The Goods and Service Tax Appellate Tribunal (GSTAT), Surat Bench, has directed the GST department to disclose whether it has initiated any recovery proceedings against a supplier whose alleged non-payment of tax was cited as the basis for denying Input Tax Credit (ITC) to the recipient.

The bench of Sanjaykumar Dwivedi (Judicial Member) and Rameshkumar G. Hadvani (Technical Member)  has specifically asked the department to inform whether a show cause notice has been issued to the supplier and to place the current status of proceedings on record.

The appeal concerns a dispute involving M/s PI Industries Ltd., against whom the department sought to deny Input Tax Credit on the ground that the supplier had allegedly not paid the tax relating to the supplies.

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According to the department’s submission before the Tribunal, M/s Shriya Chemicals Private Limited had supplied goods to PI Industries. The receipt of those goods by the recipient was, however, not disputed.

The department’s case was that despite the supply and receipt of goods, the supplier had not paid the applicable tax. On this basis, the department contended that the recipient’s claim of ITC was contrary to the requirement contained in Section 16(2)(c) of the CGST Act.

Thus, the central issue before the Tribunal at this stage was not whether the goods had actually been received, but the consequences for the recipient’s ITC where the supplier allegedly failed to pay the tax.

Rather than immediately determining the ITC dispute, the GSTAT directed the department to place on record important information concerning action against the defaulting supplier.

The Tribunal specifically directed the appellant department to file a written submission stating whether any steps had been taken to recover the tax from Shriya Chemicals Private Limited.

More particularly, the department has been asked to disclose whether any show cause notice has been issued to the supplier. The Tribunal also directed the department to report the current status of proceedings against the supplier.

The direction places the supplier’s alleged tax default at the centre of the factual examination. Before the Tribunal proceeds further with the recipient’s ITC dispute, the department must therefore clarify what action, if any, has been taken against the supplier for the alleged non-payment.

A significant factual aspect recorded in the order is that the department itself acknowledged that Shriya Chemicals had supplied the goods to PI Industries and that receipt of the goods by PI Industries was not in dispute.

The department nevertheless maintained that the supplier’s failure to pay tax attracted Section 16(2)(c) and consequently affected the recipient’s ITC claim.

The Tribunal’s direction for details of proceedings against the supplier indicates that the issue cannot be examined solely by looking at the recipient’s claim in isolation. The department has been called upon to disclose the action taken in relation to the supplier’s alleged tax liability.

PI Industries also informed the Tribunal that it had filed a cross-objection in the matter.

The Tribunal accordingly directed the Registry to register the cross-objection and place the department’s appeal and the cross-objection together for hearing.

The matter has been listed for further hearing on September 8, 2026, with notice directed to be issued accordingly.

The Surat Bench has not finally decided the entitlement of PI Industries to the disputed ITC in the August 11 order.

The order records the rival submissions and calls upon the department to furnish additional information regarding recovery proceedings against the supplier. The question of whether the recipient can ultimately retain the ITC despite the supplier’s alleged non-payment of tax remains to be considered in the pending proceedings.

The Tribunal has therefore kept the substantive controversy open while seeking further factual and procedural details from the department.

The order is significant against the backdrop of frequent GST disputes where recipients face denial of ITC because of alleged tax defaults by their suppliers.

Section 16(2)(c) forms part of the statutory conditions governing entitlement to ITC and requires that the tax charged in respect of a supply has been actually paid to the Government, subject to the statutory framework.

In the present case, the Tribunal has specifically sought information about whether the department has pursued the supplier for the alleged non-payment. The direction could therefore become relevant in determining how the recipient’s ITC claim is to be examined where the underlying transaction and receipt of goods are not disputed.

However, the August 11, 2026 order is an interim procedural direction and not a final pronouncement laying down a general rule that ITC cannot be denied unless recovery proceedings are first initiated against the supplier. The final outcome will depend upon the submissions and evidence placed before the Tribunal at the next hearing.

The department is now required to place before the GSTAT details concerning recovery action against Shriya Chemicals, including whether a show cause notice has been issued and the present status of any proceedings.

The recipient’s cross-objection will also be considered alongside the department’s appeal.

The matter is scheduled to come up before the Surat Bench on September 8, 2026, when the Tribunal is expected to consider the department’s written submission and the cross-objection filed by PI Industries.

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