2025 (8) TMI 1127 - HC - GST

Challenge to notifications and Sections 17(2) and 17(3) of CGST/MGST Acts upheld; RCM supplies treated exempt for supplier

M/s. Eagle Security & Personnel Services through Veena Chittersen Sharma (proprietor) (Eagle for short) Versus Union of India, through the Secretary, Ministry of Finance (Department of Revenue), New Delhi, State of Maharashtra, The GST Council, The Central Board of Indirect Taxes and Customs, New Delhi.

M/s. Eagle Security & Personnel Services through Veena Chittersen Sharma (proprietor) (Eagle for short) Versus Union of India, through the Secretary, ... 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether Section 17(2) and Section 17(3) of the CGST Act, read with notifications issued under Section 9(3) bringing certain services within the reverse charge mechanism (RCM), irrationally discriminate between suppliers who are body corporates and non-corporates and thus violate Article 14. 1.2 Whether the denial of Input Tax Credit (ITC) to suppliers whose outward supplies are treated as exempt because tax is payable on reverse charge basis infringes the freedom to carry on trade or business under Article 19(1)(g). 1.3 Whether provisions treating supplies on which tax is payable under RCM as 'exempt supplies' and thereby denying ITC impermissibly frustrate the object of GST to eliminate cascading (seamless credit) and/or require reading down or striking down to permit ITC or refunds analogous to inverted duty structure. 1.4 Scope and limits of judicial interference with fiscal/statutory scheme: whether courts should strike down or read down the statutory provisions or notifications in the absence of manifest arbitrariness. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Constitutional validity under Article 14 (classification between body corporates and non-corporates) 2.1 Legal framework: Sections 16, 17 and 49 read with Section 9(3) (power to notify supplies on RCM). Section 17(3) expressly includes supplies on which recipient is liable under reverse charge in the 'value of exempt supply' for purposes of apportionment under Section 17(2). 2.2 Precedent treatment: Higher court authorities recognize wide judicial deference in taxation and permit reasonable classification; tax statutes may single out classes if based on intelligible differentia and reasonable nexus to legislative objective. Prior decisions upholding differential treatment between classes in fiscal contexts were applied. 2.3 Interpretation and reasoning: The Court construed the statutory matrix to mean that where a supply is made by a person but tax is made payable by the recipient under RCM, the supplier has no output tax liability and therefore the statute treats such outward supplies as exempt for the supplier's ITC apportionment. A body corporate is a distinct class from non-corporates; differential treatment of the supplier class (corporate v. non-corporate) falls within permissible classification provided there is intelligible differentia and reasonable nexus to the legislative objective (administrative convenience, compliance burden, revenue collection efficiency, traceability of suppliers, etc.). 2.4 Ratio vs. Obiter: Ratio - classification between corporates and non-corporates in RCM context does not infringe Article 14 where intelligible differentia exists and legislative policy is within permissible bounds. Obiter - examples of administrative reasons for RCM (ease of collection, difficulty in tracing suppliers) illustrate policy rationales but are not necessary to the constitutional holding. 2.5 Conclusion: Challenge under Article 14 to Sections 17(2)/(3) and the notifications is rejected; classification is permissible and not manifestly arbitrary. Issue 2 - Article 19(1)(g) challenge (right to carry on business and competitiveness) 3.1 Legal framework: Article 19(1)(g) protects freedom to carry on business but does not guarantee competitiveness or immunity from tax burdens; taxing statutes are ordinarily not restrictions on that freedom without more. Statutory entitlement to ITC is subject to conditions in Sections 16 and 17. 3.2 Precedent treatment: Jurisprudence holds that hardship or inability to pass on tax incidence does not by itself render a tax provision unconstitutional as a restriction on Article 19(1)(g); allocation of tax burdens and credit mechanisms are legislative policy matters. 3.3 Interpretation and reasoning: The Court reasoned that denial of ITC to suppliers whose outward supplies are treated as exempt under RCM increases cost but does not bar the petitioner from carrying on business; the petitioner registered post-introduction of RCM and was aware of the scheme; competitiveness is a commercial consequence, not a constitutional right. The ITC regime is a statutory concession subject to restrictions; absence of output tax liability on supplier means no ITC entitlement under the statutory scheme. 3.4 Ratio vs. Obiter: Ratio - denial of ITC in RCM context does not infringe Article 19(1)(g). Obiter - comment that registration after scheme implementation indicates acquiescence is an ancillary observation. 3.5 Conclusion: Article 19(1)(g) challenge fails; provision does not unconstitutionally restrict the right to carry on business. Issue 3 - Compatibility with GST objective (seamless credit / cascading) and comparison with inverted duty/refund regime 4.1 Legal framework: Objective of GST is seamless credit, but statutory scheme itself (Sections 16, 17, 49 and refund provisions) prescribes when ITC or refunds arise. Section 54 (refund for inverted duty) is distinct and applies where output tax is actually paid and is less than input tax. 4.2 Precedent treatment: Courts have held that objectives of fiscal statutes do not automatically render particular provisions invalid where Legislature has chosen different mechanisms; courts cannot prescribe legislative policy (e.g., extend refund regime by judicial fiat). 4.3 Interpretation and reasoning: The Court observed that seamless transfer exists across the supply chain because recipients who pay tax under RCM can claim credit; for the supplier no output tax liability exists, so statutory ITC entitlement does not arise. Comparison with inverted duty is misplaced because that regime presupposes payment of output tax and statutory refund; RCM cases lack output tax and statutory refund is not provided. Parliamentary or executive amendment would be remedy if policy change required. 4.4 Ratio vs. Obiter: Ratio - absence of ITC in RCM cases does not violate the GST object such that provisions must be struck down; obiter - policy rationales for RCM (administrative convenience, traceability) are illustrative. 4.5 Conclusion: Objective of GST does not invalidate RCM treatment or mandate judicial creation of ITC/refund; challenge on this ground fails. Issue 4 - Scope of judicial relief: reading down, striking down and deference to fiscal policy 5.1 Legal framework: Doctrine of reading down applies narrowly where a constitutional construction is reasonably possible; courts must avoid remaking statute and must strike down when clear unambiguous language cannot be reconciled with constitutionality. Judicial restraint is emphasized in fiscal matters. 5.2 Precedent treatment: Authorities require deference to legislative policy in taxation and limit the scope of courts to substitute their policy views for that of Legislature or to undertake extensive legislative revision by reading down. 5.3 Interpretation and reasoning: Since statutory language is clear and legislative choice to treat RCM supplies as exempt for supplier is express, reading down to include proprietors (or to confer ITC/refund) would amount to judicial re-writing of the statute. No manifest arbitrariness or clear constitutional breach was found that would justify such remedial reading down. 5.4 Ratio vs. Obiter: Ratio - reading down to alter class coverage or confer benefits not provided by statute is impermissible absent ambiguity or necessity to save constitutionality; obiter - the practical policy reasons favoring RCM are noted. 5.5 Conclusion: Prayer to read down Sections 17(2)/(3) or notifications to exclude proprietorships or to provide ITC/refund is refused; court declines to rewrite fiscal policy. Overall Conclusion 6.1 The Court dismissed the challenge to the impugned provision and notification: Sections 17(2) and 17(3) read with notifications under Section 9(3) validly treat supplies on which tax is payable under RCM as exempt for the supplier and thereby deny ITC to the supplier. No violation of Articles 14 or 19(1)(g) is made out; objectives of GST and inverted duty principles do not mandate a different constitutional outcome; reading down is not justified. 6.2 No order as to costs.