A new ruling by the Appellate Authority of Advance Ruling (
AAAR) can open a Pandora's Box
when it comes to an employer, employee relationship and the nature of perquisites being provided.
The case came up when the National Aluminum Company Limited (
NACL), a manufacturer of aluminum metal, decided to appeal against the ruling pronounced by the Odisha Authority for Advance Ruling.
NACL has townships at Angul, Damonjodi and Bhubaneswar for its employees
and also runs hospitals at Damanjodi and Angul for its employees along
with guest houses for touring employees and guests. The bone of
contention was that NACL wanted to claim input credit in maintaining
hospitals, residential colonies and guest house and also the upkeep of
garden in the residential colonies, mine and office premises. When the
case went to the Odisha Authority for Advance Ruling (AAR), input credit
was disallowed for some activities.
According to the AAR, inward supplies received by way of management,
repair, renovation for furnishing the residential colony does not
qualify for
input tax credit as residential accommodation is an exempted supply.
Input tax credit is also not admissible in respect of services and goods
procured for maintenance of hospitals and pharmacy outlet as such
services, being nil rated also fall under exempt supplies. Similarly,
the service availed in relation to plant & garden in the residential
colony will also not qualify for input tax credit
NACL was, however, entitled to input tax credit of the tax paid on
inward supply of input and input service for maintenance of the guest
house, transit house & training hostel. Also, services availed in
relation to plantation and gardening within the plant area including
mining area and the premises of other business establishments will also
qualify for input tax credit.
Following the order by the AAR, the Commissioner (CX &GST,
Bhubaneswar) interestingly also preferred to appeal against the order,
challenging that the order is not legal and proper to the extent it has
allowed credit for maintenance of guest house, hostel and service
utilized for plantation and gardening within the plant area,
administrative building.
Justifications by NACL in its appeal:
- The AAR has wrongly held that the company's activities of
management, maintenance or repair of the townships are not for or in
relation to its core business while denying the credit of the tax paid
on the goods and services used for management, maintenance or repair of
the township of its employees, and horticulture in township. NACL said
it undertakes such activities for its business in the course or
furtherance of business and, therefore, it is entitled to take credit of
tax paid on such services.
- The infrastructure of township at Angul, Damanjodi and Bhubaneswar
are necessary to run large scale business of manufacturing, where
thousands of employees are working.
- In terms of GST
laws, not only the manufacturing activity but any incidental or
ancillary activities thereof are also covered within the expression
"business" in the GST laws. Maintenance of various facilities in
residential townships is integrally related to the business activities
of the appellant and not a welfare activity undertaken by the appellant.
Contentions by the Commissioner:
- Residential colonies are built for the welfare and benefit of the
employees and extending any sort of benefit to the employees cannot be
treated as something used or intended to be used in the course or
furtherance of business
- Similarly, the ruling of the AAR that utility of service provided
through plantation & gardening within the plant area including
mining area will be eligible for credit is also not legal and proper as
it does not do not pass the legal test, which is used or intended to be
used in course or furtherance of business.
Final ruling of the Appellate Authority of Advance Ruling (AAAR):
After considering the legal provisions and facts of the case, the AAAR held as follows:
- The ruling of the AAR that inward supplies received by NACL for
management, repair, renovation, alteration or maintenance service or
goods received for furnishing the residential colony will not qualify
for input tax credit is found to be correct.
- Expenditure incurred by NACL towards construction, reconstruction,
renovation, additions or alterations or repairs to the residential
colony including plantation and gardening is not eligible for input tax
benefit as it is nothing but a perquisite. "This ruling is likely to
open the debate on whether an expenditure incurred by employee qualifies
as a perquisite or a business expense incurred during the course or
furtherance of business. This is because credit for former is not
available while for later it may be available. It is time to re-look at
the employment contracts," says Harpreet Singh, Partner, KPMG India.
- However, the AAAR held that the ruling of the AAR entitling NACL to
input tax credit of the tax paid on inward supply of input and input
services for maintenance of guest house transit house and trainee hostel
is found to be not correct as the same is also a perquisite in favour
of the employees.
- The AAAR, however, allowed credit to NACL on services availed in
relation to plantation and gardening within the plant area including
mining area and the premises of other business establishments citing
that it is a business necessity for controlling pollution as well as
atmospheric temperature.
The same is also mandated in various laws under which the Applicant conducts its business such as the
Forest Conservation Act,
the Environment Protection Act, etc. Therefore, such activities are
integral to the business activity and hence can be treated as activities
in course or furtherance of its business.
"This is a positive order for the industry as, while allowing input
credit of services availed in relation to plantation and gardening
within factory premises, the authorities have not only considered
whether such expenditure was warranted by any statutory law, but also
taken cognizance of the expenditure being a business necessity for
controlling pollution, temperature and preventing soil erosion," added
said Singh.
There is a thin line between perquisite and business expenditure and the
ruling does not do anything to reduce confusion. For businesses, it
will be a setback that facilities like guesthouse that carry certain
expenditure, does not qualify for input credit. In considering
maintaining and running a guest house as a cost-to-company, the AAAR has
stated it in not in furtherance of the business nor is it integral part
of the business. The debate on employee benefit and business
expenditure is likely to continue.