not under challenge in the instant Writ Petition.

Finally, the period till which the reading down will operate? The department is likely to contend that the auto-generated GSTR-2B under Rule 60 adequately "communicates" invoice details to recipients based on supplier filings in GSTR-1 / IFF / GSTR-1A (albeit not under Section 37). Further, Invoice Management System (IMS) introduced in GST common may also be projected as solution to the issue.

The petitioner relied upon recent decision of Supreme Court in case of Shanti Kiran [2025-VIL-83-SC], as brought out in Tax Vista Edition No.258, the decision would have limited applicability to Delhi VAT matters prior to 2010 i.e. pre insertion of material provision section 9(2)(g) in DVAT Act [2025-VIL-1262-GAU].

Test of Movability or Immovability of Solar Power Plant irrelevant for GST Rate

The dispute centered around the applicable GST rate on Solar Power Generating System (SPGS) installed by the petitioner are movable property (attracting 5% GST as per Petitioner-taxpayer) or immovable property (attracting 18% as per Revenue). The dispute related to the period 2018 to 2020. The petitioner relied upon Notification No. 24/2018 dated 31.12.2018, whereby an explanation was inserted to entry no. 234 to provide that 70% of gross consideration is assumed to be towards supply of goods taxable at 5% and remaining 30% of gross consideration is assumed to be towards supply of services taxable at 18%, resulting in an effective tax rate of 8.9%. It was submitted that the Petitioner has already paid the differential tax and interest.

The department, however, objected on the ground that transaction constituted supply of service alone being works contract relating to immovable property, taxable entirely at 18%. It was further argued that the concession rate would apply only when the goods are supplied in the course of EPC services. Rejecting the department's stand, the Court held that entry no. 234 would be clearly applicable to the present case, irrespective of the fact whether the contract is a works contract relating to immovable property or a composite supply of goods and services. The question of whether the works contracts executed in respect of SPGS related to movable property or immovable property was left open.

The Circular no. 163/19/2021 dated 06.10.2021 clarified that benefit of explanation is available even for the period 01.07.2017 to 31.12.2018. The only requirement for availing the benefit of concessional rate of tax is that services must be supplied along with goods. There is no requirement that it must qualify as a composite supply nor that it must necessarily be supplied in the course of an EPC contract. While, in practice, such contracts would generally satisfy the test of composite supply and would often be structured as EPC contracts, the same are not statutory conditions for benefit of concessional rate of tax [2025-VIL-1251-AP].

Recovery towards earlier order fulfils pre-deposit, but why two orders at all?

The Petitioner filed a writ petition challenging the appellate order dated 28.07.2025 (appeal filed on 24.04.2025) against the adjudication order under Section 74 dated 05.02.2025, was rejected on the ground of non-compliance with the mandatory pre-deposit requirement.

The rejection of appeal was assailed on two grounds. First, it was contended that the adjudication order dated 05.02.2025 itself was without jurisdiction, as the respondent authorities had already dropped an earlier adjudication proceeding arising from the very same show cause notice. Second, it was submitted that amounts had already been recovered on 14.03.2023 from the Petitioner's electronic credit ledger pursuant to an earlier adjudication order dated 27.05.2022, and therefore the requirement of pre-deposit stood satisfied. In response, learned counsel for the Department submitted that the recovery was effected on account of a flaw in Form DRC-08.

The Hon'ble High Court noted that it was not in dispute that an amount in excess of 10% of the tax in dispute had already been recovered from the Petitioner. Accordingly, the appellate order was set aside, with a direction to consider the appeal on merits, and the authorities were further directed to refund the amount recovered in excess of 10%, after verification.

As per facts recorded in the order, the first adjudication order (DRC-07) dated 27.05.2022 has been rectified by DRC-08 dated 22.06.2022. While the direction to refund the amount in excess of the statutory pre-deposit is appreciable, the first ground that a second adjudication order had been passed on the same show cause notice appears to have not been pressed or examined. Notwithstanding whether the plea was pressed, the fact that the amounts recovered pursuant to the earlier adjudication were adjusted and treated as pre-deposit indicates that such recovery was considered towards the very same demand. Therefore, the fundamental issue as to how a second adjudication could be passed on the same show cause notice remains unaddressed in the judgment.

Perhaps this was due to the fact that the taxpayer had challenged the second adjudication order in the first appeal, and consequently, the grievance before the Court was limited to the dismissal of appeal for non-compliance with the mandatory pre-deposit requirement [2025-VIL-1260-CAL].

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)