Tax Vista Your weekly tax recap Edn. 13 - 14 September, 2020 By Dr. G. Gokul Kishore

Cost recovery from employees not liable to GST

In a ruling having major implications, the Authority for Advance Rulings, Maharashtra has held that cost recovery from employees for use of bus transportation facility provided by employer for commuting to office is not liable to GST. Though the ruling is in favour of the taxpayer, the reasoning appears to be not legally iron-clad.

The applicant-employer availed the services of a service provider having necessary permit under applicable laws for transporting employees from home to office and from office to home. Nominal amount was recovered from the employees by the applicant. The applicant contended that they would be eligible for exemption for such transportation in non-AC contract carriage as per Notification No. 12/2017-Central Tax (Rate) and input tax credit would be admissible to them as the seating capacity of the vehicles was more than thirteen. It was further argued that ITC would be restricted to the extent of cost borne by the applicant-employer.

The department stated that after amendment to Section 17(5) of CGST Act in 2019, ITC has been extended to service recipient using such transportation service involving vehicles with seating capacity of more than thirteen persons and the earlier restriction of availment of ITC has been relaxed in case of such large capacity vehicles used by employers for their employees. One of the surprising positions adopted by the department is that the transaction would be covered under "employer-employee" relation and the same is neither supply of goods nor supply of service as per Schedule-III of CGST Act and therefore, GST is not leviable on the amount recovered from employees.

The AAR upheld the stand of the department by holding that transportation service being used in the course or furtherance of business, the applicant would be entitled to avail ITC of GST charged by the service providers as the seating capacity of the vehicles used is more than thirteen. It relied on applicant's submission that the transportation facility can be used only by employees and once employment ceases, it cannot be used. Based on this, the AAR held that employer-employee relationship is necessary to avail such facility. On the applicant's argument on availability of exemption to them, it held that before this question is examined, liability is required to be seen and according to it, there is no supply in this case as the same is covered under Schedule-III of CGST Act. It further held that ITC on the cost borne by the employee would not be available [Tata Motors Ltd. - 2020-VIL-257-AAR].

The reasoning may not be considered as legally sound because of reliance placed on Schedule-III in holding that the amount recovered from employee is not liable to GST. The entry covers services by employee to employer and not vice versa. When amount is recovered from the employee, he is a service recipient and therefore, it is the employer who is providing the facility / service to the employee. The employer may not be the "supplier" of transportation service per se as he himself receives it from another service provider having necessary permit. The services may not amount to "supply" under GST but for such conclusion, Schedule-III does not appear to hold the key. Services provided by employer to employee are not covered under this schedule. Cost recovery from employees for various services has been a major issue impacting almost every industry and there has been no clear-cut clarification so far. Till the time either law is amended to this effect or CBIC clarifies by way of proper circular (not by way of press release), these issues will linger.

Fuel cost reimbursed on actuals to be included in taxable value

Advance rulings raise eyebrows not without a reason. In a ruling similar to Pulluri Mining & Logistics [2020-VIL-198-AAR] discussed in Tax Vista dated 20th July 2020, the Gujarat AAR has held that cost of fuel reimbursed on actuals by the recipient will require inclusion in the taxable value of service provided by the supplier. In this case, the applicant is a provider of helicopters on charter hire basis and aviation turbine fuel (ATF) is required to be provided by the service recipient. In certain cases, the contract provides for procurement of ATF by the applicant (service provider) and the same is required to be reimbursed on actuals by the service recipient based on debit note raised by the applicant for this purpose. The applicant raised several contentions like only the fixed monthly charges and flying hour charges represent consideration for supply of such service, they act as pure agent as per GST provisions and therefore, such reimbursement would be excluded from the taxable value and the same is not an incidental expense (which is includible as per Section 15 of CGST Act).

The AAR relied on the definition of "consideration" which includes payment made by recipient in respect of supply and therefore, payment for supply of rental services of aircraft would also include the amount towards fuel which is received as reimbursement and GST is liable to paid after including the same. It did not accept reliance placed on "pure agent" as per Rule 33 of CGST Rules on the ground that documentary evidence on receipt of actual amount without mark-up was not produced, such fuel cost was not indicated separately in invoice, etc. Reliance placed by the applicant on precedent judgment of Supreme Court [UOI v. Intercontinental Consultants - 2018-VIL-11-SC-ST] has been held as not applicable after noting that the same pertains to pre-GST regime and all aspects of valuation have been covered in CGST Act itself [Global Vectra Helicorp Ltd. - 2020-VIL-262-AAR].

This is the second time in a short interval, AAR has adopted such stand based on the definition of consideration. It is time for the taxpayers to draft or amend contracts involving reimbursement of expenses in such a manner that all the conditions of pure agent as per the rules are satisfied though it cannot be guaranteed there will be relief even in such a case.

CESTAT decides valuation against auto major but grants relief for extended period in Rs. 323 Crore excise dispute

Three parties were involved - German parent company, Indian manufacturer and Indian selling and marketing organisation. Both the manufacturer and selling organisation were separate entities but subsidiaries of the German parent. The manufacturing company was provided with all kinds of support by the parent including technology, raw materials, financial assistance, etc. All the cars of particular brands manufactured were to be sold and were sold to the selling organisation which in turn sold them to dealers. During audit by C&AG (CERA), valuation of excisable goods as adopted by the manufacturer for clearances to the sales organisation was doubted. An objection was raised to the effect that the transaction being one between related persons, the price adopted for sale to dealers should be the basis for payment of excise duty at the manufacturer's end also. The department agreed with the assessee that the manufacturer and sales organisations were inter-connected undertakings and therefore, one has to travel to Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 ["Valuation Rules"] and Rule 10 was specific to such situation which required mutuality of interest also in order to apply Rule 9 on related party valuation and in their case, such mutuality of interest was not satisfied. Therefore, transaction value adopted by the assessee as per Section 4(1)(a) of Central Excise Act, 1944 was agreed with.

Subsequently, revenue intelligence investigated and booked a case of under-valuation and alleged duty evasion by the auto major. As usual, adjudicating authority confirmed the duty demands involved in various SCNs. The duty demand being more than Rs. 323 crores, the logical course of filing appeal by assessee was undertaken. The Tribunal after taking note that the tripartite arrangement and facts as available in the present case were not there in precedent landmark cases on excise valuation, relied on Supreme Court's judgment in Fiat India [2012-VIL-01-SC-CE] and Grasim Industries Ltd. [2018-VIL-18-SC-CE-LB] and held that the assessee had admitted they were inter-connected undertakings and the impugned order had brought out how mutuality of interest existed. It observed that the Indian subsidiaries were mere puppets of the German parent which took decisions on production and sale of the cars and if corporate veil was pierced, the entire operations could be seen as on account of the German parent only. Promotion of the German brand was the common objective of all the parties and therefore, mutuality of interest held as satisfied in the impugned order, was agreed with by the Tribunal to hold that value of goods cleared by the manufacturer to the selling company was to be determined as per Rule 9 read with Rule 10 and Rule 11 of Valuation Rules. Because department had knowledge of the facts due to routine correspondence on this issue and CERA objection, extended period was held as not invocable and duty demand was ordered to be re-quantified for normal period [Skoda Auto Volkswagen India Pvt. Ltd. v. Principal Commissioner - 2020-VIL-404-CESTAT-MUM-CE].

Though the dispute is certain to be carried further in litigation, one of the strange points as can be seen from the Tribunal's order is the stand taken by the department initially when confronted with C&AG's audit objection and later revising its position by investigating the same issue and then charging the assessee with under-valuation and evasion of duty. It is obvious that when it comes to valuation under tax law, the department is clueless and high-pitched demands and protracted litigation are inevitable.

Construction service - Deemed value and not actual cost of land, deductible

A very brief advance ruling sans reasoning holds that even if actual cost of land is available (ascertainable), in case of construction service, one-third of the total value (cost of services, goods and value of land or undivided share) alone is deductible for GST purpose. Strict interpretation of the deeming provision as contained in Notification No. 11/2017-Central Tax (Rate) has been made to pronounce such ruling. The applicant argued, without success, that when actual value of land is available, the government should promote such transparent transaction and provide abatement to such actual land value for the purpose of determination of taxable value for supply of construction service. Reliance placed on similar provisions under VAT law was also not accepted [Karma Buildcon - 2020-VIL-264-AAR].

This is an industry issue and is not beyond doubt. While exemption notifications are required to be interpreted strictly and therefore, abatement clause should also be subjected to strict interpretation, there is a view that land being not a subject under GST, value of the same cannot be exempted / excluded. The draftsman may argue that by excluding one third of the value of the construction contract, effectively, land value is not subjected to GST. But, liability precedes exemption and what is not liable cannot be exempted or excluded. If land value is more than one third of the total contract value, to the extent of the differential value in excess of one-third value, legislative competence of exempting GST may arise. These are issues which will have to be answered by the judiciary in future.

Mixed use property - Completion certificate for one cannot be used for the other

As per Schedule-II of CGST Act, construction of complex, building, etc., is treated as supply of service except in cases where entire consideration is received after issuance of completion certificate or first occupation (whichever is earlier). In the latter case, the transaction is treated as sale of immovable property and is outside the ambit of GST. When the property is one of mixed use i.e. involves both commercial construction and residential flats, completion certificate granted by the development authority for commercial portion cannot be considered as relevant for the residential flats.

The above was the substance of an advance ruling wherein the applicant produced the Building Use Permission (BUP) granted by the authority for the commercial shops but could not prove first occupancy in respect of residential flats though there was a claim to this effect. The BUP covered only the commercial part of the building. The AAR has held that in this case, supply of residential flats will be treated as supply of service and liable to GST [V2 Realty - 2020-VIL-266-AAR]. Advance rulings hardly contain full facts and therefore, it is not clear whether entire consideration for all or some of the residential flats was received later or part consideration was received during construction phase.

Yoga and naturopathy can be painful

Wellness centres in cool and serene environment providing naturopathy or treatment under Ayurveda along with yoga and meditation can provide much needed mental relief to stressed souls but not for the corporates running such centres. In an advance ruling, the AAR perused the website of the centre and held that the consideration charged was based on type of room and occupancy type (single or double occupancy) and stay was mandatory in the packages and therefore, accommodation would be primary activity in the entire package. It went on to hold that accommodation, food and therapy are provided in a naturally bundled manner and the same would be a composite supply with accommodation service being the principal supply. The entire package has been held to be liable to GST as accommodation service. The applicant argued that they are entitled to exemption under Notification No. 12/2017-Central Tax (Rate) in respect of healthcare service provided by clinical establishments, etc., and they relied on other rulings to contend that when the service is provided under recognized system of medicine, exemption would be available. All these arguments became redundant as the AAR proceeded to consider the package to be a composite supply with accommodation as predominant [Oswal Industries Ltd. - Nimba Nature Cure Village - 2020-VIL-267-AAR].

Leaving aside the question whether the applicant in the above case is, in fact, entitled to exemption or not, it can be said that if this logic is applied, probably those hospitals which quote their cost of treatment as a package based on type of room occupied, will also go out of exemption. While charges for surgery or other treatment are separately recovered, the total cost is generally inclusive of, and is dependent on, the type of accommodation opted by the patient. More than the hospitals practising allopathy, those following Indian system of medicine or other alternative system will have to relook as to how they structure their tariff.

Rejection of refund by second order when first order holding duty itself is not payable, not sustainable

A recent judgment of Madras High Court reveals a rather sad episode. For a dispute involving around Rs. 3 lakhs, an importer had to go to High Court twice only because the Customs authorities were unreasonable. In the year 2014, certain chemicals were imported and the Customs authorities were of the view that anti-dumping duty (ADD) was payable. The importer filed writ petition in the High Court and the Court ordered payment of 50% of duty along with bond for the balance amount as an interim measure and directed the authorities to pass adjudication order. The importer paid the amount under protest. Later, the issue was decided in importer's favour by the adjudicating authority and consequential relief was ordered.

Even when a taxpayer / importer has favourable order on merits, it is the usual practice of the department to issue another show cause notice proposing rejection of refund and seeking the noticee's response on limitation and unjust enrichment. In this case, this practice was religiously followed and on the grounds of delay and non-production of evidence for payment of duty under protest, refund was rejected. The importer had to rush to High Court again. The Court was surprised to see this second order as the initial adjudication order was passed in importer's favour. The Court said that when the order holding ADD was not leviable and importer was entitled to relief had become final, Customs authorities could not have rejected the refund through another order. The ground of unjust enrichment taken in the counter affidavit by the department was held as not maintainable when the impugned order did not contain the same [Elpe Labs v. CC (Seaport - Import), Chennai-IV - 2020-VIL-434-MAD-CU].

(The author is an Advocate practising independently. The views expressed are personal)