HC Dismisses Writ Petition Challenging Section 17(2) and 17(3) CGST; RCM ITC Denial Upheld

The petitioner, a proprietorship firm engaged in providing security services, obtained GST registration with effect from 1 July 2019. Before 1 January 2019, security services were taxable on a forward charge basis. However, by Notification No.29/2018-Central Tax (Rate) dated 31 December 2018, amending Notification No.13/2017-Central Tax (Rate) dated 28 June 2017, security services supplied by any person other than a body corporate to a registered person in the taxable territory were brought under the Reverse Charge Mechanism (RCM).

The petitioner argued that as a result, its input tax paid on procurements could not be adjusted against any output liability, because for apportionment purposes such supplies were treated as exempt.

The petitioner challenged the vires of Sections 17(2) and 17(3) of the CGST/MGST Acts and the notification, contending that

(i) Section 17(3) should be read down so that supplies taxed under reverse charge are not treated as exempt supplies, and

(ii) Section 17(2), insofar as it restricts ITC under such classification, was unconstitutional.

The petition also alleged that excluding body corporates from the supplier class under the notification created an Article 14 and Article 19(1)(g) violation.

Main Issue: Whether inclusion of supplies taxed under reverse charge in the “value of exempt supply” under Section 17(3) and consequential denial of ITC under Section 17(2) is unconstitutional and violative of Articles 14 and 19(1)(g).

HC Held: The Court held that input tax credit is not a vested right but a statutory benefit, subject to conditions under the CGST/MGST Acts. On a combined reading of the provisions, it was clear that supplies on which tax is payable under reverse charge are excluded from a supplier’s output tax and expressly included in the definition of exempt supply under Section 17(3). Thus, suppliers of such services cannot claim ITC against them.

On the constitutional challenge, the Court while rejecting the plea under Articles 14 and 19(1)(g), held that the classification created by the notification, covering suppliers other than body corporates, is based on an intelligible differentia with rational nexus to the statute’s object. Proprietorships and similar entities are treated uniformly. The economic disadvantage faced by them cannot by itself invalidate the provision.

The Court concluded that there was no illegality in the legislative scheme or the notification. The writ petition was therefore dismissed.

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