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Karnataka High Court issued two land mark rulling protect taxpayer rights

The Karnataka High Court recently issued two landmark rulings that significantly protect taxpayer rights regarding Input Tax Credit (ITC) and its distribution. [1, 2, 3]

1. ISD Mechanism vs. Cross-Charge (Micro Labs Case)

The court ruled that the Input Service Distributor (ISD) mechanism was not mandatory for distributing common ITC prior to April 1, 2025. [4, 5]

  • Key Finding: Businesses were legally allowed to distribute credit through the "cross-charge" method (using tax invoices) instead of the ISD route.

  • Impact: This sets aside substantial tax demands raised against companies like Micro Labs Limited and provides a defense for other firms that used cross-charging before the 2024 law amendments made ISD compulsory starting April 2025. [4, 5]

2. Bona Fide Purchasers Entitled to ITC (Instakart Case)

The court held that a bona fide purchaser cannot be denied ITC solely because the selling dealer failed to deposit the tax with the government. [6, 7]

  • Key Finding: If a buyer acts in good faith and pays the tax to the seller, they should not be penalised for the seller's default.

  • Procedural Directive: The tax department must proceed against the defaulting seller to recover the tax rather than denying credit to the genuine buyer.

  • Exception: Denial is only justified in cases involving fraud, collusion, or non-genuine transactions. [6, 7, 8, 9]

Additional Notable ITC Rulings

  • Inverted Duty Structure (IDS) Refunds: In the South Indian Oil Corporation case (December 2025), the court ruled that refunds cannot be denied merely because the input and output goods are identical, provided there is a genuine rate mismatch.

  • Arbitrary ITC Blocking: The court quashed the "draconian" blocking of ITC under Rule 86A when done without a pre-decisional hearing or independent "reasons to believe" recorded by the officer.

  • Return Rectification: The court allowed taxpayers to correct bona fide, revenue-neutral errors in GST returns even after statutory deadlines if they do not result in revenue loss. [2, 3, 10, 11, 12]

Would you like more details on the Micro Labs or Instakart cases, or a summary of the April 2025 mandatory ISD changes?


 
 
 

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