By Surekha Ahuja
A Statutory, Judicial and Evidentiary Deconstruction with Practical Resolution Framework
Why RCM & Classification Disputes Survive Assessments but Fail in Law
In GST assessment proceedings, allegations relating to Reverse Charge Mechanism (RCM) and incorrect supply classification are routinely raised not because of ambiguity in law, but due to:
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Mechanical reliance on notifications without applying Section 7
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Ignoring Schedule III exclusions
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Failure to examine supplier registration status
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Treating accounting entries as taxable supplies
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Applying RCM as a default charging section, which it is not
These disputes typically originate at the audit or scrutiny stage, mature into SCNs under Sections 73/74, and collapse at the appellate level due to lack of statutory foundation.
Reverse Charge under GST: Legal Position Settled Beyond Doubt
Charging Structure under the CGST Act
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Section 9(1): Forward charge is the rule
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Section 9(3): Reverse charge is an exception
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Section 9(4): Limited revival, again notification-driven
RCM does not operate independently. It activates only after a transaction qualifies as “supply” under Section 7.
This sequencing is mandatory, not optional.
The Department’s Foundational Error: Skipping Section 7
Section 7 requires:
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Supply of goods or services
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For consideration
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In course or furtherance of business
If any one limb fails, the transaction never enters the charging mechanism.
This is where most RCM-based SCNs fail — the department starts with the notification instead of the statute.
GTA & Legal Services: RCM Cannot Override Supplier Status
Departmental Allegation
GST payable under RCM on GTA freight or advocate fees under Notification 13/2017.
Legal Flaw
RCM is applied without determining whether the supplier is registered.
Statutory Interpretation
Notification 13/2017 applies only when the supplier falls within the notified class.
Post Notification 20/2022, GTAs can discharge tax under forward charge.
Once:
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Supplier is registered, and
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Invoice bears GSTIN,
RCM becomes legally inoperative.
Judicial Authority
KAAR Technologies – Karnataka AAR (2022)
“RCM liability cannot be imposed on the recipient where the supplier is registered and has issued a tax invoice.”
Bharti Airtel Ltd – Bombay High Court (2021)
“Tax liability cannot be artificially shifted ignoring statutory facts on record.”
Assessment Defence Principle
RCM cannot coexist with a registered supplier charging GST.
Any SCN ignoring this is ultra vires the Act.
Director Payments: Misreading of Notification 13/2017
Typical Allegation
Director-related payments taxable under RCM.
Legal Distinction Ignored by Department
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Professional services by director → taxable under RCM
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Employer–employee relationship → Schedule III
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Reimbursement of expenses → Rule 33 exclusion
Schedule III (Entry 1)
Services by employee to employer in course of employment are outside GST.
Rule 33 (Pure Agent)
Reimbursement is excluded when:
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Expense incurred on behalf of employer
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Actuals recovered
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No markup
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Separately disclosed
Judicial Position
Yaadvi Solutions – Karnataka AAR (2022)
“Reimbursement of actual expenses to a whole-time director does not constitute consideration for supply.”
CCIL India – Karnataka AAR (2022)
“RCM under Entry 2 applies only to service consideration, not to pure reimbursements.”
Why Clay Craft (Rajasthan AAR) Fails as Precedent
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Ignored employer–employee exclusion
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Contrary to Schedule III
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Not binding outside the applicant
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Effectively diluted by subsequent rulings
HO–Branch Allocations: Accounting ≠ Supply
Allegation
Inter-unit cost allocations treated as supply under Schedule I.
Legal Reality
Section 25(4) does not override Section 7.
Schedule I applies only when consideration is deemed.
Pure cost allocations:
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No consideration
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No markup
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No independent supply intention
Binding Clarification
CBIC Circular No. 11/2021
“Internal cost sharing without profit element does not constitute supply.”
Judicial Support
Summit Digital – Maharashtra AAR (2021)
“Accounting allocations cannot be elevated to taxable supplies.”
Sponsorship & Mixed Recoveries: Artificial Clubbing Is Impermissible
Departmental Practice
Entire recovery taxed as sponsorship under RCM.
Legal Position
Only the sponsorship service component qualifies.
Infrastructure, booth, logistics recoveries — when identifiable — fall under Rule 33.
Judicial Authority
GSFC – Gujarat AAR (2022)
“RCM applies only to sponsorship consideration, not to pure agent recoveries.”
Refex Industries – AAAR
“Separately identifiable components must be independently assessed.”
Burden of Proof: Section 155 Is Fatal to Weak SCNs
The department must prove:
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Existence of supply
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Consideration
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Applicability of RCM notification
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Absence of Schedule III or Rule 33 exclusion
Presumption has no place in GST taxation.
Resolution Framework for Assessment Proceedings
Effective SCN Defence Must Establish:
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Section 7 fails → no supply
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Notification conditions unmet → no RCM
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Judicial consistency → no interpretational latitude
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No suppression → penalty unsustainable
Closing Legal Position
RCM and supply-classification disputes survive only at the assessment stage, where statutory sequencing is ignored.
Once tested against:
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Section 7
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Schedule III
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Rule 33
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Binding circulars and case law
they collapse as legally unsustainable.
GST cannot be collected on assumptions, accounting entries, or retrospective reinterpretation of notifications.
