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Delhi High Court Upheld Reverse Charge Mechanism: No Inherent Right to Input Tax Credit


In a significant decision n, the High Court of Delhi (‘HC’) in the case of Pace Setters Business Solutions (P.) Ltd. v. Union of India[i] examined the reverse charge mechanism (‘RCM’) under the Central Goods and Services Act, 2017 (‘CGST Act’) and Integrated Goods and Services Act, 2017 (‘IGST Act’) and its implications for service providers, particularly recovery agents. The petitioner, in this case, engaged in providing recovery agent services to a Non-Banking Financial Company (‘NBFC’), challenged several notifications issued by the Central Government (‘CG’) and certain provisions of the CGST Act as being ultra vires the relevant tax statutes and discriminatory, violating a. 14 of the Constitution of India (‘Constitution’). These notifications mandated the reverse charge of GST, making the recipient of the services liable for the tax, thus preventing the petitioner from claiming input tax credit (‘ITC’) for the taxes paid on input services. This ruling addressed the legal validity of these notifications and the legislative scheme, analysing whether the RCM and denial of ITC constitute hostile discrimination against the petitioner.


  • The petitioner, in this case, challenged Notifications No. 30/2012-ST dated 20.06.2012 (‘Notification-1’), No. 10/2014-ST dated 11.07.2014 (‘Notification 2’), and No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 (‘Notification 3’) (‘collectively referred to as ‘Impugned Notifications’) issued by the CG, which mandated a reverse charge of GST on recovery agent services.

  • The petitioner also contested s. 17(3) of the CGST Act, 2017, which deemed the supply of recovery agent services as exempted supplies.

  • The petitioner argued that Notifications 1 & 2 exceeded the authority of the Finance Act, 1994, while Notifications 3 and s. 17(3) of the CGST Act exceeded the authority of the CGST and IGST Acts.

  • The petitioner provided services as a recovery agent to an NBFC and was aggrieved by the RCM, which made the recipient of the services liable for paying the tax, thereby preventing the petitioner from claiming any ITC.

  • Prior to the GST regime, the petitioner was registered with the service tax (‘ST’) department and filed periodic returns, availing Cenvat Credit under the Cenvat Credit Rules, 2004.

  • On 01.06.2018, the petitioner entered into an agreement with Hero Fincorp Limited to provide recovery agent services and engage sub-contractors, who charged ST on their invoices to the petitioner.

  • Due to the RCM, the petitioner could not utilize the credit for the taxes paid on input services under the pre-GST and GST regimes. Aggrieved, the petitioner filed this writ petition (‘WP’) before the HC.


  • The HC found no merit in the challenge laid by the petitioner to the impugned notifications or the provisions of s. 17(3) of the CGST Act and accordingly dismissed the WP.

  • The HC observed that there was no merit in the claims that the impugned notifications were issued without the authority of law. It further determined that an assessee has no inherent right to claim credit for input tax paid on services availed.

  • The HC noted that the right to ITC is a statutory right and is available only if and to the extent permitted by the statute. It further held that the CG has wide discretion in selecting certain services for reverse charge taxation and that such classification does not amount to hostile discrimination.

  • The HC placed reliance on decisions of the Hon’ble Supreme Court in Income Tax Officer, Shillong & Ors. v. R. Takin Roy Rymbai & Ors[ii]; Khadinge Sham Bhat v. Agricultural Income Tax Officer, Kasargod & Anr.[iii]; Twyford Tea Co. Ltd. v. State of Kerala & Anr.[iv] and East Indian Tobacco Co. v. State of Andhra Pradesh[v] affirming the wide discretion of the legislature in matters of fiscal classification and taxation.

  • The HC rejected the petitioner’s claim of discrimination under a. 14 of the Constitution, stating that all service providers in a particular category are treated uniformly. It further held that the denial of ITC to service providers who do not have output tax liability was deemed rational and justified, as it is consistent with the legislative scheme.

  • Lastly, the HC referenced previous judgments, emphasizing that different tax collection methods for different service classes are permissible and do not constitute discrimination.

Our Analysis

The ruling in this case reinforced the principle that the legislature has broad discretion in fiscal matters, including the classification and selection of services for taxation. By upholding the RCM, the HC confirmed that the statutory provisions and notifications were within the scope of legislative competence and did not violate constitutional principles. The decision enunciated that the right to ITC is not inherent but statutory and contingent on the provisions of the relevant tax laws.

Thus, the ruling may impact other service providers subject to reverse charge taxation, affirming that challenges based on claims of discrimination under a. 14 of the Constitution will likely fail if the classification has a rational basis.

Overall, the decision highlights the balance between legislative discretion and judicial oversight in matters of taxation, underscoring the judiciary’s role in interpreting statutory provisions within the framework of constitutional principles.

End Notes

[i] 2024 SCC Online Del 2471

[ii] [1976] 103 ITR 82

[iii] AIR 1963 SC 591

[iv] [1970] 1 SCC 189

[v] [1963] 1 SCR 404

Authored by Prashant Singh, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.


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