In re Emcure Pharmaceuticals Limited (GST AAR Maharashtra)
Question 1: – Whether the GST would be payable on recoveries made from the employees towards providing canteen facility at subsidized rates in the factory and office?
Answer: – Answered in the negative.
Question 2: – Whether the GST would be payable on the recoveries made from the employees towards providing bus transportation facility? If yes, whether the Applicant is exempted under Notification No. 12/2017 Central Tax (Rate)?
Answer: – Answered in the negative.
Question 3: – Whether the GST would be payable on the notice pay recoveries made from the employees on account of not serving the full notice period?
Answer: – Answered in the negative.
FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, MAHARASHTRA
The present application has been filed under Section 97 of the Central Goods and Services Tax Act, 2017 and the Maharashtra Goods and Services Tax Act, 2017 [hereinafter referred to as “the CGST Act and MGST Act” respectively ] by M/s. Emcure Pharmaceuticals Limited., the applicant, seeking an advance ruling in respect of the following questions.-
(a) Whether the GST would be payable on recoveries made from the employees towards providing canteen facility at subsidized rates in the factory and office?
(b) Whether the GST would be payable on the recoveries made from the employees towards providing bus transportation facility? If yes, whether the Applicant is exempted under Notification No. 12/2017 Central Tax (Rate)?
(c) Whether the GST would be payable on the notice pay recoveries made from the employees on account of not serving the full notice period?
At the outset, we would like to make it clear that the provisions of both the CGST Act and the MGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, the expression ‘GST Act’ would mean CGST Act and MGST Act.
2. FACTS AND CONTENTION – AS PER THE APPLICANT:
2.1 M/s Emcure Pharmaceuticals Limited, the Applicant, a pharmaceutical company with registered office at Emcure House, T-184, M.I.D.C. Bhosari, Pune 411026, Maharashtra, engaged in developing, manufacturing and marketing of pharmaceutical products, provides canteen and bus transportation facility to its employees as a part and parcel of the employment arrangement vide letter of employment (“Employment Agreement”) to employees, which contains the terms & conditions of employment as per its HR Policy.
Canteen & Bus Transportation
2.2 The Applicant makes recoveries at subsidized rates for providing canteen and bus transportation facility to its employees and has engaged third party service providers to provide the said facilities and the service providers raise invoices with applicable GST. The Applicant recovers a certain portion of the consideration paid to such third-party service providers from its employees.
Notice Pav Recovery
2.3 There are instances where employees resign and leave the employment without serving the mandated notice period, in part or in full, the Applicant is entitled to monetary compensation, (“Notice Pay Recovery”). In such cases, the Applicant deducts salary for the tenure of notice period not served as a compensation for breach of the terms of the Employment Agreement by the employees.
B. STATEMENT CONTAINING APPLICANT’S INTERPRETATION OF LAW
Applicant’s Interpretation with respect to the recoveries made from employees for providing Canteen facilities which are without prejudice to each other.
2.4 The recoveries for providing canteen facility is not covered under the ambit of “supply” under Clause (a) of Section 7 (1) of the CGST Act.
2.5 Applicant is engaged only in the business of pharmaceutical products and is maintaining canteen as per the provisions of the Factories Act, 1948. Even if the said canteen facility were not provided, the pharmaceutical business of the Applicant would still be continuing. Thus, providing canteen facilities to its employees is not the business of the Applicant & the same cannot qualify as supply.
2.6 Reliance is placed in the case of State of Gujarat vs. Raipur Manufacturing Co. Ltd. (Civil Appeal No. 603 of 1966) wherein Petitioner was in the business of manufacturing & selling cotton textiles. Petitioner purchased coal for usage in business of cotton textiles, which was later sold by them. The Supreme Court held that the Petitioner was not engaged in the business of coal.
2.7 As per clause (b) of Section 2 (17), business also includes any activity which is in connection with or incidental or ancillary to the activities covered under clause (a) of Section 2 (17) of the CGST Act. In this regard, activities which are having direct nexus with the main business can be said to be ancillary or incidental. However, canteen facility is not related to or connected with the principle business of supply of pharmaceutical goods. Hence, the same is not incidental or ancillary to the main business of the Applicant. Thus, said canteen facility cannot be taxed under GST.
2.8 In support of the above contention, the Applicant relies on the case of Deputy Commissioner of Commercial Taxes vs. Thirumagal Mills Ltd. [1967 (20) STC 287 Mad].
2.9 Applicant also relies on the decision of the Hon’ble Delhi High Court, in the case of Panacea Biotech Limited vs. Commissioner of Trade and Taxes [(2013) 59 VST 524 (Del.)] wherein the Hon’ble Court held that, selling of used cars cannot by any stretch of the imagination be characterized as “ancillary” or incidental to the business of a pharmaceutical company.
2.10 Without prejudice to the above, the canteen facility provided by Applicant is excluded from the scope of supply in terms of Clause (a) of Section 7 (2) of the CGST Act.
2.11 The canteen facility provided by the Applicant is specifically excluded from the coverage of ‘supply’ under GST as per Clause (a) of Section 7 (2) of the CGST Act which begins with a non-obstante clause and overrides Section 7 (1) of the CGST Act. Entry (1) of Schedule-Ill covers services provided by employee to its employer in the course of employment or in relation to employment. Any activity or transaction, in this case, canteen services, which is undertaken in the course of employment or in connection with employment has been specifically excluded from the ambit of supply. By virtue of Section 7 (2) read with Entry (1) of Schedule III, the canteen facility does not amount to supply. Also, as per the Press release issued by the Ministry of Finance dated 10 July 2017 any services provided by the employer to the employees in terms of the contractual agreement entered into between the employer and employee will not be subjected to the GST.
2.12 Without prejudice to the above, it is settled position under GST regime that employee recoveries does not amount to ‘supply’.
2.13 employee recovery would not qualify as ‘supply’ under GST and hence, not taxable. Reliance is placed in the case of M/s Jotun India Private Limited, [2019-TIOL-312-AAR-GST] as well as M/s POSCO India Pune Processing Centre Private Limited [2019 (2) TMI 63].
2.27 Applicant’s Interpretation with respect to the recoveries made from employees for providing Bus Transportation facilities are provided below without prejudice to each other.
The Employee recoveries for providing bus transportation facility is not covered under the ambit of “supply” under Clause (a) of Section 7 (1) of the CGST Act.
2.27.1 The Applicant is procuring bus transportation services, for transportation of its employees in Non-AC buses, from a third-party bus transportation service provider who issues tax invoice with applicable GST to the Applicant. Applicant recovers subsidized amount for the said transportation facility from its employees.
2.27.2 The Applicant is not engaged in the business of bus transportation and accordingly, the said facility provided by the Applicant to its employees does not amount to supply under the GST regulations.
2.28 Without prejudice to the above, the bus transportation facility provided by Applicant is excluded from the scope of supply in terms of Clause (a) of Section 7 (2) of the CGST Act.
2.28.1 The submissions made by the Applicant in respect of canteen recovery equally applies so far as the bus transportation is concerned. Therefore, bus transportation facility is excluded from the purview of ‘supply’ in terms of Section 7 (2) (a) read with Schedule-Ill to the CGST Act.
2.29 Without prejudice to the above, it is settled position under GST regime that employee recoveries does not amount to ‘supply’
2.29.1 The Applicant further submits that the recovery towards bus transportation facility does not amount to ‘supply’ in light with the advance rulings pronounced by this Hon’ble Authority.
2.30 Applicant’s Interpretation with respect to the applicability of exemption from GST in respect of provision of Non-AC bus transportation facility to its employees.
2.30.1 Transportation of employees by the Applicant through usage of Non-AC buses would merit classification under the Tariff 9964 as “Passenger Transportation Services”. It is submitted that the Annexure for Scheme of classification of services appended to Notification 11/2017-CTR provides the manner for classification of services. Local transportation services of passengers through buses are covered under Tariff 996411. Further, the Explanatory Notes issued by the CBIC also provides that the services provided by bus within city limits would be very well classified under Tariff 996411. The Explanatory Notes also provides that the renter defines the travel routes in case of passenger transportation services. In the given case, the said conditions are satisfied. Hence, without prejudice to above submission, in case the bus employee recovery qualifies as supply of service, the said service would be classified under Tariff 9964 only.
2.30.2 Therefore, without prejudice to the above submissions, even in case where the bus transportation facility provided by the Applicant to its employees amounts to supply, the said services would be exempted by virtue of Notification No. 12/2017-CTR dated 28.06.2017 (‘Exemption Notification’).
2.30.3 Further, as per SI. No. 15 (b) of the Exemption Notification, “Non-air-conditioned contract carriage other than radio taxi, for transportation of passengers, excluding tourism, conducted tour, charter or hire” is exempt from GST. The buses in the given case also qualifies as ‘contract carriage’ as defined in the Explanation given in the Exemption Notification.
2.30.4 The definition of contract carriage as per clause (7) of Section 2 of Motor Vehicles Act, 1988, is very wide to include any motor vehicle which carries a passenger for hire or reward from one point to another and therefore, the said buses in question used for employee transportation would be covered under the definition of contract carriage.
2.30.5 Thus, even where the bus transportation facility amounts to service, the said supply of service by the Applicant to its employees would be exempted from GST.
2.31 Applicant’s Interpretation with respect to the notice pay recoveries made from the employees for not serving the notice period, are provided in the below grounds which are without prejudice to each other.
2.31.1 Without prejudice to the above, the notice pay recovery by Applicant is excluded from the scope of supply in terms of Clause (a) of Section 7 (2) of the CGST Act.
2.31.2 The Applicant also submits that the notice pay recovery is specifically excluded from the coverage of ‘supply’ under GST as per Clause (a) of Section 7 (2) of the CGST Act
2.31.3 Entry (1) of Schedule-Ill covers services provided by employee to its employer in the course of employment or in relation to employment. Thus, any activity/transaction undertaken in course of employment or in connection with it has been specifically excluded from the ambit of supply.
2.31.4 As per the “Employment Agreement”, notice pay recovery is merely a recovery of the salary paid by the Applicant to its employees. Therefore, the same is an integral part of the salary benefits and deduction which is provided in the course of employment services. Hence, GST will not be payable on such recovery made by the Applicant.
2.31.5 In the case of GE T&D India Limited [2020 (1) TMI 1096], the Hon’ble Madras High Court held that the notice pay recovery will not attract service tax as it a part of the employees’ salary.
2.31.6 Further, the Hon’ble Tribunal in the case of HCL Learning Ltd. [2019 (12) TMI 558] has also held that notice pay recovery is not liable to service tax.
2.31.7 In the above case laws notice pay recovery has been held as a part of the salary only and not as any separate transaction and should be treated as a deduction in the course of employment services only. Since, services provided by the employee is not liable to GST, therefore, tax cannot be applied on notice pay recovery which is deducted in the course of employment services. Reliance is placed on the Tribunal’s decision in the case of Uniparts India Ltd V/s. Commissioner (Appeals), C.Ex.Meerut, [2020 (33) G.S.T.L. 233 (Tri – All.)
2.31.8 The applicant also relies on the decision of the Hon’ble Supreme Court in Sundaram Finance Limited v State of Kerala [AIR 1966 SC 1178], as well in the case of Ishikawajima-Harima Heavy Industries v CIT in 2007, 288 ITR 408, 440 (SC), wherein the Hon’ble Supreme Court laid the principle for interpreting the contract.
2.31.9 Further, Applicant submits that, by collecting notice pay for defaults of the employees under the Employment Agreement, it cannot be said to have provided the service of ‘agreeing to the obligation to tolerate an act’. The Madras High Court in the case of GE T&D (supra) has also held that the notice pay recovery cannot be equated with tolerating an act.
2.31.10 Similarly, reliance can also be placed on Order-in-Original No. 47/ADC/ST/GZB/2015-16 dated 30.03.2016, passed by the Ld. Additional Commissioner, Central Excise & Service Tax, Ghaziabad in the case of Glaxo Smithkline Consumer Healthcare Ltd.
2.31.11 Therefore, based on the above cited cases, the notice pay recovery collected by the Applicant are in the nature of penalty, and there is no obligation on the part of the Applicant to tolerate the act of non-compliance by the employees. Hence, the notice pay recovery does not amount to tolerate an act to qualify as supply of service and hence, GST cannot be levied.
2.32 The notice pay recovery made by Applicant does not come qualify as “consideration” and hence, does not come under the ambit of “supply” under Clause (a) of Section 7 (1) of the CGST Act.
2.32.1 As per Section 7 (1) (a) of CGST Act, any activity of supply of goods/services which is done without any consideration would not qualify as supply under Section 7 (1) (a). Only amounts received towards the supply of goods/ services can be treated as consideration. Notice pay recovery is not a consideration which is being received by the Applicant towards the activity carried out by the Applicant. Notice pay recovery should be treated as a penalty for mere non-compliance of the terms of the agreement only.
2.32.2 Also, in the service tax regime, it was settled position that any amount charged towards any default should not be treated at par with consideration under service tax regulations. The said analogy would equally be applicable in respect of the definition of consideration provided in the CGST Act.
2.32.3. In the present case, the notice pay is not recovered by the Applicant in lieu of or in return for any activity performed and therefore, cannot be treated as a consideration for performance of any activity. Since, there is no consideration involved in the notice pay recoveries, the said transaction will not amount to supply as per Section 7 (1) (a) of the CGST Act and hence, no GST would be payable by the Applicant on this transaction.
2.33 Notice pay collected by the Applicant from its employees are in the nature of compensation for damages for breach of contract.
2.33.1 The Applicant submits that upon breach of contract, the aggrieved party is entitled to claim compensation for the breach of contract. Such compensation is a legal and statutory right provided under Section 73 and 74 of the Indian Contract Act, 1872, and even without any specific clause in the contract for the damages or compensation payable upon the breach of contract, the party suffering such breach has the statutory right to claim damages or compensation from the party who has broken the contract.
2.33.2 Notice pay recovered by the Applicant can at best be treated as compensation towards the loss of the Applicant for the breach of the contract by the employee. In the present case, the penalty imposed by the employer on its employee is a part of the contract which is a legal document and is binding on both the parties. The nature of notice pay recovery is the compensation for the loss incurred by the employer due to breach of the terms of the agreement, which cannot be equated with consideration under the GST Regulations. Hence, there cannot be a supply to attract GST.
2.34 Without prejudice to the above, the notice pay recovery does not amount to “supply” under Section 7 (1) (c) read with Schedule I to the CGST Act.
2.34.1 The Applicant submits that the transaction of notice period recovery does not amount to ‘supply’ and hence, GST is not applicable.
2.34.2 In view of the provisions of Section 7 (1) (c) and Schedule I of the CGST Act, a supply between related person even without consideration would tantamount to supply and GST would be applicable. However, such supply should be in course or furtherance of business. It is submitted that the notice pay recovery does not amount to ‘business’ of the Applicant, as the Applicant is a pharmaceutical company involved in the business of developing, manufacturing and marketing a broad range of pharmaceutical products globally.
2.34.3 The definition of service under GST Laws is very wide. In order to qualify as service, the presence of activity is required and the meaning of ‘activity’ is mentioned in the CBEC Education Guide.
Therefore, in order to qualify as service, there has to be certain activity which is being carried out or any work which is being performed. In absence of such an act or deed, there cannot be any activity. Accordingly, in case of lack of activity involved in any transaction, as in the subject case, the said transaction does not amount to service. The said analogy would equally be applicable in respect of the definition of service provided in the CGST Act.
2.34.4 Hence, notice pay recovery cannot be treated as ‘supply’ even under Section 7 (1) (c) read with Schedule I to the CGST Act.
2.35 APPLICANT SUBMISSION DATED 25.11.2021:-
2.35.1 The Applicant is not availing any ITC on the input services of canteen and bus transportation. The Applicant has reversed the entire tax amount on monthly basis on canteen services at the month end to the expenditure account. With regard to bus transportation services, vendor, a proprietor, has not charged any GST which is paid reverse charge mechanism by applicant and no ITC has been availed on the same.
2.36.1 In light of the submissions and judicial precedents, it is submitted that no GST shall be payable on Notice Pay Recoveries made by the Applicant. Further, reliance is placed on the decision In the case of K.N. Foods Industries Pvt. Ltd. [2020 (1) TMI 6 – CESTAT ALLAHABAD] wherein the revenue authorities alleged that the receipt of ex-gratia payment is towards ‘obligation to tolerate an act’. The Hon’ble Allahabad CESTAT held that the amount received as compensation towards recovery of loss from unintended events cannot be treated as ‘obligation to tolerate an act’ and said amount cannot be said as payment towards any service.
2.36.2 Reliance is also placed in the decision in the case of South Eastern Coalfields Ltd. [2020 (12) TMI 912], wherein the Tribunal held that the recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se.
2.36.3 In this regard, the following cases can also be relied upon:-
