ANALYSIS OF AMENDMENT OF ITS OWN RULING BY AAR-WEST BENGAL ON NON ADMISSIBILITY OF ITC OF GST PAID ON INWARD SUPPLY/PURCHASE OF MOTOR VEHICLE USED FOR SUPPLYING RENT-A-CAB/RENTING/LEASING/HIRING SERVICE
Case Name : Mohana Ghosh, In Re
Appeal Number : 06/WBAAR/2019-20 & 08/WBAAR/2019-20
Date of Judgement : Original on 10/06/2019 & suo motto amended by AAR on 25.6.2019
Issue involved: In a recent AAR-West Bengal Ruling, the issue of admissibility or otherwise of the input tax credit (ITC) of GST paid on inward supply/purchase of motor vehicle for supply of rent-a-cab/renting/leasing/hiring service, has been considered and analysed.
Submission of the Applicant:
The applicant was supplying cabs on rental basis. It submitted that customers take cabs on rent for the transportation of passengers. Rent-a-Cab was, therefore, essentially associated with the transportation of passengers. GST paid on the purchase of motor vehicles for supplying rent-a-cab service should, therefore, be admissible in terms of section 17(5)(a)(B).
It sought an advance ruling on whether credit was admissible of the input tax paid on the purchase of motor vehicles for the supply of rent-a-cab service.
Submission of the Revenue:
The Revenue Representative submitted that the GST Act did not allow credit of GST paid on inputs for supply of rent-a-cab service in terms of section 17(5)(b)(iii) of the Act. However, the provisions of the Act have since been amended. The above restriction is removed with effect from 01/02/2019. Post-amendment, admissibility of input tax paid on the purchase of motor vehicles to be used for supply of rent-a-cab service should, therefore, be examined in terms of section 17(5)(a)(B) of the GST Act. As renting of a cab is made for the sole purpose of transporting passengers, the applicant is eligible to claim the input tax credit on the purchase of motor vehicles for supplying rent-a-cab service.
Observations and findings of Hon’ble AAR:
The advance ruling in this matter was pronounced on 10/06/2019. The order, however, suffered from certain legal errors that were apparent on the face of the record. They needed to be rectified. This Authority, therefore, proceeded to amend the said order on its own accord under section 102 of the GST Act. As the rectification is not going to enhance the tax liability or reducing the amount of admissible input tax credit from the original order, the requirement under proviso to section 102 of the GST Act did not apply.
Section 17(5)(b)(iii) of the GST Act did not allow input tax credit on supply of rent-a-cab service, except under certain specific conditions. Post-amendment, effective from 01/02/2019, the restriction continues under section 17(5)(b)(i) of the Act on renting and hiring of motor vehicles. A registered taxpayer cannot, therefore, claim the input tax credit on the GST paid for hiring motor vehicles. The Applicant, however, was a supplier of rent-a-cab service. Section 17(5) of the Act does not restrict the supplier of such services from claiming the input tax credit on inward supplies except as provided under section 17(5)(a) of the Act.
Section 17(5)(a) of the Act provides that input tax credit shall not be available on inward supply of motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely –
| (A) | a further supply of such motor vehicles; or | |
| (B) | transportation of passengers: or | |
| (C) | imparting training on driving such motor vehicles. |
The above provisions do not allow a registered taxpayer to claim the input tax credit on inward supply of motor vehicles of a specific category (the motor vehicles meant for transportation of persons having seating capacity not exceeding thirteen persons). The restriction, therefore, does not apply to the goods transport vehicles, buses etc. Inward supplies of cabs like the ones the Applicant uses for the supply of rent-a-cab service, however, fall under the ambit of the restriction, unless they are used for the supplies mentioned under section 17(5)(a)(A) to (C) of the Act.] The Applicant argues that rent-a-cab service qualifies to be treated as a supply of passenger transportation service. [Input tax credit on inward supply of motor vehicles used for outward supply of rent-a-cab service should, therefore, according to the Applicant, be admissible under section 17(5)(a)(B) of the GST Act.]
Passenger transportation service is classified under SAC 9964. Transportation of passengers, with or without accompanied belongings, is taxable under Sl. No. 8 of Notification No. 11/2017 – CT (Rate) dated 28/06/2017 (corresponding State Notification No. 1135 – FT dated 28/06/2017), as amended from time-to time (hereinafter collectively called the Rate Notification). As obvious from reference to the accompanied belongings, the recipient of the service is a passenger travelling from one place to another. He may have varying degrees of control over the carriage, providing him with a certain measure of independence in choosing the destination and travel time, depending upon the nature of the contract, explicit or implied. But the supply remains that of transportation of the recipient as a passenger, and the consideration is paid for the distance travelled.
Renting of any motor vehicle, however, is classified under SAC 9966. It is taxable under Sl. No. 10(i) of the Rate Notification. The recipient of this service is not a passenger. He is enjoying the service of having provided a motor vehicle, with or without a driver, for use in whatever way he likes for the duration of the renting period. It may remain parked for the entire duration of renting without actual transportation of any person. Even when any person – the recipient of the service or someone of his choice is being actually transported, the consideration is paid not for the distance travelled, but for renting the cab.
The photocopies of the applicant’s invoices reflected that the recipients are institutions like West Bengal Postal Circle, who clearly could not travel as a passenger. Furthermore, the invoices were raised for the duration of renting, which is a fixed number of hours in a calendar month. If the cab is requisitioned on holidays or for extra hours on a working day, an additional amount was charged irrespective of the distance travelled.
The recipient has to pay a fixed amount whether or not the cab is moved. If, however, the cab travels beyond a threshold, the rent is calculated as a cost-plus, taking the distance travelled into account.
Rent-a-cab is not defined in the GST Act. Nature of the applicant’s service was, therefore, derived from what was stated in the Application and what could be ascertained from the invoices. The applicant provided cab rental service inter alia to institutions like West Bengal Postal Service. The recipient has to pay the applicant a certain amount per month as consideration irrespective of what distance the cab travels in a particular month. Additional amount has to be paid if the cab is retained for extra hours or requisitioned on holidays. For the purpose of covering the cost of fuel, the distance travelled needs to be brought into play, but only if it crosses a certain threshold. It was, therefore, clear from the above discussion that the nature of the service the applicant provided was classifiable under SAC 9966 as renting of a motor vehicle. Credit of GST paid on inward supply of motor vehicles or other inputs for the supply of the applicant’s service was not, therefore, admissible in terms of section 17(5)(a) of the GST Act.
Based on the above discussion, AAR ruled as under:
GST paid on the purchase of motor vehicles for supplying rent-a-cab service is not admissible for credit in terms of section 17(5)(a) of the GST Act.
Author’s humble take on the above AAR Ruling:
It is really interesting and peculiar to note that in the above case, even the Revenue Authorities were of the admissible view that in the post amendment scenario, the ITC of GST paid on inward supply/purchase of motor vehicles used for renting or hiring for the purpose of transportation of passengers is allowable.
However, in its original ruling dated 10.6.2019, the Hon’ble AAR has held that ITC of GST paid on inward supply/purchase of motor vehicles used for supply of rent-a-cab service is inadmissible as per section 17(5)(b)(i)of the GST Act. However, in its suo-motto amended order dated 25.6.2019, the Hon’ble AAR has held that such ITC is inadmissible u/s 17(5)(a) of the GST Act.
The Hon’ble AAR, suo-motto, has made a distinction between supply of renting or hiring of a motor vehicle classifiable under SAC 9966 and supply of passenger transportation services classifiable under SAC 9964 and has held that the ITC of GST paid on purchase of motor vehicles for supply of passenger transportation services is allowable by virtue of section 17(5)(a)(B) of the GST Act, whereas ITC of GST paid on inward supply/purchase of motor vehicles for supply of renting or hiring of a motor vehicle is not allowed/restricted as per section 17(5)(a) of the GST Act.
The Hon’ble AAR has observed that in passenger transportation service (SAC 9964), the recipient of the service is a passenger and he pays the consideration for the distance travelled, whatever be the degree of control he enjoys over the vehicle.
In renting or hiring of a motor vehicle (SAC 9966), the recipient is provided the right to use the vehicle over a specified duration, whether he is a passenger or not. Distance travelled is taken into consideration to recover the cost of fuel. But travelling a certain distance is not the essence of the service.
Going strictly by the Hon’ble AAR interpretation of the nature and classification of two supplies viz. supply of passenger transportation service and supply of renting/hiring of motor vehicle, a very interesting and peculiar scenario can be envisaged and i.e., when a person operates his motor vehicle in tie-up with app based mediators like OLA/UBER and the customers travel a certain distance as passengers in such motor vehicle, the ITC of GST paid on the inward supply/purchase of such motor vehicle is allowable, but if a person directly rents out/hires his motor vehicle to customers including corporates and other organisations, then ITC of GST paid on the inward supply/purchase of such motor vehicle is not allowable.
In order to have proper appreciation and better understanding of the issue presently under consideration, it will be desirable and worthwhile to consider the exact language of the relevant and applicable sections viz. section 17(5)(a) of the GST Act, which has been relied upon both by the applicant and the Hon’ble AAR in the above ruling and also section 17(5)(b)(i)of the GST Act, on the basis of which, the Hon’ble AAR has held that ITC of GST paid on purchase/inward supply of motor vehicle used for renting or hiring is not allowable.
The said sections of the GST Act read as under:
“17(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 for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:—
(A) further supply of such motor vehicles; or
(B) transportation of passengers; or
(C) imparting training on driving such motor vehicles;
(aa)…………………………………………..
(b) the following supply of goods or services or both—
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein,
It is desirable and worthwhile to note here that the entire crux of the applicant’s arguments and contentions has centered around the exception as contained in section 17(5)(a)(B) of the GST Act, so as to justify the admissibility of ITC of GST paid on purchase/inward supply of motor vehicles used for supply of rent-a-cab service on the ground that the same was being used for transportation of passengers. However, the Hon’ble AAR has not agreed with the same by making a distinction between supply of passenger transportation services and supply of renting/hiring of motor vehicle.
In this regards, keeping in view the legislative intent of expanding the scope of eligibility of input tax credit as the sole basis for making the amendments in section 17(5) of the GST Act w.e.f. 1.2.2019, it would have been really encouraging and refreshing if the said unjustified and superficial distinction between the supply of renting or hiring of motor vehicles and supply of passenger transportation services would have been done away with by the Hon’ble AAR, as renting or hiring of motor vehicles (other than those meant for goods transportation) is done by corporates and organisations for the purpose of transportation of passengers/staff only.
Infact in line with the Government’s philosophy of ensuring “ease of doing business”, the Legislature itself must come out with clear and unambiguous provisions in this regard so as to do away with this artificial and meaningless distinction between the supply of renting or hiring of motor vehicles and supply of passenger transportation services so as to eliminate the eminent and foreseeable opening up of a pandora box of unnecessary litigations.
This whole case needs to be looked into from a different perspective also. Interestingly and surprisingly, the applicant in support of his case, has not contended his arguments on the basis of the exception contained in section 17(5)(a)(A) of the GST Act, which is also having a direct bearing on the issue under consideration and is more straightforward in the context of the admissibility of ITC of GST paid on inward supply of motor vehicle used for rendering rent-a-cab service.
As per the provisions of section 17(5)(a)(A) of the GST Act, the ITC of GST paid on inward supply of motor vehicles is admissible if the same is used for making further supply of such motor vehicles. Clearly, in supply of rent-a-cab service, the motor vehicle, on which GST has been paid by the supplier on its purchase/inward supply, is being used for further supply of such motor vehicle for renting/hiring, and as such the ITC of GST paid by the supplier on purchase/inward supply of such motor vehicle, is to be considered as admissible by virtue of the exception as contained in section 17(5)(a)(A) of the GST Act. The fact that whether such GST has been paid on the purchase of such motor vehicle or for the hiring of such motor vehicle by the supplier of rent-a-cab service must not make any difference, as section 7 of the GST Act includes renting and hiring also in the purview of supply.
However, since the above contention and ground concerning the justifiability of the admissibility of ITC of GST paid on inward supply/purchase of motor vehicle as per exception contained in section 17(5)(a)(A) of the GST Act, was not taken up by the applicant in the said case, therefore, the Hon’ble AAR has also not considered the same. But since the Hon’ble AAR has suo-motto made a distinction between the supply of passenger transportation services and supply of renting/hiring of motor vehicle, even when the concerned Revenue Authorities were also in agreement with the admissibility of such ITC, therefore it would have been really a very pleasant and healthy benchmark that in the same manner, the Hon’ble AAR could have discussed the admissibility of such ITC as per provisions of section 17(5)(a)(A) of GST Act, on its own.
Before parting, it is also desirable to consider the provisions of section 17(5)(b)(i) of the GST Act, which constitutes the trigger point for the inadmissibility of ITC of GST paid on purchase/inward supply of motor vehicle use for renting/hiring, and which was made the sole basis for the inadmissibility of such ITC by the Hon’ble AAR, in its original ruling dated 10.6.2019.
A plain reading of the said provision, makes it clearly evident that even the restriction of availability of ITC of GST paid on purchase/inward supply of motor vehicle used for renting or hiring as provided in section 17(5)(b)(i) of the GST Act, is also subject to the exceptions of renting or hiring of such motor vehicle for the purpose of further supply of such motor vehicle and for transportation of passengers. This exception is clearly contained in the expression “except when used for the purposes specified therein”, forming an integral part of the said section.
Therefore, keeping in view the above factual and legal propositions, the above Ruling pronounced by the Hon’ble AAR, needs to be reviewed and reconsidered with a view to ensuring proper and correct appreciation of the applicable provisions of Law in this regards.
Author Bio
Very Well analysed Sir,
But do you think the proviso under 17(5)(b)(i) which states ‘making an outward taxable supply … as an element of a taxable composite or mixed supply’ would have changed the case instead of relying on “except when used for the purposes specified therein”, ?