CA. Shilpi Jain, Sneha Latha
With a lot of hue and cry about 20th Sep ’18 being the last date for claiming the input tax credit (ITC) for the FY 2017-18, there has been an attempt to reconcile the tax credits as per books and that as claimed in Form GSTR-3B. During this reconciliation it would be fruitful to also review those tax payments of which credit has not been availed and tag them into those actually ineligible (no further action in this regard), those which are doubtful due to which not availed (profession advice can be sought to decide the further course of action) and those which have been missed due to inadvertence (of which credit can now be availed). One such doubtful credit seems to be the credit relating to the expenses incurred at the residential colonies maintained by companies for their employees at residential quarters near remotely located factories. In this article we will be discussing on these expenses including a recent advance ruling in this regard.
Factories of certain industries that cause pollution are hazardous to the general public and these are generally located at remote locations i.e. far from the cities, towns, villages and other places where people are inhabited. This being the case, the workers or employees required for such industries, maintain a residential colony close to the factory to ensure that the workers or employees are available round the clock to run the factory. Thereby, any expense that is incurred or necessary for such residential colony, like security, maintenance for general upkeep of the colony, other articles required for making the colony inhabitable i.e. furniture, fridge, etc., is to be considered as a business expense for the reason that without such expense being incurred by the company, it would not be able to maintain its worker or employee strength and time, to run the factories.
These expenses are not new but are something that were incurred during the earlier tax regime also i.e. during the CENVAT regime also. The CENVAT Credit Rules, 2004 as existed prior to 2012 did allow credit of expenses which were ‘relating to business’. Similar is the criteria under the GST as well where, as per section 16(1) of the CGST and SGST Acts, credit is eligible if it is used in the course or furtherance of business. Thereby any business expense would be eligble for credit unless specifically restricted u/s 17(5) of those Acts.
In the light of the above background, there existed a dispute w.r.t. the eligibility of credit relating to the expenses incurred at the residential colonies maintained by manufacturing entities. In the case of M/s ULTRATECH CEMENT LTD (UNIT BIRLA WHITE) Vs COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX JAIPUR-II 2018-TIOL-1365-CESTAT-DEL, it was held that the credit w.r.t. the security expenses incurred for the residential colony is eligible as it has relationship with the business i.e. manufacture, as such activity requires availability of manpower which is ensured by the existence of the residential colony. Going by the ratio of this decision it can be said that even under GST such credit should be eligible as credit eligbility under GST is also similar to the CENVAT provisions as existed before 2012.
However, there was a recent advance ruling by the Odisha AAR in the case of M/s National Aluminium Company Ltd., which is summarized briefly below and discussed.
- M/s. National Aluminium Company Ltd. (hereinafter referred to as ‘Applicant’) is a Government of India enterprise and engaged in manufacture of calcined alumina, in its refinery located at Damanjodi in the State of Odisha.
- Produced alumina is transported to aluminium smelter at Angul (Odisha) for production of aluminium cold rolled sheets and coils.
- Applicant as a part of its business, is having townships at Damanjodi, Angul and residential colony at Bhubaneswar.
- Applicant runs hospitals at Damanjodi and Angul for its employees. It also has guest houses for touring employees and guests.
- The applicant is receiving various services of repair and maintenance in the townships, guest houses, hospitals and horticulture which are received as part of its business operations. The suppliers of such services are charging GST in their invoices.
Query raised in Order No.02/ODISHA-AAR/18-19 dated 28th September, 2018
Query posed: Whether the applicant is entitled to take input credit of tax paid on various goods and services used for maintenance of applicant’s townships, guest houses, hospitals and horticulture for paying output tax?
- The services provided by the applicant are exclusively in relation to the residential colony, some are in relation to the plant, guest house, transit house, for use in residential colony, in plant, urban plantation, etc. The applicant might be doing those activities while discharging some obligation but such activities are not for or in relation to the core business.
- Some other activities like contract for running a pharmacy outlet is simply for dispensing medicine and other allied product free of charge which is a clear case of supply without consideration mainly to the employees of the applicant.
- Undeniably the applicant is providing services to its employees by way of residential accommodation in the colony, temporary accommodation in the guest houses and is dispensing health services to its employees and others.
- In the press release issued on 10th of July, 2017 by CBIC, clarified that perquisites provided by applicant to employees in terms of employment contract are not chargeable to GST. In the said press release it was also clarified that gifts of value exceeding Rs. 50,000/- by the applicant to an employee will constitute a supply and chargeable to GST.
- Supply of services by an employer to the employees is a supply between related persons. On the other hand service by way of residential accommodation in the colonies or otherwise is a perquisite which has been clarified as not chargeable to GST implying thereby any perquisite including residential accommodation is an exempt supply.
- Thus the inward supplies received by the applicant by way of management, repair, renovation, alteration 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 (hereinafter referred as ‘Act’). The services which are partly in relation to residential colony and partly in relation to the plant, the ITC eligible is only to the extent relatable to plant of applicant.
- As per ESI Act, establishment of hospitals and maintenance is considered to be discharging the statutory obligation, but providing medical service to employees is supply of service and such service being nil rated will fall under the exempt supplies and not eligible for credit.
- In the provisions of law, as its stand today, there is no such provision providing for input tax credit in respect of goods and/or services procured by an employer for supply to the employees for discharging any statutory obligation.
- Establishing, maintaining and furnishing guest houses is purely treated as providing accommodation services to guests including employees on tour by applicant. The applicant is entitled for ITC of tax paid on such services. But for providing food and beverages in the guest house by the applicant, the applicant might not be charging for providing such services, the inputs used for preparing food and beverages shall not be eligible for input tax credit as per section 17(5) of the Act.
- The applicant is availing services for plantation inside and outside the plant area, some urban plantation in Koraput and annual plantation in unspecified area, which is not a business requirement, though a statutory obligation. Hence, providing plantation and maintenance outside the plant area (being for non-business purpose) and in residential colony (being perquisite) is not eligible for ITC as per section 17(1) of the Act. However such expenses incurred in plant area would be eligble.
Analysis: The following are the major reasons for denial of the ITC by the AAR. Let us examine its validity.
Analysis of Major reasons for denial of the ITC by the AAR
1. Perquisites and other free of charge facilities provided to employees are exempt supplies:
- It is firstly to be understood that nothing is given free of charge, at least not to the employees. For the reason that the said facilities i.e. the medicines, other supplies at the residential colonies, etc. are provided to the employees in return for his services to the company as an employee and such service by the employee is a neither a supply of good nor a supply of service, being a Schedule III item.
- Another aspect to be considered is that while ascertaining the eligibility of credit, the end use of the goods/services has to be seen [Commissioner of C.E.X., Chandigarh Versus Super Music International 2009 (245) E.L.T 782 (Tri. – Del.) and Needle Industries (India) Pvt Ltd Versus Commissioner Of Central Excise, Salem 2015 (317) E.L.T. 529 (Tri. – Chennai)], which in the instant case is for the manufacturing activities i.e. such goods or services are procured not for the purpose/intention of supply to employees but for the purposes of sustaining the business activities. Thereby cannot be considered being used for non-supply or non-business or exempt purposes.
- Further as per the proposed amendment to the Act (effective date yet to be notified), such Schedule III items would not be considered as an exempt supply for the purposes of reversal of credit.
2. Credit restricted as expenses incurred as part of statutory obligations are not eligible for credit
- It is no-where specified in the Act that expenses incurred as part of statutory obligations are restricted. Further, existence of statutory obligation to incur such expense means that it is a necessity for the existence of the business and thereby a business expense and eligible for credit.
- Further, the proposed amendment to the Act in section 17(5) therein is trying to carve out an exception to the blocked credit to allow certain blocked credits if they are statutory obligations. This does not mean that other statutorily obligated expenses would not be eligible for credit.
3. Plantation/gardening expenses incurred for other than plant premises not eligible for credit
- Presently in the Act the eligibility of credit is not dependent on the place of receipt of the goods or service (except in the case of pipelines being part of plant and machinery).
- Hence, ITC w.r.t. plantation etc. which is a business expense, being restricted on the basis of the location for which it is procured is not correct.
From the above it can be seen that most of the credits would be eligible. However, if the company does not wish to dispute then it can still avail the credit without utilizing it until a final decision has been given. Intimation to the department also be made in this regard. This would avoid interest and penalties.
In the light of the above discussion it can be seen that most of the expenses incurred would be for the business only and eligible for credit. Thereby, it is necessary to review all the credits of FY 2017-18 considered as ineligible till now and see if the same can be availed before 31.12.2018.