The admissibility of input tax credit is not free from controversies under GST like pre-GST regime. There are many cases where Orders passed by the Advance Ruling Authority as well as Appellate Authority for Advance Ruling in the favour of the department and only few orders are in the favour of the assessees. The Advance Ruling Authorities across the country are working on their own choices and passing orders against the precedent judgments were decided in the pre-GST regime by the Tribunal, High Courts in the identical issues.
For which GST Council in its 31’st meeting has recommended for the creation of AAAR to deal with the conflicting decisions made by two or more State AAAR on the same issue. (Proposed and will be effective only after the necessary amendments in the GST Acts are carried out).
The author wish to present a case study of admissibility of Input Tax Credit of GST paid on services utilized for maintenance of township, guest house, hospital, horticulture by a public sector undertaking namely M/s National Aluminium Company Limited, who was before the Odisha Advance Ruling Authority / Appellate Authority for Advance Ruling (GST).
The applicant seeking an advance ruling in respect of its entitlement to take credit of input tax paid on various goods and services used for maintenance of applicant’s township, guest house, hospital, horticulture in its ordinary course of business.
Contention of the applicant:
Applicant having township at Angul, Damanjodi and Bhubaneswar. They run hospitals for their employees. They have also guest houses for accommodating touring employees and guests. They maintain parks and green area in the factories and townships. These infrastructures are necessary for the applicant to run its large-scale business of manufacturing where thousands of employees are working. They are receiving services of management, maintenance and repair of these facilities. Such services are used in the course or furtherance of business and therefore they are entitled to take credit of tax paid on the said supplies of services as per the provision of Central Goods and Services Tax (CGST) Act, 2017. Further, they stated that the supplies on which they seek to take credit are not blocked under sub-section (2) and (5) of Section 17 of the OGST Act / CGST Act, 2017.
Findings/ discussions of AAR:
1. The input and / or input services received by the applicant for the activities such as maintenance and repair of the townships, guest houses, hospitals and horticulture have no nexus to the manufacturing activity undertaken by the applicant. The said activities are neither relating to business nor relating to manufacture of final product and its supply. The said activities may be welfare activities of the employees. The expression “in course or furtherance of business” appearing in Section 16(1) of the GST Act refers to activities which are integrally related to the business activity and not welfare activities.
2. The services, availed by the applicant are awarded on contractual basis which are in the nature of repairs and maintenance of its assets, contained in such township, guest house or hospitals. The residential township or colonies are located outside any factory. The services for repairs and maintenance of building and land and other assets are primarily done by service providers, to whom jobs are awarded under works contract terms and cover under definition contained in Section 2(119) of the OGST Act / the CGST Act. It reveals that the tax credit on input and / or input services received by the applicant for the said activities are in the form of works contract service, for repairs and maintenance of various immovable property and assets, the input tax credit of which are directly restricted or blocked under specific provision under Section 17 (5) of the OGST / CGST Act.
3. Plantation and maintenance of such plantation outside the plant area, being for non-business use, will not qualify for input tax credit in terms of Section 17(1) of the OGST / CGST Act, 2017. Similarly, the service availed in relation to plant & garden in the residential colony will not qualify for input tax credit.
4. The hospital / dispensary maintained by the applicant for its employees and society come within the definition of “Clinical establishments” whose supply is tax exempted under Serial 74, Heading 9993 of the Notification No.12/2017-Central Tax ( Rate), dated 28th June,2017. The services rendered by the guest house maintained by the applicant, for the residential or lodging purpose, is also exempted under Serial 14, Heading 9963 of the Notification No.12/2017-Central Tax (Rate), dated 28th June,2017. Consequently, the input tax credit on such exempt supply is also restricted under sub-section (2) of Section 17 of the OGST / CGST Act. In view of the above, the embargo provided in clauses ( c ) and ( d) including the Explanations appended to sub-section (5) and (6) of Section 17 of the OGST / CGST Act and the Notification No. 12/2017-Central Tax (Rate), dated 28th June,2017, applies in full force in this case and the applicant is not entitled to the benefit of the credit of the tax paid on the input and/ or input services received for the referred purposes as per its application.
5. The inward supplies received by way of management, repair, renovation, alternation or maintenance service or goods received for furnishing the residential colony shall not qualify for input tax credit in terms of Section 17(2) of the OGST / CGST Act. The services which are being availed clearly in relation to the residential colony and partly in relation to the plant, proportionate ITC to the extent relatable to the plant are available whereas services availed in relation to the residential colony shall not qualify for input tax credit in terms of sub-section (2) of Section 17 of the OGST Act / CGST Act.
6. Establishment of hospitals and maintenance thereof may be for discharging the statutory obligation under the ESI Act by the employer, but dispensing medical service to the employees and others is a supply of service by the employer ( the applicant in this case). Such service being nil rated will fall under exempt supplies. Consequently, the inputs and input services received by the applicant for dispensing the exempt service will not qualify for input tax credit in terms of Section 17(2) of the OGST / CGST Act.
7. Establishing, maintaining and furnishing guest houses including landscaping by way of gardening or otherwise is neither a perquisite nor a statutory obligation. It is purely for providing accommodation service to guests including employees on tour. This is in fact a business requirement to maintain such facilities and accordingly the applicant is entitled to input tax credit paid on inward supply of input and input services for maintenance of the guest house, transit house and training hostels, but excluding the food and beverages provided in such establishments. Credit of such input services are such blocked in clause (b) of sub-section (5) of section 17 of the OGST and CGST Act.
8. Therefore, the Appellant is entitled to input tax credit of the tax paid on inward supply of input and input services for maintenance of the guest house, transit house & training hostel but excluding the food & beverages provided in such establishment.
We have gone through the various judicial pronouncements cited by the applicant in support of his claim. With great respect to the principles of law down in those decisions rendered in peculiar facts and circumstances of each case we have no hesitation to say that the facts of the instant case are different and distinguishable.
Rulings: In view of the foregoing discussions, the application for advance ruling is disposed accordingly.
Consequent to pronouncement of Advance Ruling No.02/ODISHA-AAR/2018-19, dated 28-9-2018, both the applicant and jurisdictional officer, aggrieved by the ruling passed by the Odisha AAR and preferred appeal before the Odisha Appellate Authority for Advance Ruling for Goods and Services Tax, Bhubaneswar.
Details of Appeal / Appellants:
1. M/s National Aluminium Company Limited, (Appellant-I)-Appeal No.02/2018/AAAR/ODISHA.
2. The Commissioner, GST & CX, Bhubaneswar (Appellant-II)-Appeal No.03/2018/AAAR/ODISHA.
Since both the appeals have arisen out of the same AAR order, thus Odisha Appellate Authority for Advance Ruling has passed common Order No.02-03/ODISHA-AAAR/2018-19, dated 21.01.2019.
Submission of Appellant-I: The applicant has requested to set aside / modify the impugned Advance Ruling No.02/ODISHA-AAR/2018-19 dated 28.09.2018 and allow input tax credit on inputs and inputs services used by them for maintenance of their township, security services and horticulture meant for township.
Grounds of Appeal of Appellant-I:
1. The AAR has wrongly held that the appellant’s activities of management, maintenance or repair of the townships are not for or in relation to its core business while denying the credit of the tax paid on the goods and services used for management, maintenance or repair of the township of its employees, and horticulture in township. The appellant undertakes such services for its business in the course or furtherance of business and therefore it is entitled to take credit of tax paid on such services.
2. The AAR has not rebutted the appellant’s submission as made in its application and additional written submissions. The AAR has overlooked the binding decisions; hence, it has breached the judicial discipline.
3. The fact that business plan for establishment plant included setting of the township as well, which show that township are integral part of smooth and effective functioning of the manufacturing activities.
4. The word ‘business’ has been defined under section 2(17) of CGST Act,2017, where the word business cover under the scope and ambit of definition of business that ‘ an activity or transaction in connection with or incidental or ancillary to business in terms of sub-clause (a) of Section 2(17) of the CGST Act. So not only manufacturing activity but any incidental or ancillary activities thereof are also covered within the expression “business” and maintenance services of townships management is integrally related to business.
5. With the introduction of GST, there is no requirement to make such demarcation of input and input services and credit of tax paid on all the supplies received by the application in the course or furtherance of business is admissible without any whisper of doubt.
6. The ratio of earlier rulings under Cenvat Credit Rules, 2004 squarely applicable in the present GST regime as provisions of tax credit in the present GST are more extensive than the provisions of the Cenvat Credit Rules, 2004.
7. The AAR has wrongly and deliberately ignored the various rulings without appreciating the ratio of these rulings which are squarely applicable in the present case of the appellant.
8. A comparative reading of the provisions of the erstwhile Cenvat credit rules and input tax credit in the present GST regime, it can be appreciated that earlier tax provisions were restrictive as compared to present tax provision. Hence, tax credit in terms of section 16 of CGST Act,2017 cannot be denied when such credit were allowed in the old regime. Hence, the AAR has wrongly and deliberately ignored the various rulings without appreciating that the rtaio of these rulings which are squarely applicable in the present case of the applennat.
9. The AAR has ignored the appellant’s submission with regard to garden maintenance service as the garden is maintained because of statutory requirement to comply with pollution laws or for increase in the efficiency of employees and hence these services used in course or furtherance of business.
10. The AAR has wrongly held that the appellant had provided residential accommodation service and that these are exempted from tax being provided to the employees. The main purpose of appellant in providing such facilities is for the benefit of its own business.
11. The appellant’s activities cannot be roped in as taxable supply for residential service by invoking paragraph 2 of Schedule 1 for the various reasons. The appellant has contended that there is no supply of goods or services to the employees.
Submission of Appellant-II: on the other hand the Commissioner, CX & GST, Bhubaneswar in his appeal petition, has submitted that the order passed by the AAR is not legal & proper to the extent of:
1. Allowing the input tax credit of the services utilised for maintenance of Guest House, Transit House and Trainee Hostel.
2. Allowing the input tax credit for the services utilized for plantation and gardening within the plant area including the mining area and the premises of other establishment like administrative building, guest house, transit house and training hostel.
Grounds of Appeal of Appellant-II: The Commissioner, CX & GST, Bhubaneswar, in his grounds of appeal has submitted that:
1. The residential colonies are built for the welfare and benefit of the employees of the Appellant-I and extending any sort of benefit to the employees cannot be treated as something used or intended to be used in the course of furtherance of business.
2. Since guest house, transit house and training hostel are also meant for welfare and benefit of the employees, treating them as business requirement, as related to the core business, does not appear to be correct.
3. The plantation and gardening within the plant area or the mines area of the applicant have no nexus with the manufacturing of Aluminium sheets and coils. These services do not pass legal test i.e. used or intended to be used in course or furtherance of business.
4. AAR holding that utility services provided through plantation & gardening within plant area including mining area and premises of other business establishment will qualify for input service credit appears to be incorrect.
Findings of AAAR:
1. As per CBIC vide its Press Release dated 10.10.2017, referred by the Appellant-I, perquisite are not subject to GST. Therefore, since the perquisites are outside the scope of GST, input tax credit shall not be available to the Appellant-I in respect of tax paid on goods and services procured by it for management, repair, renovation, alternation or maintenance services (including watch and ward services, security services, plantation / gardening/landscaping services, etc) pertaining to residential accommodation for its employees in township / colony.
2. However, for academic interest, even if it is argued that perquisites do fall within the scope of GST; the benefit of input tax credit still cannot be allowed, as any activity for the comfort, convenience and welfare of its employees cannot be treated as having been done in course or furtherance of business. This has been held by the Hon’ble Bombay High Court ( Nagpur Bench), in its order dated 11.10.2010 in the Central Excise Appeal No.22 of 2008 in the case of Commissioner of Central Excise, Nagpur vs. M/s Manikgarh Cement [2010(20) S.T.R.456(Bom)]. Therefore, appeal filed by the Appellant-I is not legally sustainable and hence is liable to be rejected.
3. The ruling of the AAR that the Appellant-I is entitled to input tax credit of the tax paid on inward supply of input and input services for maintenance of guest house, transit house and trainee hostel is found to be not correct. The guest house service provided by the Appellant-I to its employees as well as non-employees cannot be treated as an activity in course or furtherance of its business. Hence, we are of the view that tax paid on inward supplies of goods and services in connection with the guest house cannot be allowed the benefit of input tax credit. To this extent, the appeal filed by the Appellant-II is sustainable and hence allowed.
4. The ruling of the AAR that services availed in relation to plantation and gardening within the plant area including mining area and the premises of other business establishments will qualify for input tax credit is found to be correct. Therefore, such activities are integral to the business activity of the Appellant-I and hence can be treated as activities in course or furtherance of its business. To this extent, the appeal filed by the Appellant-II is not sustainable and hence liable to be rejected.
5. The appellant-I has cited Order of Hon’ble Bombay High Court in the case of Coca Cola India Pvt. Ltd, vs. CCE 2009(15) S.T.R. 657(Bom), wherein the Hon’ble High Court had observed that whatever forms cost of production of the final goods, according to the Standards of Cost Accountancy, would be regarded as input / input service and hence the benefit input tax credit should be available on such input/ input services. In this regard, we just want to place on record the fact that the Hon’ble Bombay High Court, vide subsequent order dated 25.10.2010, in the case of Commissioner Central Excise vs. M/s Ultratech Cement Ltd. [2010(260) E.L.T. 369( Bom)], has interpreted the correct meaning and rejected the contention of the revenue that a service to qualify as an input service must be used in or in relation to the manufacture of the final products and held that any service used in relation to the business of manufacturing the final product would be an eligible input service.
From the above, it is established that to claim input tax credit , an input service must be integrally connected with the business of manufacturing the final product, Cost of an input service forming part of the cost of final product alone cannot be a condition to allow the benefit of input tax credit. Our decision, as mentioned above, is based on this principle as laid down by the Hon’ble Bombay High Court in the Ultratech Cement case (supra).
Rulings: In view of our findings as aforementioned, the appeal filed by M/s. National Aluminum Company Ltd (Appellant-I) fails, whereas the appeal filed by the Commissioner of CX & GST,
Conclusion : In light of the cited AAR and AAAR Orders with regard to admissibility of ITC of Input of goods and input services relating to the GST paid on various goods and services used for maintenance of applicant’s township, guest house, hospital, horticulture in its ordinary course of business. The Advance Ruling Authority has disallowed certain services to avail ITC and allowed certain services to take input tax credit of services utilized for maintenance of Guest House, Transit House and Trainee Hostel, services utilized for plantation and gardening within the plant area including the mining area. But on the other hand Jurisdictional Authority as Appellant-II has submitted that the order passed by the AAR is not legal & proper in respect of input tax credit for the services has allowed by the AAR. Finally, the applicant as well as Jurisdictional authority aggrieved with the Order of AAR filed appeal before the Appellate Authority for Advance Ruling. The AAAR after careful consideration to the submissions made by the both appellants, examining the relevant statutory provisions of OGST / CGST Acts and applying the ratio of judicial pronouncements referred by the Appellant-I , has uphold the ruling of the AAR that services availed in relation to plantation and gardening within the plant area including mining area and the premises of other business establishments will qualify for input tax credit and to this extent the appeal filed by the Appellant-II has rejected. Further, AAAR uphold the ruling of the AAR relating to supplies received by the Appellant-I by way of management, repair, renovation or maintenance service or goods received for furnishing the residential colony shall not qualify for input tax credit and disallowed Input Tax Credit of these services and to that extent Appellant-II’s appeal succeeds partially. With the introduction GST, the basic concept of eligibility of availing Input Tax Credit on goods and services should not be interpreted wrongly which were allowed in the earlier tax regime. The earlier precedents decisions / judicial pronouncements should be followed by the AAR as well as AAAR while passing Order, to maintain judicial discipline in the adjudicating proceeding in the GST regime.