Introduction – The Supplier’s Dilemma
Non Body Corporate Security service providers across India are facing the same question:
When our services fall under the Reverse Charge Mechanism (RCM), why are we not entitled to claim Input Tax Credit (ITC)?
”Under the earlier forward charge system, the supplier collected GST from clients, paid it to the Government, and claimed ITC on input services and goods. After RCM was introduced, however, the supplier no longer has output tax liability, and hence the ITC paid on inputs remains blocked. This has increased costs and made suppliers less competitive.
When Does RCM Apply to Security Services?
As per Notification No. 29/2018, security services (supply of security personnel) fall under RCM when:
Nature of Service
Supply of security personnel.
Supplier of Service
Any person other than a body corporate (e.g., proprietorships, partnerships).
Recipient of Service
A registered person located in the taxable territory.
Thus, if a proprietorship security agency provides guards to a registered client, the client (recipient) is liable to pay GST under RCM, and the supplier cannot utilize ITC.
Background of the Case – Eagle Security
Eagle Security & Personnel Services is a sole proprietorship. Until 1st January 2019, it operated under forward charge. The agency charged GST from clients, paid it as output tax, and adjusted ITC against it.
From 1st January 2019, however, by virtue of Notification No. 29/2018, when Eagle Security supplied services to registered persons, the liability shifted to the recipient under RCM. Consequently, the supplier had no output tax liability and lost the ability to adjust ITC. Feeling aggrieved, the agency challenged this position before the Bombay High Court.
Petitioner’s Arguments
The petitioner raised two main constitutional challenges:
Article 14 (Right to Equality)
They argued that suppliers to body corporates continued under forward charge and could claim ITC, whereas suppliers to non-body corporates were pushed into RCM without ITC entitlement. Thus, equals were being treated unequally.
Article 19(1)(g) (Right to Trade and Business)
They contended that denial of ITC increased their costs and rendered them uncompetitive, thereby violating their fundamental right to carry on business.
Court’s Analysis – The Legal Framework of ITC
The Court examined the relevant provisions of the CGST Act:
- Section 16: ITC is available only when statutory conditions are met.
- Section 17(2): ITC attributable to exempted supplies is not allowed.
- Section 17(3): Supplies on which tax is payable under RCM are deemed to be exempt supplies.
- Section 49(4): ITC can be used only against output tax liability.
- Section 2(82): “Output tax” excludes tax payable under RCM.
On this combined reading, the Court held that since suppliers under RCM have no output tax liability, they cannot utilize ITC.
Article 14 – Equality Challenge
The Court rejected the Article 14 argument. It held that body corporates and non-body corporates are legally distinct classes, and tax law permits reasonable classification. All non-body corporates are treated alike, hence there is no discrimination. Article 14 prohibits arbitrary class legislation but allows rational classification.
Article 19(1)(g) – Right to Trade
The Court clarified that while the Constitution guarantees freedom to conduct business, it does not guarantee competitiveness in business. ITC is not a fundamental right; it is a statutory concession. The legislature can impose conditions or carve out exceptions.
The petitioner was not prevented from carrying on business—only their eligibility for ITC was restricted by law. Thus, Article 19(1)(g) was not violated.
Reliance on Other Precedents
- Delhi High Court (Pace Setters Business Solutions Pvt. Ltd., 2024): Already upheld the validity of Section 17(3) and RCM notifications.
- Supreme Court (Safari Retreats Private Limited, 2024): Held that ITC is a statutory right, not an absolute entitlement, and the legislature may impose exceptions.
Final Decision
The Bombay High Court dismissed the writ petition. It upheld the validity of Section 17(2), Section 17(3), and Notification No. 29/2018. Denial of ITC to suppliers under RCM is neither unconstitutional nor arbitrary.
Practical Implications for Security Agencies
For proprietorship or partnership security agencies supplying services to registered entities, RCM applies and ITC cannot be claimed.
Agencies must factor this cost impact into their pricing and contracts. At the same time, they should highlight to clients that the tax paid under RCM is available to the client as ITC, thereby ensuring supply-chain tax neutrality. Some agencies may also consider restructuring their business as body corporates, depending on long-term strategy.
Conclusion
The judgment makes it clear: denial of ITC to suppliers under RCM is not a legal defect but an intentional design of the GST law. ITC is a statutory right, not a fundamental one. The focus for businesses should now shift from litigation over ITC to compliance-friendly contracting, realistic costing, and recipient-side credit planning.
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