Delhi High Court: It’s Rational To Deny ITC To Service Provider, Not Liable To Pay Tax On Output Services

Delhi High Court: It’s Rational to Deny ITC to Service Provider, Not Liable to Pay Tax on Output Services

The bench observed that challenging it under Article 14 of the Constitution of India would fail

The Delhi High Court has held that the rationale for denying input tax credit (ITC) to service providers, not liable to pay tax on output services, is clear.

The bench comprising Justice Vibhu Bakhru and Justice Amit Mahajan observed that service providers rendering services on which tax was payable on a reverse charge constituted a class of their own. Therefore, challenging it under Article 14 of the Constitution of India would fail.

The Indian Constitution does not prohibit reasonable classification, which has a rational nexus to its object. Thus, denying ITC was incorrect.

The petitioner/assessee is in the business of providing services as a recovery agent to a non-banking financial company (NBFC).

The petitioner was aggrieved due to service tax and the Goods and Services Tax (GST) on the services payable on a reverse charge basis. Thus, the liability of service tax under the Finance Act, and after 01 July 2017, the liability to pay GST on specified services, was on the recipient.

Following the Scheme of Service Tax under the Finance Act and the GST under the Central Goods and Services Tax (CGST) Act and the Inter-State Goods and Services Tax (IGST) Act, where the tax is payable on a reverse charge by the recipient, the service provider is not entitled to claim any benefit of the taxes paid on input services.

The reason was that since there was no liability for output tax on the service provider, it was not entitled to claim any set-off or credit for the tax paid on inputs. Thus, the petitioner was not entitled to claim any credit for the service tax or GST paid on inputs, as it was not liable to pay any service tax or GST on the services of a recovery agent rendered by it.

However, the petitioner challenged the scheme as discriminatory. He claimed that he continued to file periodical service tax returns in the prescribed Form ST-3 under Section 70 of the Finance Act. He added having availed the Central Value Added Tax (CENVAT) credit on input services under the CENVAT Credit Rules, 2004.

As per the 20 June 2012 notification issued under Section 68(2) of the Finance Act, service tax on certain services was entirely payable by the recipient of the services. On some services, part of the service tax was apportioned in the specified ratio between the service provider and the recipient.

Thus, the onus of services provided by an insurance agent to any person carrying the insurance business was chargeable to service tax depending on the person receiving the services. However, on services on the supply of manpower for any purpose, 25 percent of the service tax chargeable was payable by the service provider and 75 percent by the service recipient.

The petitioner submitted that denying ITC to him and the service providers was discriminatory. It was contrary to the scheme of the CGST Act and the fundamental structure on which the GST law was premised.

On the other hand, the department contended that the petitioner could not raise grievance on how he structured the business. Under the agreement between the petitioner and Hero Fincorp Limited, the petitioner was required to provide the services and not outsource them. If he had complied with it, he would have no grievance. The Parliament had the necessary legislative competence to enact a scheme of taxation involving the levy and collection of tax on a reverse charge.

The judges thus held that utilizing the ITC was a statutory right; such credit was available only if the statute permitted it and it did. A service provider providing services subject to tax payment on a reverse charge was not liable for payment of service tax or GST on the services rendered. Thus, the tax on such services was payable by the service recipient.