Madras High Court Upheld The Constitutional Validity Of Section 16(2)(C)
And Rule 36(4)
1.
Introduction
The introduction of the
Goods and Services Tax (GST) in India in July 2017 was hailed as one of the
most transformative indirect tax reforms in the country. It subsumed multiple
taxes into a unified system, introducing new concepts such as seamless flow of
Input Tax Credit (ITC). However, over the years, restrictions and conditions
imposed on ITC have given rise to significant litigation.
One of the most debated
conditions is contained in Section 16(2)(c) of the CGST Act, 2017, which
stipulates that a registered taxpayer can claim ITC only if the supplier has
actually paid the tax to the Government. Adding to this, Rule 36(4) of the
CGST Rules, 2017 was introduced, restricting ITC availment only to the
extent reflected in GSTR-2A (now GSTR-2B).
The case of M/s Baby
Marine (Eastern) Exports vs. Union of India & Others decided by the
Madurai Bench of the Madras High Court on 06 August 2025 (W.P.(MD) Nos.
21165 & 21166 of 2022) examined a constitutional challenge to these
provisions. The petitioner, an exporter, claimed that these restrictions
unfairly penalize purchasing dealers for the defaults of their suppliers. The
Court, however, dismissed the challenge, reinforcing that ITC is a conditional
concession and not a vested right.
This article provides a
comprehensive analysis of the case under structured headings, exploring the
facts, issues, submiss+ions, legal reasoning, and implications of the judgment.
2. Case
Details at a Glance
- Case Name:
M/s Baby Marine (Eastern) Exports vs. Union of India & Others
- Court:
High Court of Judicature at Madras, Madurai Bench
- Coram:
Hon’ble Mr. Justice G.R. Swaminathan
- Writ Petition Nos.:
21165 & 21166 of 2022
- Date of Judgment:
06 August 2025
- Petitioner:
M/s Baby Marine (Eastern) Exports, a partnership firm engaged in
exports.
- Respondents:
Union of India & State Tax Authorities.
- Subject of Dispute:
Challenge to the constitutional validity of Section 16(2)(c) of the
CGST Act, 2017 and Rule 36(4) of the CGST Rules, 2017, along with a
prayer for refund of ₹31,57,846 adjusted against ineligible ITC
3.
Background and Facts of the Case
The petitioner, M/s
Baby Marine (Eastern) Exports, is an exporter of goods. As part of its
business operations, it purchased inputs and services from suppliers and
availed Input Tax Credit (ITC) on such purchases. During refund claims,
however, the department invoked Section 16(2)(c) and Rule 36(4),
alleging that certain suppliers had not paid tax to the Government, thereby
rendering the ITC availed by the petitioner ineligible.
On 17 February 2021,
an order was passed by the department adjusting the petitioner’s refund claim
of ₹31,57,846 against this alleged ineligible ITC. Aggrieved by this,
the petitioner approached the High Court in two connected writ petitions.
In W.P. No. 21165 of
2022, the petitioner sought a declaration that Section 16(2)(c) of the CGST
Act and Rule 36(4) of the CGST Rules are ultra vires the Constitution of
India, particularly Article 14 (equality before law). In W.P. No. 21166
of 2022, the petitioner challenged the refund adjustment order, praying for
its quashing and for directions to release the refund amount with interest.
4.
Submissions by the Petitioner
The petitioner advanced
several arguments to support its case:
1. Unfair
Burden on Purchasing Dealers: Section 16(2)(c) makes
ITC dependent on whether the supplier has paid the tax to the Government. The
petitioner contended that once a purchasing dealer has paid the consideration
along with tax to the supplier, its responsibility should end. Penalizing the
recipient for the default of the supplier is arbitrary and unreasonable.
2. Violation
of Article 14 of the Constitution: By linking ITC
eligibility to the actions of a third party (supplier), the provision
discriminates against bona fide dealers. This violates the guarantee of
equality and fairness under Article 14.
3. Rule
36(4) is Over-Restrictive: Rule 36(4) restricts ITC to
invoices reflected in GSTR-2A/2B, even though technical glitches or mismatches
may occur. This creates an impractical burden on taxpayers to constantly
reconcile with suppliers’ filings.
4. Refund
Adjustment is Illegal: The refund claim of ₹31,57,846 was
wrongly adjusted against alleged ineligible ITC. The petitioner had already
borne the tax burden and fulfilled its part of compliance. The adjustment was
unjust and contrary to the objectives of GST, particularly for exporters who
are meant to operate on a zero-rated basis.
5. Judicial
Precedents Allowing Relief: The petitioner urged the Court to
adopt a taxpayer-friendly interpretation, citing the doctrine of
impossibility – a recipient cannot be expected to ensure that suppliers
discharge their tax obligations.
5. Defence
by the Respondents
The Union of India and
State Tax Authorities defended the validity of the provisions:
1. ITC
is a Concession, Not a Right: The respondents argued
that ITC is not a vested right but a statutory concession. The legislature is
competent to prescribe conditions for its availment.
2. Judicial
Precedents Upholding Validity: The respondents relied
heavily on prior judgments:
o Kerala
High Court in Nahasshukoor vs. Assistant Commissioner (2023),
which upheld Section 16(2)(c) and Rule 36(4).
o Division
Bench of Madras High Court in L & T Geostructure LLP vs. Union of India
(2025), which confirmed the legality of Rule 36(4), holding
it to be a temporary regulatory measure until return matching was streamlined.
3. Reasonable
Classification: The conditions imposed are neither
arbitrary nor discriminatory. They apply uniformly to all taxpayers and serve
the legitimate purpose of preventing revenue leakage.
4. Refund
Cannot be Ordered in Writ: As for the refund adjustment, the
respondents contended that the High Court cannot act as an appellate authority
to directly order refund release. The petitioner must pursue remedies under the
GST Act and Rules before competent forums.
6.
Observations of the Court
Justice G.R. Swaminathan,
after hearing both sides, made the following observations:
1. Presumption
of Constitutionality: Taxation statutes carry a presumption of
constitutionality. A provision can be struck down only if it is manifestly
arbitrary, irrational, or discriminatory.
2. Nature
of ITC: ITC is not an absolute or vested right of the
taxpayer. It is a benefit conferred by the statute, and the legislature
is well within its power to attach conditions to its availment.
3. Earlier
Judgments Binding: Since the Kerala High Court and the
Madras High Court (Division Bench) had already upheld the validity of the same
provisions, the single bench could not take a contrary view.
4. Reasonableness
of Rule 36(4): The Court recognized that Rule 36(4) was
introduced as a temporary safeguard until technological systems like GSTR-2A
and 2B stabilized. Therefore, it could not be labeled arbitrary.
5. Refund
Claim Beyond Writ Jurisdiction: Regarding refund, the
Court noted that while the petitioner claimed to have borne the tax burden, the
High Court under Article 226 could not substitute statutory remedies. The
petitioner was free to approach authorities under the Act to pursue its refund
claim.
7. Final
Decision
The Court dismissed both
writ petitions. It upheld the constitutional validity of Section 16(2)(c)
and Rule 36(4), rejecting the petitioner’s claim of arbitrariness or
violation of Article 14. The refund adjustment order dated 17.02.2021 was not
interfered with, though liberty was granted to the petitioner to pursue refund
remedies before statutory authorities.
8.
Conclusion and Implications
The judgment in Baby
Marine (Eastern) Exports adds to the growing line of judicial precedents
upholding restrictions on Input Tax Credit. It makes three critical points for
taxpayers and practitioners:
1. ITC
is Conditional: Courts consistently recognize ITC as a
concession, not a right. Compliance with statutory conditions is mandatory,
even if it results in hardship to purchasing dealers.
2. Vendor
Compliance is Crucial: Businesses must ensure that their
suppliers are tax-compliant, since the failure of suppliers to pay tax can
result in denial of ITC. This increases the importance of vendor due diligence.
3. Judicial
Restraint in Tax Policy: High Courts are reluctant to
interfere in fiscal policy choices. Unless a provision is manifestly arbitrary,
courts will uphold legislative intent.
For exporters like Baby
Marine, the ruling is a setback, as it shifts the compliance burden onto them.
However, it also clarifies the legal position, reducing uncertainty for the tax
administration.
Disclaimer: All the Information is based on the notification, circular advisory and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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