[GST] Reverse Charge Mechanism Notifications Denying ITC To Service Providers Are Constitutionally Valid: Bombay High Court

The bench opined that in case of RCM, the person receiving the services, i.e. the recipient pays the tax and can claim credit of the same. The provider of service is exempt from paying tax. Merely because persons covered by RCM cannot claim credit of ITC cannot be seen in a microscopic way to hold the notification and the provision as ultra vires.

Justices M.S. Sonak and Jitendra Jain were addressing the case where the assessee/petitioner filed a writ quashing and setting aside sub-section 17(2) of the CGST Act and MGST Act introduced vide the Impugned Notifications to the extent it denies the benefit of ITC claim to the assessee/petitioner for being ultra vires of the CGST Act, MGST Act and Rules made thereunder and the Constitution.

The assessee is aggrieved by RCM because input tax paid on goods and services procured by her for rendering security services now cannot be set-off against output tax liability because these services under RCM are treated as exempt services in the hands of the assessee, and consequently there is no output tax liability against which Input Tax Credit (ITC) can be set-off, thereby resulting in higher cost of rendering services.

The assessee submitted that on account of the impugned provisions and the Notification issued, the assessee is unable to compete since the assessee is now not entitled to avail ITC, thereby resulting in increased cost of rendering service. Therefore, the assessee's right to carry on business under Article 19(1)(g) of the Constitution of India is violated.

The bench after looking into Sections 2, 9, 16, 17 and 49 of the CGST Act observed that the person whose services are chargeable to tax under RCM is not liable to pay any tax and such services are treated as exempt undern Section 17, and further there being no output tax liability on such person, the credit of input tax is not permitted.

The bench stated that the benefit of credit of ITC is available only if there is output tax liability. In RCM there is no output tax liability because it is treated as exempt and, therefore, in tune with the objective of GST, credit of ITC cannot be claimed in the absence of liability but same can be claimed by the recipient of service.

A provision of law cannot be struck down or read down to make a business competitive for a particular type of entity. The provisions of law are to be tested on the touchstone of the Constitution of India and not on the touchstone of competitiveness in the business environment. Article 19(1)(g) guarantees freedom to carry on business or profession and not the competitiveness of a business entity in the market, stated the bench.

Admittedly, it is not the case of the assessee that by virtue of the impugned notification/provision there is a bar on him to carry on his business. Therefore, even on this count, there is no reason for reading down or quashing the impugned provisions challenged in the writ petition or it being violative of Article 19(1)(g) of the Constitution of India, added the bench.

In view of the above, the bench dismissed the petition.

Case Title: M/s. Eagle Security & Personnel Services v. Union of India

Case Number: WRIT PETITION NO.1687 OF 2024

Counsel for Petitioner/Assessee: Shreyas Shrivastava a/w Saurabh R. Mashelkar

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