As a GST professional, I have often observed that an amendment intended to settle one controversy can sometimes give rise to an entirely new set of legal questions.

The retrospective insertion of Section 16(5) of the CGST Act is one such instance.

It undoubtedly brought much-needed relief to taxpayers whose otherwise eligible Input Tax Credit (ITC) had been denied merely because it was claimed beyond the time limit prescribed under Section 16(4).

But has Section 16(5) really put an end to the litigation?

Perhaps not.

While the amendment has resolved the substantive question of ITC eligibility in many cases, it has simultaneously raised more complex questions concerning retrospective legislation, concluded proceedings, recovery of confirmed demands and the principle of finality.

## First, what is Input Tax Credit?

For readers who may not deal with GST on a regular basis, Input Tax Credit, commonly known as ITC, is one of the fundamental features of the GST system.

In simple terms, when a business pays GST on its purchases, it can generally use that tax as credit against the GST payable on its sales, subject to fulfilment of prescribed conditions.

For example, if a business pays ₹1,00,000 as GST on its purchases and has a GST liability of ₹1,50,000 on its sales, it may generally use the ₹1,00,000 as ITC and pay only the balance ₹50,000 in cash.

But what happens when an otherwise eligible ITC is claimed late?

That question resulted in substantial litigation under Section 16(4) of the CGST Act.

## What does Section 16(4) say?

In simple terms, Section 16(4) prescribes the outer time limit within which a taxpayer can claim ITC relating to an invoice or debit note.

During the initial years of GST, this provision resulted in denial of ITC where credit was claimed beyond the statutory deadline, even in cases where the underlying purchases were genuine and the taxpayer otherwise satisfied the substantive conditions for claiming credit.

The issue was particularly significant during the early GST years, when businesses and the tax administration were adapting to a completely new indirect tax regime, evolving compliance requirements and technological challenges.

## What relief does Section 16(5) provide?

Section 16(5) was introduced by the Finance (No. 2) Act, 2024 with retrospective effect from 1 July 2017.

In simple terms, it provides a special relaxation for the first four financial years of GST: **2017-18, 2018-19, 2019-20 and 2020-21.**

For these years, ITC relating to an invoice or debit note can be claimed if it was taken in a return under Section 39 filed on or before 30 November 2021.

Section 39, put simply, deals with periodic GST returns. For most regular taxpayers, the relevant return through which ITC is availed is GSTR-3B.

Therefore, if a taxpayer claimed otherwise eligible ITC relating to any of these four financial years through a GSTR-3B filed on or before 30 November 2021, Section 16(5) protects that credit from denial solely because of the earlier time restriction under Section 16(4).

The legislative intention appears clear: taxpayers satisfying this extended timeline should not lose otherwise eligible ITC merely because of the original deadline under Section 16(4).

## Pending proceedings and the special rectification mechanism

Where proceedings are still pending before an adjudicating authority, appellate authority or court, the position is comparatively straightforward. Since Section 16(5) expressly operates retrospectively from 1 July 2017, the amended law must ordinarily be considered while deciding the taxpayer's eligibility to ITC.

The Government also introduced a special rectification mechanism through Notification No. 22/2024-Central Tax dated 8 October 2024 for specified orders involving ITC denied under Section 16(4), where the credit subsequently became eligible under Section 16(5) or Section 16(6).

For readers unfamiliar with these provisions:

- Section 73 broadly deals with tax demands in cases not involving fraud, wilful misstatement or suppression of facts.
- Section 74 broadly deals with tax demands where fraud, wilful misstatement or suppression of facts is alleged.
- Section 107 deals with appeals against GST orders before the First Appellate Authority.
- Section 108 gives specified higher authorities the power to examine and, in appropriate cases, revise orders passed by subordinate GST officers.

The special rectification mechanism covers specified orders under these provisions where ITC was denied for contravention of Section 16(4) but subsequently became eligible under Section 16(5) or Section 16(6).

CBIC Circular No. 237/31/2024-GST [F. No. CBIC-20001/6/2024-GST] dated 15 October 2024 further clarified how the retrospective amendment should be implemented at different stages of proceedings.

For taxpayers falling squarely within this mechanism, the route to relief is comparatively clear.

The harder questions arise outside these straightforward situations.

## Retrospective relief vs finality of proceedings

Consider a taxpayer whose ITC was denied solely under Section 16(4). Several situations are possible.

- The taxpayer may have paid the demand without filing an appeal.
- An appeal may have been filed and rejected.
- The limitation period for filing an appeal may have expired.
- Recovery proceedings may already have been completed.
- Or the order may have attained finality while the demand itself remains unpaid.

Following the retrospective insertion of Section 16(5), the very substantive basis on which the ITC was denied may no longer survive.

This leads to a fundamental question:

> Can a tax demand continue to be enforced when the retrospectively amended law recognises that the ITC was legally available at the relevant point of time?

The answer involves a tension between two established legal principles.

- On the one hand, retrospective legislation requires the law to be applied from the date specified by the legislature, even though the amendment itself was enacted later.
- On the other hand, the law also recognises the importance of finality. Judicial and quasi-judicial orders cannot ordinarily be reopened indefinitely merely because the underlying legal position subsequently changes.

This tension between substantive retrospective relief and procedural finality is where some of the most interesting questions surrounding Section 16(5) arise.

## What has the Supreme Court said about retrospective legislation?

The Constitution Bench judgment of the Supreme Court in Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited, (2015) 1 SCC 1 remains one of the leading authorities on retrospective legislation.

The Supreme Court explained the general principle that legislation imposing a new obligation, liability or disability is ordinarily presumed to operate prospectively unless the legislature clearly provides otherwise.

Section 16(5), however, presents a different situation.

Parliament has expressly made the provision retrospective from 1 July 2017. Therefore, there is no real ambiguity about whether the provision operates retrospectively.

The more difficult question is: how far can this retrospective benefit travel into proceedings that have already attained finality?

That question cannot necessarily be answered merely by establishing that Section 16(5) is retrospective. The procedural status of each case remains important.

## Parliament has expressly barred certain refunds

The legislature has specifically addressed one important category of cases.

The Finance (No. 2) Act, 2024 provides that where tax has already been paid or ITC has already been reversed which would not have been so paid or reversed had Section 16(5) or Section 16(6) been in force at the relevant time, no refund shall be granted.

In simple English:

> If a taxpayer had already paid the tax or reversed the ITC before receiving the benefit of the retrospective amendment, Section 16(5) does not automatically entitle the taxpayer to get that money or credit back as a refund.

CBIC Circular No. 237/31/2024-GST [F. No. CBIC-20001/6/2024-GST] dated 15 October 2024 reiterates this position.

The consequence is significant. Two taxpayers with identical ITC claims may ultimately face entirely different economic outcomes.

- A taxpayer whose dispute remained pending may receive the benefit of Section 16(5).
- Another taxpayer who promptly paid the demand or reversed the ITC may be barred from obtaining a refund.

This raises an important policy question:

> Should retrospective tax relief effectively depend upon whether a taxpayer continued to litigate rather than complied with the original demand?

The statutory position regarding refunds may be express. From the perspective of tax equity, however, the question remains worthy of discussion.

## The Supreme Court in Mafatlal Industries

The landmark nine-judge Bench judgment of the Supreme Court in Mafatlal Industries Ltd. v. Union of India, (1997) 5 SCC 536 is relevant when considering claims for refund of indirect taxes.

The Supreme Court broadly emphasised that refund claims relating to indirect taxes must ordinarily be pursued within the statutory framework created by the legislature and subject to the conditions and limitations contained in that framework.

A taxpayer therefore cannot necessarily assume that a retrospective change in substantive law automatically creates an unrestricted right to reopen concluded proceedings or obtain a refund. This becomes particularly relevant where Parliament itself has expressly barred refunds of amounts already paid or ITC already reversed.

However, Mafatlal must be applied carefully and in its proper context. The constitutional dimensions of an exceptional case may depend upon its precise facts, the nature of the levy and the remedy sought.

## The most interesting question: a final order but an unpaid demand

In my view, one of the most legally interesting situations arises where an adverse order has attained finality, but the tax demand remains unpaid.

Consider this example.

A taxpayer's ITC was denied solely because it was claimed beyond the deadline under Section 16(4). An adjudication order was passed. The taxpayer did not appeal within the prescribed period, and the order attained finality.

However, the Department has not yet recovered the demand.

Subsequently, Section 16(5) is introduced retrospectively, and under the amended law, the ITC in question is clearly eligible.

Can the Department nevertheless recover the demand because the original adjudication order has attained finality?

Or can the taxpayer contend that recovery of a demand whose substantive foundation has retrospectively ceased to exist would be legally unsustainable?

The issue becomes particularly interesting because the statutory refund bar expressly deals with amounts already paid or ITC already reversed. It does not, by itself, expressly state that an unpaid demand must necessarily continue to be recovered despite the retrospective validation of the underlying ITC.

At the same time, the principle of finality cannot simply be ignored.

The answer may therefore depend upon the precise procedural history of each case, including whether the ITC was denied solely under Section 16(4), whether other grounds for denial were involved, whether the taxpayer was eligible for the special rectification mechanism, whether any statutory appellate remedy remains available and whether the extraordinary writ jurisdiction of a High Court can appropriately be invoked.

This is an area where further judicial guidance would be particularly valuable.

## What are the High Courts saying specifically about Section 16(5)?

The judicial trend is increasingly clear in cases where proceedings remain pending or the relevant order remains under challenge.

In Tvl. Sri Balaji Metal Trading v. Deputy State Tax Officer (W.M.P. (MD) Nos. 12417, 12418 & 12420 of 2025, 18 June 2025), the Madras High Court considered the retrospective insertion of Section 16(5) and granted relief in respect of ITC denied on limitation grounds, subject to satisfaction of the statutory conditions.

Similarly, in M/s. Selva Vilas Jewellery v. Superintendent of GST and Central Excise (W.M.P. (MD) Nos. 27970 & 27972 of 2025, 7 January 2026), the Madras High Court recognised the retrospective effect of Section 16(5) in relation to ITC claims for the specified financial years.

The broad principle emerging from these decisions is relatively straightforward: where ITC satisfies the conditions of Section 16(5), it should not continue to be denied solely because of the earlier time restriction under Section 16(4).

These decisions are important. But they do not necessarily answer every question involving orders that have long attained finality, amounts already paid, expired appellate remedies or unrecovered demands.

That may well be the next frontier of Section 16(5) litigation.

## The cases that may still generate litigation

The genuinely difficult cases are likely to involve orders that have attained finality, appeals dismissed on limitation, taxpayers who never filed appeals, recovery proceedings based on pre-amendment orders, voluntary payments through DRC-03, payments made under protest, demands partly paid and partly outstanding, and cases involving multiple grounds for ITC denial where Section 16(4) was only one of the issues.

The precise factual and procedural distinctions in each case may significantly affect the relief available.

## A larger question of tax equity

Suppose two taxpayers had identical ITC claims. Both claimed their ITC after the original Section 16(4) deadline but before 30 November 2021.

The first taxpayer challenged the demand and continued litigating until Section 16(5) was introduced. The taxpayer now receives the benefit of the retrospective amendment.

The second taxpayer promptly complied with the demand and paid the tax. Because of the express statutory refund restriction, that taxpayer may not receive the money back.

The difference in economic outcome arises not from any difference in substantive eligibility for ITC, but from the procedural position in which each taxpayer happened to find themselves when the retrospective amendment was enacted.

This leads to a question worth reflecting upon:

> Should a tax system create a situation where continued litigation ultimately produces a more favourable outcome than prompt compliance?

The answer may be legally settled by the statutory language. The larger question of tax equity, however, remains.

## Has Section 16(5) ended the litigation?

Section 16(5) has unquestionably resolved a major category of ITC disputes. But it would be premature to conclude that litigation surrounding the time limit for claiming ITC has ended.

The amendment has simply changed the questions being litigated.

Earlier, the principal question was: was the ITC claimed within the time limit prescribed under Section 16(4)?

The emerging questions are far more nuanced:

- Can a concluded order be reopened in light of retrospective beneficial legislation?
- Can an unrecovered demand continue to be enforced when its substantive foundation has retrospectively disappeared?
- What remedy is available to a taxpayer whose appeal was rejected solely on limitation?
- Can a taxpayer who has already paid the demand ever successfully challenge the statutory refund bar?
- And should two taxpayers with identical substantive eligibility face different outcomes merely because one paid the demand while the other continued to litigate?

These questions extend beyond Section 16(5). They concern the larger relationship between substantive justice, procedural finality and certainty in tax administration.

Section 16(5) may have closed one chapter of GST litigation. But it has certainly opened another.

We would be interested to hear the views of fellow tax professionals, legal practitioners and businesses: do you believe Section 16(5) has truly resolved the controversy, or has it merely shifted the litigation to a new set of questions?

The retrospective insertion of Section 16(5) rescued Input Tax Credit that had been denied purely on limitation grounds. It also opened a harder set of questions about concluded proceedings, unpaid demands and the principle of finality.

Section 16(5) of the CGST Act: Retrospective Relief Granted — But Is the ITC Litigation Really Over?

## Why transfer pricing is no longer just a big-company problem

There was a time when transfer pricing was a concern only for the top 500 Indian corporates — the Tatas, the Infosyses, the subsidiaries of Fortune 500 multinationals.

**That time is over.** Today:

- A mid-sized IT services company in Chennai billing its Singapore holding company
- A Pune-based manufacturer selling components to its German parent
- A Bengaluru startup paying royalties to its Delaware IP holding entity

All of them are squarely within India's transfer pricing regime — and most are not adequately prepared.

## The scale of the shift

- ₹40,000+ crores collected in TP adjustments in a recent cycle
- Increasing TP litigation across courts and tribunals
- OECD BEPS framework embedded into Indian law
- Access to CbCR, Master File, and Local File data

Tax authorities today have unprecedented visibility into how profits are allocated globally.

If your business has related-party transactions — international or even domestic — this matters to you.

## What is transfer pricing?

When unrelated parties transact, prices are determined by market forces.

When related parties transact, prices can be manipulated, affecting:

- Profit allocation
- Tax jurisdiction
- Overall tax liability

Transfer pricing rules ensure that related-party transactions occur at arm's length — as if between independent entities.

### Risk of non-compliance

If prices deviate:

- Income is adjusted upward
- Additional tax is levied
- Interest and penalties apply
- The case may be referred for TP audit

## The Indian transfer pricing framework

### Legal backbone

Sections 92 to 92F of the Income Tax Act cover:

- International transactions
- Specified domestic transactions
- Deemed international transactions

### Associated Enterprises (AE)

Entities are considered related if there is:

- 26% or more shareholding
- Management or control overlap
- Significant loan financing
- Other prescribed relationships

### Accepted methods

- CUP (Comparable Uncontrolled Price)
- RPM (Resale Price Method)
- CPM (Cost Plus Method)
- PSM (Profit Split Method)
- TNMM (Transactional Net Margin Method)

TNMM dominates in India, especially for IT and ITES.

## What has changed (2024–2026)

### 1. BEPS is now enforced reality

**Country-by-Country Reporting (CbCR).** Applicable for groups with revenue above ₹5,500 crores. It provides jurisdiction-wise:

- Revenue
- Profit
- Tax paid
- Employees
- Assets

**Master File and Local File.**

- Master File: global structure, value chain
- Local File: entity-level transaction analysis

**Principal Purpose Test (PPT).** Treaty benefits are denied if tax avoidance is a primary purpose.

**Multilateral Instrument (MLI).** Treaties are updated without renegotiation, so existing structures may be reinterpreted.

### 2. Safe harbour rules (updated)

Predefined margins for:

- IT / ITES: 17%–24%
- KPO: 24%
- Contract R&D: 24%
- Loans and guarantees: prescribed spreads

Many businesses cannot sustain these margins, forcing full benchmarking.

### 3. Domestic transfer pricing

Applies if transactions exceed ₹20 crores, including:

- Related-party payments
- SEZ-linked transactions
- Tax-incentive-based structures

## The five most litigated TP areas

**1. IT and software services**

- Classification as captive or low-risk entities
- Authorities often push for higher margins

**2. Royalties and intangibles**

- DEMPE framework focus
- Substance over legal ownership

**3. Management fees**

- Were the services actually rendered?
- Is the allocation justified?

**4. Intra-group financing**

- Interest rates
- Guarantee fees
- Cash pooling structures

**5. Business restructuring**

- Exit charges
- Transfer of profit potential

## Advance Pricing Agreements (APA)

### What is an APA?

A binding agreement with tax authorities on:

- Pricing methodology
- Arm's length pricing

### Key benefits

- Certainty (up to 5 years, plus a 4-year rollback)
- Reduced litigation
- Elimination of double taxation (in bilateral APAs)

### Types

- Unilateral APA — faster, India-only certainty
- Bilateral APA — full protection from double taxation

## Documentation: non-negotiable

### Penalties

- Section 271AA: 2% of transaction value (no documentation)
- Section 271G: 2% (failure to furnish data)

### Required documentation (Rule 10D)

- Group and entity overview
- Functional analysis (FAR)
- Comparability study
- Method selection and justification
- Pricing computation

Quality matters more than volume. Boilerplate documentation fails audits.

## Secondary adjustment risk

Under Section 92CE, if a TP adjustment occurs:

- The excess amount is treated as a loan to the foreign AE
- Notional interest is charged if it is not repatriated

This creates ongoing financial impact, not just a one-time tax cost.

## Practical action plan (FY 2026–27)

- Review inter-company agreements
- Conduct functional analysis
- Benchmark margins
- File Form 3CEB on time
- Evaluate safe harbour eligibility
- Consider an APA for large transactions
- Assess secondary adjustment exposure

## Mutual Agreement Procedure (MAP)

Used to resolve double taxation:

- Involves treaty partner countries
- Increasingly efficient post-BEPS
- Applicable for major jurisdictions (US, UK, Japan, Germany and others)

## The IPRS perspective

Transfer pricing is not just compliance — it is strategic.

Businesses that manage TP well:

- Maintain updated agreements
- Perform proactive benchmarking
- Involve leadership (CFO and Board)

Businesses that do not:

- Face higher adjustments
- Experience prolonged litigation
- Suffer double taxation

## Conclusion

India's TP environment today is more data-driven, more scrutinised and more consequential.

At the same time, tools such as APAs, MAP, safe harbours and robust documentation offer strong protection — if used proactively.

The gap between proactive and reactive businesses has never been wider.

If you have not reviewed your transfer pricing policy in the last 12 months, now is the time.

Transfer pricing is no longer a concern reserved for the top 500 corporates. If your business has related-party transactions — international or even domestic — the Indian framework already applies to you.

Transfer Pricing in 2026: The Hidden Risk in Your Global Transactions

Imagine a company that has been performing exceptionally well. Its revenues are steadily increasing, the business is expanding, and its shareholders are increasingly confident in its growth. As shareholders subscribe to additional capital, the company's paid-up share capital also increases.

For the management, this is undoubtedly a positive development. But growth also brings responsibility.

As a company evolves, so does the regulatory framework applicable to it. Compliances that may not have applied at an earlier stage can become mandatory when prescribed thresholds are crossed or when the company falls within the scope of specific statutory provisions. Therefore, along with focusing on growth, a company must periodically evaluate whether any new compliance requirements have become applicable.

One such important requirement is dematerialisation of securities.

## The ISIN process and the DSC question

Once the requirement is identified, the process involves several procedural steps and documents for obtaining an ISIN. One practical aspect that caught my attention was the requirement to affix the Digital Signature Certificate (DSC) of the authorised signatory on the documents submitted for ISIN generation.

Initially, I wondered why documents such as the MOA and AOA required a fresh DSC when they had already been digitally signed at the time of incorporation. However, it made sense considering that the directors of a company may have changed since incorporation.

But the Certificate of Incorporation (COI) was different. Since it is issued by the Ministry of Corporate Affairs and already carries the digital signature of the ROC, affixing another DSC seemed rather unusual. My immediate thought was:

> How am I supposed to affix a DSC to a document that has already been digitally signed by the ROC?

The practical solution was to scan the original COI and affix the authorised signatory's DSC to the scanned document. Only then could it be uploaded and accepted as part of the Master Creation Form (MCF) process required for the ISIN application.

## Depository alignment for shareholders

Another important practical aspect I came across was the requirement for shareholders to hold their demat accounts with the same depository in which the company's ISIN is registered, that is, NSDL or CDSL.

This meant that even though some shareholders already had demat accounts, I could not immediately proceed with the dematerialisation of their shares. Their existing accounts had to be maintained with the same depository as the company's ISIN. Where they were not, demat accounts had to be opened with the appropriate depository before proceeding further.

## The lesson

These experiences reinforced an important lesson: identifying the requirement for dematerialisation is only the first step. The practical readiness of both the company and its shareholders is equally important for ensuring a smooth transition from physical to dematerialised securities.

And sometimes, it is these small practical details that turn a compliance requirement into a valuable learning experience.

Identifying that dematerialisation applies to your company is only the first step. The practical details of ISIN generation, digital signatures and depository alignment are where the real work begins.

Our Blogs

Section 16(5) of the CGST Act: Retrospective Relief Granted — But Is the ITC Litigation Really Over?

Transfer Pricing in 2026: The Hidden Risk in Your Global Transactions

From Physical to Digital: A Practical Journey of Shares Dematerialisation

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