Security service providers often ask: Why is Input Tax Credit (ITC) unavailable to suppliers when tax is payable under the Reverse Charge Mechanism (RCM)? It's a legitimate concern—it raises costs and affects competitiveness.
The Bombay High Court addressed this head-on in Eagle Security & Personnel Services v. Union of India (W.P. No. 1687/2024).
This note explains the judgment in clear, practical terms so you can confidently grasp the issue by the end.
📌 Case Background
The petitioner was a sole proprietor providing security services.
1. Before 1 January 2019, GST on such services was under forward charge—the supplier paid GST.
2. From 1 January 2019, by Notification No. 29/2018 (amending 13/2017), these services shifted to RCM. Under RCM, the registered recipient pays GST if the supplier is not a "body corporate."
Practical fallout: the supplier had no output tax liability, so GST paid on inputs could not be set off—ITC was effectively blocked.
The petitioner challenged Sections 17(2) and 17(3) of the CGST Act and the notification. A Division Bench (Ordinary Original Civil Jurisdiction) of the Bombay High Court comprising Justice M. S. Sonak and Justice Jitendra Jain heard the matter.
Judgment was reserved on 5 August 2025 and pronounced on 18 August 2025.
⚖️ The Statutory Scheme: Court's Starting Point
The Court outlined the GST framework succinctly:
1. Section 16: ITC is available only when statutory conditions are met.
2. Section 17(2): ITC must be restricted proportionately to exempt supplies.
3. Section 17(3): Supplies on which the recipient pays tax under RCM are deemed "exempt" for the supplier.
4. Section 49(4): ITC can be utilised only against output tax.
5. Section 2(82): "Output tax" excludes tax payable under RCM.
Bottom line: Under RCM, the supplier has no output tax. With no output tax, there is no scope to utilise ITC.
⚖️ Constitutional Challenges Raised
Article 14 (Equality)
- Body corporates remain under forward charge.
- RCM applies to proprietors and firms.
- Argument: equals are treated unequally.
Article 19(1)(g) (Right to trade)
- Denial of ITC raises costs and harms competitiveness.
- Argument: this is an unreasonable restriction on business.
🔍 Court's Analysis
1. On Article 14 (Equality)
- Body corporates and non-body corporates are distinct legal classes.
- Tax legislation can reasonably classify and treat them differently.
- Fiscal policy allows wide legislative latitude; perfect symmetry isn't required.
- The classification is reasonable and does not violate Article 14.
2. On Article 19(1)(g) (Right to Trade)
- The Constitution guarantees the freedom to carry on business, not a guarantee of competitiveness.
- Economic hardship arising from tax policy does not make the law unconstitutional.
- ITC is a statutory entitlement, not a fundamental right, subject to conditions, blocks, and exceptions.
- Therefore, Article 19(1)(g) is not violated.
3. Comparison with Inverted Duty Structure
- The analogy with inverted duty refunds was rejected.
- In inverted duty cases, there is output tax (albeit at a lower rate), enabling refunds under Section 54.
- In RCM cases, the supplier has no output tax at all, so refunds/ITC cannot be claimed on that basis.
- Creating a refund mechanism for RCM suppliers is a policy matter for Parliament/the GST Council, not the Court.
4. GST Objective: Seamless Credit Across the Supply Chain
- While the supplier may not get ITC, the recipient pays GST under RCM and can claim ITC.
- Thus, at the supply-chain level, credit still flows seamlessly.
- RCM serves policy goals such as administrative convenience, simplified compliance, easier tracking, and efficient collection—areas where courts are slow to intervene.
5. Key Precedents Relied On
- Pace Setters Business Solutions (Delhi HC, 2024): Upheld the validity of Section 17(3) and RCM notifications.
- Safari Retreats (SC, 2025, 2 SCC 523): Affirmed that ITC is a statutory right; the Legislature may create exceptions. Courts cannot "read down" clear tax language to soften policy.
On this basis, the Bombay High Court upheld Sections 17(2), 17(3), and Notification 29/2018.
✅ Verdict
1. Petition dismissed.
2. Sections 17(2) and 17(3) of the CGST Act and Notification 29/2018 are valid.
3. No output tax = No ITC for suppliers under RCM.
4. This position is constitutional.
💡 Practical Takeaways for Businesses
If you are a non-corporate supplier (proprietorship or partnership) providing security services under RCM:
1. You cannot use ITC because you have no output tax liability.
2. This is by design under the GST framework and is not a constitutional defect.
3. Reflect this in pricing and contracting.
4. The recipient will discharge RCM and claim ITC, preserving supply-chain efficiency even if your books show "credit lock."
5. Some businesses may reassess their legal form (proprietorship versus body corporate) as a strategic choice.
🎯 Closing Note
1. No ITC for suppliers under RCM is constitutionally valid.
2. ITC is a statutory entitlement, not an absolute right.
3. Where there is no output tax, there can be no set-off.
This judgment decisively resolves the "RCM vs ITC" debate. The focus now should be on compliance-friendly contracts, realistic pricing, and recipient-side credit planning.
In GST, not every credit is your right—sometimes it belongs to the structure itself.
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