Legal Examination of the Section.

Section 17(5)( b) of CGST Act, 2017 reads as under:

(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 ,life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

Whether Proviso to section 17(5)(b)(iii) applicable on Food & Beverage?

 Extracts from Advance Ruling No. GUJ/GAAR/R/39/2021 in case of TATA motors:

1) We note that sub clause of Section 17(5)(b)(i) ends with colon : and is followed by a proviso and this proviso ends with a semicolon.

2) Colons and semicolons are two types of punctuation. Colons are used in sentences to show that something is following, like a quotation, example, or list. Semicolons are used to join two independent clauses/sub-clauses, or two complete thoughts that could stand alone as complete sentences. That means they’re to be used when you’re dealing with two complete thoughts that could stand alone as a sentence.

3) We find that semicolon creates a wall for conveying mutual exclusivity between the sub-clauses, in present matter. It is obvious that the legislature intended the said sub-clauses to be distinct and separate alternatives, with distinctively different qualifying factors and conditionalities.

4) Thus, we hold that Section 17(5)(b)(i) sub-clause ending with a colon and followed by a proviso which ends with a semi colon is to be read as independent sub-clause, independent of sub clause Section 17(5)(b)(iii) and its proviso [of subclause iii].

Thereby, the proviso to section 17(5)(b)(iii) is not connected to the sub-clause of Section 17(5)(b)(i) and cannot be read into it.

 Therefore it is clear from the above ruling ,that ITC is not admissible on the supply of Good or services mentioned in Sec 17(5)(b)(i) on the basis of the proviso to Sec 17(5)(b)(iii).Due to separation of the clauses and proviso through a “semicolon”.  

 From the ruling it is understood that proviso regarding “obligation” is not applicable on sec 17(5)(b)(i) related to “food and beverage” and is only applicable on sec 17(5)(b)(iii) related to “travel benefits extended to employees on vacation”.

 But since it is not obligatory under any law in India for an employer to provide travel benefits to its employees on vacation as leave or home travel concession, therefore it makes the proviso redundant if only applicable to sec 17(5)(b)(iii) which should not be done while interpreting a law.

Reliance is placed on following Judicial pronouncements by Patna High Court:

Eastern Coalfields Ltd. vs State Of Bihar And Ors. on 10 September, 1999

Following the aforesaid principle, this Court has to interpret the provisions of the different sub-regulations of Regulation 19 harmoniously. On such harmonious construction, this Court hold that the registration of reference can be said to be declined only when the order of the Registrar declining reference, if appealed against, is affirmed by the appellate authority and not before that. If this Court holds to the contrary that a reference which is declined to be registered by the Registrar is the last word on the subject in that case the provisions of Regulation 19(8)(1) and 19(8)(2) become otiose and redundant. But, the appeal provision as pointed out above must be treated to be a continuation of original proceeding to register a reference. So on the principle of harmonious construction of the various clauses of Regulation 19, this Court holds that the pending appeal under Regulation 19(8) (1) or 19 (8) (2) a reference, even, if it is declined to be registered by the Registrar, shall be deemed to be a pending reference. Any other construction would render the provisions of Regulation 19 (8)(1) and 19 (8)(2) of the Regulation redundant. It is one of the cardinal principles of statutory construction that no provision of a statutory instrument should be so interpreted so as to render it a surplusage or a redundant.

Extract from 28th GST council meeting press release:

Scope of input tax credit is being widened, and it would now be made available in respect of the following:

1. Most of the activities or transactions specified in Schedule III;

2. Motor vehicles for transportation of persons having seating capacity of more than thirteen (including driver), vessels and aircraft;

3. Motor vehicles for transportation of money for or by a banking company or financial institution;

4. Services of general insurance, repair and maintenance in respect of motor vehicles, vessels and aircraft on which credit is available; and

5. Goods or services which are obligatory for an employer to provide to its employees, under any law for the time being in force.

In 28th Council Meeting, it was specifically discussed that the proviso is also applicable to Food and Beverages supplied by an employer in compliance with the obligation of a law.

Conclusion:

Intention of the law makers in drafting the law:

“The intentions of the law makers can also be understood by making difference between the current drafting of law as well as its previous drafting before the amendment in the given section ,which clearly depicts that lawmakers want the obligatory proviso to the section to be applicable to the whole of sec 17(5)(b) and not only to sec 17(5)(b)(iii) and it can be seen that outward supplies cannot be made in relation to membership of a club, health and fitness centre and travel benefits extended to employees on vacation such as leave or home travel concession so the proviso in relation to further outward supply is specifically made consistent to sec 17(5)(b)(i) and not to Sec 17(5)(b)(ii) and Sec 17(5)(b)(iii) .

And by inserting clause relating to obligatory under any law is made applicable to all of sec 17(5)(b).

Difference between current and previous law Drafting: 

Previous Law regarding 17(5)(b) Current law regarding 17(5)(b)
(b) the following supply of goods or services or both—

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an 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 an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre;

(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; and

(iv) travel benefits extended to employees on vacation such as leave or home travel concession;

(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 ,life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

“By taking into account the rationale and reasoning of the law makers in drafting the law it can be concluded that the proviso relating to obligation under any law is also applicable to Food and Beverage”

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