A court refused to grant an unconditional stay on a GST demand in a case challenging the constitutional validity of Section 16(2)(c) of the CGST Act.

Issue

In a writ petition that challenges the constitutional validity of Section 16(2)(c) of the CGST Act, is a taxpayer entitled to an unconditional stay on the recovery of a tax demand, especially when other High Courts have already upheld the validity of the said provision?

Facts

A taxpayer filed a writ petition challenging the constitutional validity of Section 16(2)(c) of the CGST Act. This is the highly debated provision that makes a buyer’s right to claim Input Tax Credit (ITC) conditional on their supplier having actually paid the tax to the government.
The petitioner also challenged a specific demand order for approximately ₹1 crore in tax, plus another ₹1 crore in interest and penalty.
They requested the High Court to grant an unconditional stay on the recovery of this demand. Their main arguments for this were:
1. Their supplier, who had defaulted, had already paid a sum of ₹21 lakhs to the department.
2. Had they filed a normal statutory appeal instead of a writ petition, they would only have had to make a pre-deposit of 10% of the disputed tax (which would be ₹10 lakhs) to get an automatic stay on the recovery of the balance.

Decision

The High Court ruled procedurally in favour of the revenue.

It refused to grant an unconditional stay on the recovery of the demand.
The court’s reasoning was that a private dispute between the petitioner (the buyer) and their supplier cannot be a ground for denying the government its statutory dues.
It also took significant note of the fact that at least three other High Courts had already upheld the constitutional validity of Section 16(2)(c), which significantly weakened the petitioner’s case for getting a full, unconditional stay.
However, the court did grant a conditional stay. It directed that the recovery of the demand would be stayed, but this was made subject to the petitioner depositing ₹20 lakhs with the High Court.

Key Takeways

A Dispute with a Supplier is Not a Defense Against the Government: If your supplier fails to pay their taxes to the government, your ITC can be denied under Section 16(2)(c). The law makes it clear that your remedy is to sue your supplier to recover the money; you cannot use that dispute as a reason to not pay the government’s demand against you.
Courts are Reluctant to Grant Unconditional Stays in Tax Matters: In tax disputes, and especially when a taxpayer is challenging the validity of a law that other courts have already upheld, it is very difficult to get an unconditional stay on the recovery of the demand. The courts will typically require a significant deposit to balance the interests of the taxpayer and the revenue.
The Judicial Trend is to Uphold Section 16(2)(c): The court’s specific observation that multiple High Courts have already upheld the validity of Section 16(2)(c) is very significant. It indicates a clear and consistent judicial trend that is not in favour of the taxpayers on this particular constitutional challenge.
A Writ Petition Can Sometimes Be More Expensive: It’s interesting to note that by filing a writ petition instead of a statutory appeal, the petitioner was asked to deposit ₹20 lakhs for a stay. Had they filed a normal appeal, the mandatory pre-deposit to get an automatic stay would have been only 10% of the disputed tax, which was ₹10 lakhs.

HIGH COURT OF BOMBAY

Christie’s India (P.) Ltd.

Union of India

M.S. Sonak and Advait M. Sethna, JJ.

WRIT PETITION (L) NO. 16964 OF 2025

SEPTEMBER 20, 2025

Tushar Jarwal, Daliya Singh and Rahul Sateeja, Adv. for the Petitioner. Ms. Shruti Vyas, Abhishek Mishra and Ms. Jyoti Chavan, Addl.G.P for the Respondent.

ORDER

1. Heard Mr. Jarwal for the Petitioner, Ms. Vyas, for the Respondent No.1 and Ms. Chavan, Addl.G.P for the Respondent-State.

2. There is a challenge to the constitutional validity of Section 16(2)(c) of the Central Goods and Services Tax Act, 2017, and its corresponding provision in the Maharashtra Goods and Services Tax Act, 2017, on the ground that the same violates Article 14, 19(1)(g) and 300A of the Constitution.

3. The learned counsel for the Respondents points out that the Hon’ble High Courts of Kerala, Patna and Madhya Pradesh have already upheld the vires of the impugned provisions. Mr. Jarwal further submits that the Gauhati High Court, has, recently struck down this provision and to the best of his knowledge, the Revenue has not appealed the same.

4. Accordingly, we issue a Rule in this Petition. Ms Chavan and Ms Vyas waive service after Rule.

5. Since a provision of the central statute is challenged, we also issue notice to the Hon’ble Attorney General for India.

6. Issue notice to the Respondent No.5. In addition to the usual mode of service, private service/hamdast is allowed. The Petitioner must file an affidavit of service.

7. The Petitioner has also challenged the order dated 28 February 2025, made by the 4^th Respondent, i.e. the Assistant Commissioner of Sales Tax at Maharashtra, raising a demand of Rs. 1 crore towards GST, and penalty and interest amounting to an additional Rs. 1 crore. Ms Chavan points out that the dues as such are not objected to, but the Petitioner’s contention is that the liability to pay such dues should be that of the 5^th Respondent. She, therefore, submits that the State should not be deprived of its dues based on the disputes between the Petitioner and the 5 ^th Respondent, regarding the liability to pay the dues.

8. On the other hand, Mr. Jarwal points out that the 5 ^th Respondent has already paid Rs. 21 lakhs towards GST liability. He submitted that if the Petitioner were to file an Appeal against the order dated 28 February 2025, the Petitioner would have had to deposit only 10% of the demanded GST tax and upon such deposit, there could be no further recoveries until the disposal of the Appeal. He submitted that since the 5^th Respondent has already paid Rs. 21 lakhs, an unconditional stay restraining recoveries pursuant to the order dated 28 February 2025 may be granted.

9. We have considered the rival contentions. At least prima facie, we are satisfied that the State should not be deprived of its dues primarily on account of disputes between the Petitioner and the 5 ^th Respondent as to the liability for payment. At least at present, we cannot hold that the payment of Rs. 21 lakhs by the 5 ^th Respondent discharges the entire liability towards tax. Suppose the Petitioner seriously believes that the liability is that of the 5 ^th Respondent. In that case, the Petitioner can always initiate proceedings to recover such amount from the 5 ^th Respondent in accordance with the law. Neither the dispute with the 5 ^th Respondent nor the fact that the Respondent may have paid Rs. 21 lakhs would entitle the Petitioner to an unconditional stay in a matter involving the Revenue.

10. Therefore, though we have issued a Rule in this Petition, given the conflicting decisions on the subject, we are satisfied that this is not a matter where the Petitioner should be granted any unconditional stay.

11. Accordingly, we stay recoveries pursuant to the order dated 28 February 2025, subject to the Petitioner depositing in this Court an amount of Rs. 20 lakhs within 6 weeks from the date of uploading of this order. This amount is determined having regard to the dues, which are prima facie Rs. 1 Crore, the payment made by the Fifth Respondent, and the contention about the amount usually required to deposit for restraining coercive action. Furthermore, at least 3 High Courts have already upheld the constitutional validity of the impugned provision.

12. Such a deposit must be made after giving due intimation to the learned counsel for the Respondents. If no amount is deposited and intimation given, then this stay shall stand vacated without further reference to this Court.