Case Note & Summary
The writ petition arose under Article 226 of the Constitution of India before the Bombay High Court, Ordinary Original Civil Jurisdiction. The petitioner, a sole proprietorship registered under the CGST Act with effect from 1 July 2019, carried on business providing security services. Prior to 1 January 2019, GST on security services was payable on forward charge basis by the supplier under the head 'Investigation and Security Services'. With effect from 1 January 2019, Notification No.29/2018 dated 31 December 2018 amended Notification No.13/2017 dated 28 June 2017 to bring security services under reverse charge mechanism, making the recipient of services liable to pay tax where the supplier is any person other than a body corporate. The petitioner, being a proprietorship and not a body corporate, fell within the reverse charge regime. Consequently, the security services supplied by the petitioner were treated as exempt supplies in the petitioner's hands under Section 17(3) of the CGST and MGST Acts, and the petitioner could not claim input tax credit on goods and services procured for rendering those services, as Section 17(2) restricted credit to taxable supplies. The petitioner contended that this denial of input tax credit increased her costs and made her business uncompetitive, violating Articles 14 and 19(1)(g) of the Constitution and defeating the GST objective of avoiding cascading effect. She sought a writ of mandamus or certiorari to read down Section 17(3) and quash Section 17(2) to the extent it denied input tax credit, and to declare the provisions ultra vires. The High Court heard the petitioner through counsel, who argued that the notification excluded body corporates from the phrase 'supplier of service' and thus treated equals unequally. Counsel further argued that there was no refund mechanism for input tax credit under reverse charge, unlike inverted duty structure cases, and that the right to carry on business was infringed. The court analysed the scheme of Sections 16 and 17 of the CGST Act, 2017: Section 16(1) entitles every registered person to input tax credit subject to prescribed conditions and restrictions; Section 17(2) restricts credit to the portion attributable to taxable supplies; and Section 17(3) includes within the value of exempt supply supplies on which the recipient is liable to pay tax on reverse charge basis. The High Court held that the statutory scheme was coherent; reverse charge supplies were statutorily deemed exempt in the hands of the supplier, and the recipient who paid tax could claim input tax credit. The classification between body corporate and non-body corporate suppliers was founded on intelligible differentia and had rational nexus to the object of the Act, and the denial of input tax credit to the petitioner did not violate Article 14 or Article 19(1)(g). Accordingly, the court dismissed the writ petition and upheld the constitutional validity of Sections 17(2) and 17(3) of the CGST/MGST Acts and Notification No.29/2018.
Headnote
A) Constitutional Law - Equality and Classification - Section 17(2), Section 17(3) CGST Act, MGST Act, Notification No.29/2018 - Petitioner, a non-body-corporate supplier of security services, argued that exclusion of body corporate from reverse charge mechanism discriminates between equals - Court examined statutory scheme and held that the classification was based on intelligible differentia and had rational nexus to the object of the GST Act - Held that no violation of Article 14 of the Constitution was made out (Paras 4-6, 8-10). B) Taxation - Input Tax Credit and Reverse Charge - Section 16(1), Section 17(2), Section 17(3) CGST Act 2017 - Reverse charge supplies included in exempt supply value deny input tax credit to supplier - Section 16 allows credit subject to conditions, and Section 17 restricts credit to taxable supplies; recipient who pays tax on reverse charge basis can claim credit - Held that the statutory scheme is coherent and the denial of input tax credit to the supplier does not contravene the CGST Act (Paras 8-10). C) Constitution - Freedom of Trade and Business - Article 19(1)(g) Constitution of India - Denial of input tax credit to a proprietorship supplying security services increases cost but does not impose an unreasonable restriction - Court considered the contention that GST objective of avoiding cascading effect is defeated and that no refund exists for tax paid under reverse charge - Held that the measure is regulatory and within legislative competence, and no violation of Article 19(1)(g) was established (Paras 5-6, 8-10).
Issue of Consideration
Whether Section 17(3) of CGST and MGST Acts insofar as it treats taxable supplies under reverse charge as exempt supplies and Section 17(2) denies input tax credit to the supplier is ultra vires Articles 14 and 19(1)(g) of the Constitution; whether exclusion of body corporate from reverse charge liability under Notification No.29/2018 creates unreasonable classification between body corporate and non-body-corporate suppliers; whether provisions should be read down to exclude proprietorship entities to avoid cascading effect and protect right to carry on business
Final Decision
The High Court dismissed the writ petition and upheld the constitutional validity of Sections 17(2) and 17(3) of the CGST/MGST Acts and the notifications, holding that treating reverse charge supplies as exempt supplies and the consequent denial of input tax credit to non-body-corporate suppliers is consistent with the statutory scheme and not violative of Articles 14 or 19(1)(g) of the Constitution.
Law Points
- Section 16(1) CGST Act entitles registered persons to input tax credit subject to prescribed conditions and restrictions
- Section 17(2) CGST Act restricts credit to input tax attributable to taxable supplies
- Section 17(3) CGST Act includes supplies on which recipient is liable to pay tax on reverse charge basis within value of exempt supply
- Notification No.29/2018 dated 31.12.2018 amending Notification No.13/2017 dated 28.06.2017 brings security services under reverse charge mechanism for non-body-corporate suppliers
- classification between body corporate and non-body corporate suppliers is permissible under Article 14 Constitution
- denial of input tax credit to reverse charge supplier does not violate Article 19(1)(g) Constitution
- GST statutory scheme permits recipient of reverse charge services to claim input tax credit
