Facts of the Case

M/s. Transtech Solution, a works-contract firm registered under GSTIN 21AANFT4251D1ZH, received an e-mail on 28.04.2025 intimating that Input Tax Credit of Rs.1,88,120/- had been blocked in its Electronic Credit Ledger under Rule 86A of the CGST/OGST Rules, on the ground that its supplier, M/s. Metro International, was found non-existent. The petitioner downloaded portal records purporting to show that Metro International had duly filed returns and discharged its liability for 2024-25, and filed a representation on 03.05.2025 that remained unattended. During hearing, the Department additionally flagged a second supplier, M/s. Cerebral Trade Exim, also alleged to be non-existent, and disclosed that both suppliers' registrations had in fact been cancelled since January 2024, and that a Section 73 notice via Form DRC-01A had separately been issued to the petitioner for the same amount.

Issues Involved

  1. Whether the Department's action in blocking Input Tax Credit under Rule 86A, on the ground of dealing with non-existent suppliers, can be examined and reversed in writ jurisdiction based on the petitioner's own downloaded portal documents.
  2. Whether the writ court should adjudicate the factual dispute over supplier genuineness, or leave it to the statutory fact-finding authority under Section 16(2) of the CGST Act.
  3. What direction should follow where the petitioner's reply to the blocking action has remained pending consideration by the Department.

Petitioner's Arguments

  • The petitioner contended that documents downloaded from the GST portal showed both alleged suppliers had duly filed their GSTR-3B and GSTR-1 returns and discharged 100% of their liability for FY 2024-25, demonstrating they were not non-existent at the relevant time.
  • Relying on invoices from the suppliers, it was argued there was no impediment to unblocking the ITC, and reliance was placed on M/s. Atulya Minerals and the Karnataka High Court's K-9-Enterprises to contend that the Department had acted under a misconception and in a highhanded manner warranting interference.

Respondent's Arguments

  • The Department produced a confidential report from the Special Commissioner (Enforcement) showing that dealers, including the petitioner, had transacted with non-existent West Bengal-registered suppliers, and a Blocked Credit Ledger extract recording the specific block with the reason 'Supplier found non-functioning'.
  • It was submitted that both Metro International and Cerebral Trade Exim had, in fact, had their registrations cancelled since 20.01.2024 and 18.01.2024 respectively, and continued issuing invoices thereafter; a Section 73 notice via Form DRC-01A had also been issued to the petitioner for the identical amount, to which no reply had yet been filed.

Court Order / Findings

  • The Court found a factual incongruity between the petitioner's documents (showing supplier compliance) and the Department's confidential report and cancellation dates, and held that verifying whether goods had genuinely moved and been received — the touchstone under Section 16(2)(b) and (c) of the CGST Act and Rule 36 of the CGST Rules — required documentary scrutiny (invoices, waybills, books of account) that a writ court is ill-equipped to undertake.
  • Extensively analysing Rule 86A, the Court reiterated that blocking of ITC is an extraordinary, non-mechanical power requiring 'reasons to believe' based on objective material, but equally held — relying on the Supreme Court's Ecom Gill Coffee Trading and Chief Commissioner CGST v. Safari Retreats, and on S.S. Industries v. Union of India and Delhi High Court rulings in Banson Enterprises and Mukesh Kumar Garg — that where a genuine investigation into fraudulent/non-existent-supplier ITC claims is underway, writ courts should not stall it or grant interim ITC relief pre-empting the statutory fact-finding process.
  • Declining to examine the factual merits of whether the suppliers were genuinely functioning, the Court held the matter is not fit for exercise of extraordinary writ jurisdiction, and directed the authority in seisin to consider the petitioner's pending reply/explanation dated 03.05.2025 within four weeks, after affording an opportunity of hearing, without expressing any opinion on the merits of the underlying dispute.

Important Clarification

  • Blocking of Input Tax Credit under Rule 86A on the ground of dealing with a non-existent or non-functioning supplier is not, by itself, examinable on merits in writ jurisdiction where the underlying facts (genuineness of the supplier, actual movement of goods, and post-cancellation invoicing) remain disputed and require documentary verification.
  • The distinction between 'entitlement to' claim ITC and being 'entitled to avail' it (per Safari Retreats) reinforces that ITC remains conditional on satisfying Section 16(2)'s cumulative requirements, which only the adjudicating authority can verify on evidence.
  • Where a genuine fraud/non-existent-supplier investigation is in progress, courts will decline to interfere with Rule 86A blocking or pre-empt a Section 73/74 adjudication, but will direct the authority to decide the taxpayer's pending representation within a fixed timeframe.

Sections Involved

  • Rule 86A of the Central Goods and Services Tax Rules, 2017 – empowers blocking of the Electronic Credit Ledger where ITC is believed to be fraudulently availed or ineligible, the core provision examined.
  • Section 16(2) of the CGST Act, 2017 – lays down cumulative conditions (valid invoice, actual receipt of goods/services, tax actually paid, return filed) for availing ITC.
  • Rule 36 of the CGST Rules, 2017 – prescribes documentary requirements for claiming ITC.
  • Section 73 of the CGST Act, 2017 – the provision under which a parallel demand notice (Form DRC-01A) had separately been issued to the petitioner for the same amount.

Decision – In Favour of

In favour of the Department on maintainability — the writ court declined to unblock the ITC or examine the factual dispute, though the petitioner's pending representation was directed to be decided within four weeks, leaving the substantive outcome open.

Case Details

Court: High Court of Orissa at Cuttack
Case No.: W.P.(C) No.13821 of 2025
Coram: Hon'ble the Chief Justice Mr. Harish Tandon and Hon'ble Justice Mr. Murahari Sri Raman
Date of Judgment: 24.07.2025 (Heard 10.07.2025)

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