Brief Facts
The petitioner provides recovery agent services to a Non-Banking Finance Company. GST is liable to be paid by the recipient (under reverse charge) on such services vide Notification No.10/2017-Integrated Tax (Rate). Also, the supplier is ineligible to avail ITC for supplying such services vide Section 17(3) of CGST Act.
Petitioner's submissions
The petitioner contends the aforesaid notification and provision as:
- arbitrary and discriminatory, in violation of Article 14 of the Constitution; and
- ultra vires the CGST Act and IGST Act.
The classification between those services where the tax is payable on a reverse charge basis and those where tax is payable on forward charge basis, is not founded on intelligible differentia and has no nexus with any object to be served.
Further, denial of ITC in respect of certain services amounts to double taxation, which is impermissible. That is, the same service is taxed twice - first, in respect of input services and second, in the hands of service recipient.
Also, denial of ITC was contrary to the object of the CGST Act. The entire object was to avoid a cascading effect of tax. Therefore, seamless transfer of ITC is the fundamental rationale of the scheme of GST law. According to the Circular dated 07.06.2017 issued by the Director General of Taxpayer Services and the Circular dated 01.01.2018 issued by the Central Board of Excise and Customs, GST will prevent cascading of taxes by providing a comprehensive ITC mechanism across the entire supply chain and the final price of goods would be lower due to the seamless flow of ITC between the manufacturer, retailer and supplier of services.
Respondents' submissions
The petitioner cannot raise grievance regarding the manner in which it had structured its business. In terms of the agreement between the petitioner and the his recipient, the petitioner was required to provide the services and not to outsource the same. If the petitioner had complied with this obligation, he would not be aggrieved. Any inconvenience or hardship caused would not be relevant in pronouncing on the constitutional validity of a fiscal statute or economic law. [Union of India v. Cosmo Films Ltd. - (2023) 9 SCC 244]
Further, the Parliament has necessary legislative competence to enact a scheme of taxation involving levy and collection of tax on a reverse charge basis.
Also, the petitioner has no statutory right to claim ITC, which is a concession granted by the statute and not a vested right. [TVS Motor Company Ltd. v. State of Tamil Nadu & Ors.: (2019) 13 SCC 403; ALD Automotive Pvt. Ltd. v. Commercial Tax Officer: (2019) 13 SCC 225; and Union of India v. VKC Footsteps India Pvt. Ltd.: (2022) 2 SCC 603]
Lastly, merely shifting of collection of tax from service provider to service recipient does not violate any constitutional right. [R.C. Jall Parsi v. Union of India: AIR 1962 SC 1281, Rai Ramkrishna & Ors. v. State of Bihar: AIR 1963 SC 1667, and Gujarat Ambuja Cements Ltd. & Anr. v. Union of India: (2005) 4 SCC 214]
Judgment of the Delhi High Court
Dated April 03, 2024 from WP(C) No. 7742 of 2019
- A taxation law cannot claim immunity from the equality clause in Article 14. But, the State has a considerably wide discretion in classification for taxation purposes in view of the intrinsic complexity of fiscal adjustments of diverse elements. Given legislative competence, the legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax.
- If the classification does not transgress the fundamental principles underlying the doctrine of equality, it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others.
- The mere fact that a tax falls more heavily on some in the same category is not a ground to render the law invalid.
- Only when the law operates unequally within the range of its selection, and cannot be justified on the basis of a valid classification, that there would be a violation of Article 14.
In matters of fiscal legislation, the legislature has a wide degree of flexibility and discretion including in matters relating to classification. [Khadinge Sham Bhat v. Agricultural Income Tax Officer, Kasargod & Anr.: AIR 1963 SC 591]
The Constitution Bench of the Supreme Court had, in the context of application of Article 14, held as under: [Twyford Tea Co. Ltd. v. State of Kerala & Anr.: (1970) 1 SCC 189]
- A State does not have to tax everything in order to tax something. It is allowed to pick and choose districts. objects, persons, methods and even rates for taxation if it does so reasonably. [Ref: Willis in his "Constitutional Law" page 587]
- If a State can validly pick and choose one commodity for taxation, that is not open to attack under Article 14. This indicates a wide range of selection and freedom in appraisal not only in the objects of taxation and the manner of taxation but also in the determination of the rate or rates applicable. [East Indian Tobacco Co. v. State of Andhra Pradesh: (1963) 1 SCR 404, at page 409]
The legislature has wide discretion in choosing the persons to be taxed or the objects for taxation. All persons rendering services of a particular nature have been treated uniformly. It is certainly not open for a class of assessees to seek parity with another class of persons, that is, not subject to the same tax. Similarly, selecting a different mechanism to collect tax in respect of some services cannot be challenged under Article 14.
ITC is available only if the statute permits and to the extent that it does. The service providers (rendering services on which tax is payable on under reverse charge) would constitute a class of their own. Article 14 does not prohibit reasonable classification, which has rational nexus to its object. Denying ITC to service providers (who are not liable to pay tax on output services) is founded on a rational basis which has a clear nexus with the classification since such person has no liability against which ITC can be set off. Thus, denial of ITC in such cases cannot be held as irrational and arbitrary.
