1. Finance Minister of India stated at paragraph 5(b) of the Statement of Objects & Reasons while introducing the Central Goods & Services Tax (“CGST”) Bill, 2017 in the Parliament as under:
“5. The Central Goods and Services Tax Bill, 2017, inter alia, provides for the following, namely:—
(b) to broad base the input tax credit by making it available in respect of taxes paid on any supply of goods or services or both used or intended to be used in the course or furtherance of business”
2. Hence a clear intent to broad base the input tax credit is evident from the above. However, Sec. 17 of the CGST Act, 2017 contains some restrictions with regard to claim of input tax credit. Given the broad base intent of allowing the input tax credit, any restrictions on the same must be construed strictly. In the present article we are mainly concerned with the restrictions with respect to rent-a-cab. Relevant provision is reproduced below:
“Sec. 17(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
(iii) rent-a-cab, life insurance and health insurance except where ––
(A) the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or
(B) such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply”
3. Several issues will come up when one closely examines the above provision. Same are as under:
Renting V. Hiring
4. Let us assume a scenario where a manufacturing company avails services of a vendor to supply a car along with the driver for transporting employees to the factory from their homes and vice-a-versa. Payment to the vendor is done on monthly basis of a fixed amount upto certain kilometers. For every extra kilometer, vendor shall charge separately on per kilometer basis. Can such a contract be considered as renting of cab or it must be considered as hiring of cab ? Classification is important because hiring of cab is not specifically covered under the restrictions of above referred provision as it only includes renting of cab.
5. Uttrakhand High Court in the case of Commissioner of Customs & Central Excise v. Sachin Malhotra 2015 (37) S.T.R. 684 (Uttarakhand) drew a distinction between “renting” and “hiring” and held that unless control is not given to the hirer to deal with the vehicle howsoever for a short period, it shall not amount to renting. In other words, only when control of vehicle is given, it will amount to renting. If the vendor is in control of the vehicle (i.e. appoints the driver and decides the routes), it shall only amount to hiring. Said conclusion was reached by applying the provisions of Rent-A-Cab Scheme, 1989 framed u/s 75 of the Motor Vehicle Act, 1988. It must be noted that the said judgment was for the period prior to 01.04.2007. Relevant portion of the judgment is reproduced below:
“What is sought to be taxed under the provisions, which we have adverted to in this judgment, is service, which is rendered in relation to renting of cabs. Under Section 65(91) of the Service Tax Act, “rent-a-cab scheme operator” has been defined as a person, who is engaged in the renting of cabs. The words “in relation to”, undoubtedly, do have the effect of expanding the scope of taxation. With this proposition, we can have no quarrel. But, this cannot detract from our enquiring into as to what is the transaction, which is actually brought to tax. We are constrained to pose this question and answer this question as what is sought to be taxed is the service in relation to the renting of cabs. So, the most important and crucial element, which we must bear in mind, is, whether there is a business of renting of cabs. Unless there is renting of cabs, there is no question of further enquiring as to the services, which may be rendered therein.
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A perusal of Clause 10 (of Rent-a-cab Scheme) would re-enforce us in the view that we are taking that, under the rent-a-cab scheme, the hirer is endowed with the freedom to take the vehicle, wherever he wishes, and he is only obliged to keep the holder of the licence informed of his movements from time to time. When a person chooses to hire a car, which is offered on the strength of a permit issued by the Motor Vehicles Department, then the owner of the vehicle, who may or may not be the driver, will offer his service while retaining the control and possession of the vehicle with himself. The customer is merely enabled to make use of the vehicle by travelling in the vehicle. In the case of a passenger, he is expected to pay the metered charges, which is usually collected on the basis of the number of kilometers travelled. These are all matters, which are regulated by the Government. Unlike the said scenario, in the case of a rent-a-cab scheme, as is clear from the very fundamental principle underlying the scheme, it is to give the hirer the freedom to use the vehicle as he pleases, which, undoubtedly, implies that he must have possession and control over the vehicle. This is the fundamental distinction between rent-a-cab and a pure case of hiring.”
6. On the contrary Hon. Gujarat High Court in the case of Commissioner of Service Tax v. Vijay Sales 2014 (36) S.T.R. 513 (Guj.) held otherwise. Gujarat High Court held that one cannot escape the liability on the ground that hiring is different from renting. Relevant portion of the judgment is reproduced below:
“We need not be oblivious of the fact that for the purpose of regulating the business of renting of motor cabs or motor cycles to persons who are desirous of driving by themselves or through drivers, either for their own use or for any matters connected herewith, the scheme is made by the Central Government,
Conceptually and essentially, if the nature of service provided is the same, natural corollary is that such service shall be taxed under the taxing statute. It nowhere culls out from the taxing statute that the same contemplated taxing those services where legal possession is handed over by the owner of the person renting the vehicle and where such de jure possession continue with the owner or person providing the service to the customer, such service is to be excluded.
We also need to remind ourselves that concept of providing transportation service where de jure control remains with the owner or company of the vehicle and the driver and yet, it functions in accordance with the wish and desire of the person hiring such vehicle is extremely popular in India unlike the concept of person renting the cab desiring to drive himself by having all liabilities on himself. In absence of any specific exclusion in the statute of such service from the taxing net, large portion of such services cannot be held to be non inclusive by any artificial interpretation.
Principle of contemporaneous exposition whereby yellow and black taxes are not subjected to service tax also would not preclude us to resort to such interpretation.
From the aforesaid discussion, it can be said that the petitioner cannot escape tax liability on the ground that the hiring is different from renting as the intention of the Government is to tax service provider of a service which involves both hiring and renting of a cab for a longer duration and distinction as sought to be carved out by the petitioner is not finding favour with this Court.”
7. Bangalore CESTAT in the case of K. Kareemun v. Commissioner of C. Ex. 2016 (42) S.T.R. 988 (Tri. – Bang.) also had an occasion to deal with the issue in question. Hon. CESTAT analyzed the entire history of legal provisions with respect to rent-a-cab and concluded that initially when the definition of “rent-a-cab” was introduced, there was a reference to rent-a-cab scheme under Motor Vehicles Act and subsequently when it was implemented, the reference to rent-a-cab scheme under Motor Vehicles Act was omitted. Hence the term “rent-a-cab” has to be interpreted de-joint of the rent-a-cab scheme especially after 01.06.2007 where any motor vehicle constructed or adapted to carry more than 12 passengers excluding the driver was also included in the definition of “cab”. Hence it was held that renting and hiring cannot be differentiated.
8. Very recently Hon. Allahabad High Court in the case of Anil Kumar Agnihotri v. Commissioner, Central Excise Kanpur (CENTRAL EXCISE APPEAL No. – 299 of 2013) also reaffirmed the view expressed by the Gujarat High Court and held that renting and hiring cannot be differentiated. Relevant portion of judgment is reproduced below:
“A plain and simple reading of the relevant provisions would reveal that what is sought to be taxed under the Act is the service provided by a person under a rent-a-cab scheme. It makes no distinction between renting or hiring. The two terms have not been specifically defined under the Act and as such they have to be assigned the meaning which is acceptable in common parlance. Ordinarily, in common usage, there is hardly any distinction between ‘renting’ or ‘hiring’ and both the terms are usually used as synonym. In the case at hand we find that the appellant indulges in providing service under a rent-a-cab scheme in relation to a cab and therefore irrespective of whether he retains possession and control of the vehicle or passes it to the consumer, the service so rendered by him would fall within the taxable service as defined under Section 65 (105) (o) of the Act and is chargeable to tax under Section 66 of the Act.
The “rent-a-cab scheme” 1989 formulated by the Central Government in exercise of powers under Section 75 of the Motor Vehicles Act, 1988 providing for obtaining a licence by the operator of the scheme has nothing to do with the provisions relating to the imposition/chargebility of service tax. Therefore notwithstanding the above scheme, any person providing service of renting a motor cab would be amenable to service tax under the Act.”
9. We can observe from the above that the reasoning adopted by the Hon. Gujarat High Court as well as Hon. Allahabad High Court seems to be correct. Even the view expressed by Hon. Uttrakhand High Court was for the period prior to 01.04.2007 wherein it was arguable that the expression “rent-a-cab” must be seen in light of the provisions of rent-a-cab scheme and hence hiring of cabs cannot come within the ambit of tax. In GST, word “rent-a-cab” has not been defined. Hence one must interpret the same in common parlance and not in the context of “rent-a-cab” scheme. Hence one cannot say that only if exclusive control is provided to the customer it would amount to rent-a-cab and otherwise it would be hiring of cab. It must also be noted that if exclusive control and possession of a cab is given to a customer, it would amount to transfer of right to use goods and not as passenger transportation service.
What is a “CAB” ??
10. Although Sec. 17(5)(b)(iii) of the CGST Act, 2017 says that input tax credit is not available in respect of rent-a-cab, the word “cab” has not been defined. Hence let us take a scenario where a company has taken a bus on hire for transportation of staff. Whether the said “bus” can be considered as a “cab” and hence input tax credit is not available?
11. Before the negative list based service tax regime (i.e. before 01.07.2012) the word cab was defined under Finance Act, 1994 as under:
“Section 65(20) – “Cab means –
(i) a motor cab, or
(ii) a maxi cab, or
(iii) any motor vehicle constructed or adapted to carry more than twelve passengers, excluding the driver, for hire or reward:
Provided that the maxi cab referred to in sub-clause (ii) or motor vehicle referred to in sub-clause (iii) which is rented for use by an educational body imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre, shall not be included within the meaning of cab”
12. As per above definition even bus was considered as a “cab”. However, on or after 01.07.2012 (i.e. negative list based regime), any person providing service of ‘renting’ of motor vehicle designed to carry ‘passengers’ was taxable subject to certain exemptions. Since the expression “motor vehicle” was used, renting of all types of motor vehicles (i.e. motor cab, maxi cab as well as any other motor vehicle (e.g. bus)) was made taxable. Hence the definition of “cab” was no longer relevant (see Notification No. 20/2012-ST dated 05-06-2012 which provided that the provisions of Section 65 shall not apply with effect from 01-07-2012). It must also be noted that Sec. 65B inserted w.e.f. 01.07.2012 does not have a definition of “cab”. Hence after 01.07.2012, the word “cab” has to be understood without any reference to the definition contained u/s 65(20). Even under GST, in absence of any statutory definition, how should one interpret the word “cab” ?
13. As per P Ramanatha Aiyar’s Law Dictionary word “cab” means any carriage for the conveyance of passengers which plies for hire and is not a stage carriage that is, a carriage in which passengers are charged separate fares for their seats. Further the word “carriage” means any vehicle used for conveyance of passengers.
14. Oxford Dictionary defines the word “cab” as a taxi.
15. As per Sec. 2(25) of the Motor Vehicle Act, 1988 motor cab is defined as any motor vehicle constructed or adapted to carry not more than six passengers excluding the driver for hire or reward.
16. From the above definitions one can see that we have conflicting meanings. One includes any kind of carriage as “cab”. Second one only covers “taxi”. Third one is a statutory definition under another legislation which includes only vehicles which carry not more than six passengers.
17. It well settled principle of interpretation that in absence of any statutory definition under the law in question, one has to follow the definition in the market parlance. Maxwell in the book “Maxwell on Interpretation of Statutes” has elaborated this principle by saying that in dealing with matters relating to general public, statutes are presumed to use words in their popular sense rather than their narrowly legal or technical sense. Justice Storey of the United States in the case of “200 chests of Tea” (1894) 9 Wheaton (U.S.) has held that legislature does not suppose merchants to be naturalists or geologists or botanists. For the first time in the Indian Context, bench comprising of five judges of Supreme Court echoed the same concept in the case of Ramavatar Budhiprasad v. Assistant Sales Tax Officer AIR 1961 SC 1325. Issue before the court was whether “betel leaves” can be regarded as a “vegetable”. Supreme Court held as under:
“Reliance was placed on the dictionary meaning of the word “vegetable” as given in Shorter Oxford Dictionary where the word is defined as “of or pertaining to, comprised or consisting of, or derived, or obtained from plants or their parts”. But this word must be construed not in any technical sense nor from the botanical point of view but as understood in common parlance. It has not been defined in the Act and being a word of everyday use it must be construed in its popular sense meaning “that sense which people conversant with the subject matter with which the statute is dealing would attribute to it.” It is to be construed as understood in common language”
18. One may refer series of decisions thereafter following the same principle. Hence we can conclude that in absence of statutory definition of the word “cab”, same must be understood in the context of market parlance. Hence even if technically bus can be referred as a “carriage for conveyance of passengers”, in the context of market parlance “bus” is never understood as a “cab” (google search for “cab service” will show that it covers small cars and not buses). Hence the restriction u/s 17(5)(b)(iii) will not apply to a bus.
In Respect of Motor Vehicle ??
19. Even if one is able to cross the hurdle of Sec. 17(5)(b)(iii) by saying that “bus” is not a cab and hence input tax credit of bus service is available, one has to also refer to the provisions of Sec. 17(5)(a). Same is reproduced below:
“17. Apportionment of credit and blocked credits. —
(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely :—
(a) motor vehicles and other conveyances except when they are used —
(i) for making the following taxable supplies, namely :—
(A) further supply of such vehicles or conveyances; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles or conveyances;
(ii) for transportation of goods”
20. Above provision states that input tax credit shall not be available “in respect of” motor vehicles unless the same is covered by the exceptions. Motor vehicle is defined u/s 2(76) of the CGST Act, 2017 as under:
“(76) “motor vehicle” shall have the same meaning as assigned to it in clause (28) of section 2 of the Motor Vehicles Act, 1988 (59 of 1988);”
21. As per the above definition one has to refer to Sec. 2(28) of the Motor Vehicle Act, 1988 to understand the term. Same is defined as under:
““motor vehicle” or “vehicle” means any mechanically propelled vehicle adapted for use upon roads whether the power of propulsion is transmitted thereto from an external or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle running upon fixed rails or a vehicle of a special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding twenty-five cubic centimeters”
22. Above definition clearly includes a bus within its scope as it covers all mechanically propelled vehicles. Hence the issue before us is whether the phrase “in respect of motor vehicle” will cover renting/hiring of a bus ?
23. One way to look at it can be that since a separate entry has been made for “rent-a-cab”, the above referred entry in respect of motor vehicle will not cover renting/hiring. Hence renting/hiring of bus will be eligible for input tax credit.
Author Bio
Dear Sir, I do not agree with you from point no. 19 onwards. as you have refered to Sec 17(5) (a) saying that ITC is not available in respect of motor vehicles and other conveyances except….
and sec 17(5)(b)(iii) Rent a cab service…….
My observation is that, Sec17(5)(a) talks about ITC on purchase of motor vehicles and other conveyances where as Sec 17(5)(b)(iii) talks about ITC on rent a cab services.
which is why both points can not be linked here.