Transportation services provided to employees/workers – ITC Eligible or ineligible?

CA Mahesh Jhawar

Haryana Authority of advance Ruling (Advance Ruling No. HAR/HAAR/R/2018-19/04), in the case of YKK India Private Limited has pronounced that the ITC of tax paid on transportation services availed by the Company for the purpose of transportation of passenger shall not eligible as the same is a blocked credit u/s 17(5). Let us analyse the AAR in detail.

Background and statement of facts:

• M/s YKK India Private Limited (‘The Company’) is engaged in the business of supply of slide fasteners, chains, sliders etc; (‘Final Product’)
• The Company has its 2 units in Rewari-District, Haryana at plot No.s 699 and 122 where the employees of the Company are engaged in Manufacturing of final products.
• The said Factories are located in remote location where public transport is very minimal and hinders transportation of employees to and from factory.
• Accordingly, in order to carry out its business of supply of goods, the Company entered into contract with ‘Deep travel’ for hiring of buses and cars for transportation of employees from factory to a fixed drop point at a monthly fee of Rs. 1,48,000 and applicable tax.
• For provision of services, contractor raised invoices on the Company for above agreed amount plus GST. The contractor classified the said services under HSN 996413 – ‘Non-scheduled local bus and coach charter services’, which attracts GST at the rate of 18%.

Contention of the Company:

• The Company places reference on Section 2(62) – Definition of Input tax and 2(63) – Definition of Input Tax Credit.
• The Company contented that the tax paid to transporter towards inward supply of transportation services of employees satisfies the definition of input tax u/s 2(62). Since the said services are being availed in the course and furtherance of business, the Company is eligible to take the credit u/s 16 of CGST act, 2017.
• It was further explained that, as the company do not take control of the vehicles themselves and that the vehicles remain with the contractor all the time, the services obtained by the applicant do not fall under the head “Rent-a-cab” services, but under HSN 996413 – “Non-Scheduled local bus and coach charter service”. They are therefore, eligible to avail ITC of GST paid on such services.

Contention of the AAR

• AAR drawn attention to the provisions of Section 17(5) – blocked credits. The same has been reproduced below.

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

(a)……………………………………………….

(b) the following supply of goods or services or both-

(i)………………………………………………….

(ii)…………………………………………………

(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.

• The point which merits examination here is whether the impugned services are covered by the definition of “rent-a-cab”
• The phrase “Rent-a-cab” has not been defined under GST law. In such situations where statutory meaning of any term/phrase has not been defined must be construed in terms of their commercial or trade understanding, or according to their popular meaning.
• Definitions of Wikipedia, Oxford dictionary, Merriam-webster dictionary, Cambridge dictionary were referred to and it was understood that, in common parlance, Cab refers to a vehicle which has been taken on hire/rent along with driver, for going from one place to another.
• Further, Chapter V of the Finance Act, 1994, i.e the service Tax statute was referred to. The definition relating to “Rent-a-cab” as occurring in Finance act, 1994, shall also have bearing on what is meant by “Rent-a-Cab” in common parlance when it comes to understanding the same for the purpose of taxing statutes.
  • As per Section 65(105)(o), A “taxable Service” means any service provided or to be provided “to any person, by a “rent-a-cab scheme operator” in relation to the renting of a Cab”
  • As per Section 65(91), “Rent-a-cab operator” means any person engaged in the business of renting of cabs
  • As per Section 65(20), “Cab” means
    • A Motor cab, or
    • A maxicab or
    • Any motor vehicle constructed or adapted to carry more than twelve passengers, excluding driver, for hire or reward
• In light of the above provisions and understanding, AAR contended that where any commercial vehicle is hired for transportation of passengers, it would be squarely be covered by phrase “rent-a-Cab”
• Hence, in view of the above, AAR held that the services of contractor for hiring of buses/cars for transportation of employees qualify as “Rent-a-cab” service. Accordingly, the applicant is not eligible for input tax credit of GST charged by the contractor for hiring of buses/cars for transportation of employees.

Advance Ruling

• The applicant is not eligible to take input tax credit and restriction of ‘Rent-a-cab’ service specified in Section 17(5)(b)(iii) shall apply on following services:
  • GST charged by the contractor for hiring of buses for transportation of employees.
  • GST charged by the contractor for hiring of cars for transportation of employees.

(Author is a Chartered Accountant in Practice and can be reached at Camaheshjhawar@outlook.com)