2025 (4) TMI 1050 - AAR - GST

Taxability - recoveries made by the Applicant from the employees for providing canteen facility to its employees - recoveries made by the Applicant from the employees for providing bus transport facilities to its employees - exemption under the SI. No. 15 of Notification No. 12/2017-Central Tax (Rate) - notice pay recoveries made by the Applicant from its employees for not serving the notice period - value on which GST is payable. Whether the recoveries made by the Applicant from the employees for providing canteen facility to its employees is taxable under the GST laws? - Whether the recoveries made by the Applicant from the employees for providing bus transport facilities to its employees is taxable under the provisions of CGST Act? - HELD THAT - As per Income Tax Act 1961 perquisite is defined to be the value of free benefit or facility given by the employer to his employees. The collection from the employees of whatever value is not covered under perquisite . It could be inferred from the above that any service rendered free of charge or any service rendered on a concessional basis shall qualify as a perquisite. But it is to be noted that only the value/ portion to the extent of concession offered by the employer is to be treated as a perquisite and not the remaining portion/value that has been charged by the employer. Applying the said analogy to the instant case in respect of the canteen and transportation services provided by the applicant to its employees it becomes clear that the exemption provided in Entry 1 of Schedule III to the CGST Act 2017 applies only to the concession part extended to the employees and not on the value charged to the employees. Thus the recoveries made from the employees for canteen and transportation services are liable to levy of tax. Whether the Applicant would be exempted under the SI. No. 15 of Notification No. 12/2017-Central Tax (Rate)? - HELD THAT - As per clause (b) of above SI. No. 15 of Notification No. 12/2017-Central Tax (Rate) dated 28.6.2017 the services of transportation of passengers with or without accompanied belongings by non-air-conditioned contract carriage other than radio taxi for transportation of passengers excluding tourism conducted tour charter or hire is exempt from GST. Further the hire or charter services are excluded from the said entry 15 (b) of Notification No. 12/2017 CT(R) dated 28.06.2017. In view of aforesaid discussion the transportation services provided by the Applicant to its employees are not covered by entry 15 (b) of the Notification No. 12/2017 CT(R) dated 28.06.2027. The services provided by M/s. Ferrero India Pvt. Ltd. squarely fall under transport of passengers under SAC 9964 and taxable at 5% without ITC or 12% with ITC (If ITC is not blocked by other provisions) under entry No. 8 (vi) of Not. No. 11/2017-CT (R) dated 28.06.2017 as amended from time to time. Without prejudice even if GST is payable in respect of aforesaid employee recoveries what would be the value on which GST is payable? - HELD THAT - The value of the outward supply of canteen and transportation service can be considered as having two parts. First part is the amount of recovery that is made from the employees and second part is balance value of the services provided by the employer as perquisite which is in the lieu of the services provided by employees to the employer. The entire balance value of the services for which no amount is charged is the perquisite provided by the employer to the employees. As this part is in lieu of services of the employees to the employer which fall under schedule 3 the perquisite part is not taxable as a corollary deeming it to be falling in the said entry of schedule 3. Hence though the employer and employee are related parties the value on which tax is a liable to be paid is only the recovered amount from the employee as the remaining part of the value is the perquisite provided by the employer which is not liable to tax. Whether the notice pay recoveries made by the Applicant from its employees for not serving the notice period is taxable under the GST laws? - HELD THAT - The provisions for forfeiture of salary or recovery of bond amount in the event of the employee leaving the employment before the minimum agreed period are incorporated in the employment contract to discourage non-serious candidates from taking up employment. The said amounts are recovered by the employer not as a consideration for tolerating the act of such premature quitting of employment but as penalties for dissuading the non-serious employees from taking up employment and to discourage and deter such a situation. Further the employee does not get anything in return from the employer against payment of such amounts. Therefore such amounts recovered by the employer are not taxable as consideration for the service of agreeing to tolerate an act or a situation. In view of this clarification notice pay recoveries made from the employees are not liable to levy of tax under CGST Act 2017. Conclusion - i) The recoveries made by the Applicant from the employees for providing canteen facility to its employees is taxable under the GST laws. ii) The recoveries made by the Applicant from the employees for providing bus transport facilities to its employees is taxable under the provisions of CGST Act. iii) The services provided by M/s. Ferrero India Pvt. Ltd. squarely fall under transport of passengers under SAC 9964 and taxable at 5% without ITC or 12% with ITC (If ITC is not blocked by other provisions) under entry No. 8 (vi) of Not. No. 11/2017-CT (R) dated 28.06.2017 as amended from time to time. iv) Value on which GST is payable is the actual amount of recoveries made from the employees. v) The notice pay recoveries made by the Applicant from its employees for not serving the notice period is not taxable under the GST laws.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) were:

(a) Whether recoveries made by the Applicant from employees for providing canteen facilities are taxable under the GST laws?

(b) Whether recoveries made by the Applicant from employees for providing bus transportation facilities are taxable under the CGST Act?

(c) Whether the Applicant would be exempted under Sl. No. 15 of Notification No. 12/2017-Central Tax (Rate) in respect of bus transportation services?

(d) If GST is payable on the aforesaid recoveries, what is the value on which GST is payable?

(e) Whether notice pay recoveries made by the Applicant from employees for not serving the notice period are taxable under GST laws?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Taxability of recoveries for canteen and bus transportation facilities

Relevant Legal Framework and Precedents:

The definition of "supply" under Section 7(1)(a) of the CGST Act requires supply of goods or services for a consideration in the course or furtherance of business. "Business" is defined under Section 2(17) broadly to include trade, commerce, manufacture, profession, vocation, and any activity incidental or ancillary thereto, whether or not for pecuniary benefit.

Schedule III of the CGST Act excludes certain activities from being treated as supply, including "services by an employee to the employer in the course of or in relation to his employment."

Several precedents were cited by the Applicant, including rulings from this Authority and various High Courts, which held that recoveries from employees for facilities like canteen, bus transportation, or health insurance do not constitute supply under GST, especially when such facilities are provided as part of employment terms and not as a commercial activity.

Court's Interpretation and Reasoning:

The Applicant contended that the canteen and bus transportation facilities are provided as per contractual employment terms, are subsidized, and are not the Applicant's business activities. The Applicant argued that these services are provided by third-party vendors, with GST charged to the Applicant, who then recovers only a part from employees, with no profit motive.

The Applicant further argued that these activities are excluded from the scope of supply under Section 7(2)(a) read with Schedule III, as they are perquisites provided in the course of employment, and thus not taxable.

The Applicant relied on the principle that the term "business" should be confined to commercial activities and that providing support services to employees does not amount to carrying on business in those services.

The Authority, however, held that the supply of canteen and transportation services to employees is incidental or ancillary to the Applicant's principal business of manufacturing chocolates and confectionary products. The activities support the main business by ensuring employee welfare and operational efficiency.

Therefore, these services fall within the definition of "business" under Section 2(17). The Authority observed that the Applicant is supplying these services to employees for consideration (albeit subsidized), satisfying the elements of "supply" under Section 7(1).

It was noted that there are two distinct transactions: (i) third-party service providers supply canteen and transport services to the Applicant, who pays GST on these; and (ii) the Applicant supplies these services to employees and recovers part of the cost. The latter transaction is a supply liable to GST.

Key Evidence and Findings:

The Applicant's long-term wage settlement agreement explicitly provides for recoveries from employees for canteen and bus transportation facilities. Salary slips showed deductions for these services. Third-party service providers raised GST invoices to the Applicant. The Applicant did not own transport vehicles or hold contract carriage permits.

Application of Law to Facts:

The Authority applied the broad definition of "business" and "supply" under the CGST Act and concluded that the recoveries from employees constitute supply of services by the Applicant to its employees for consideration in the course or furtherance of business.

However, the Applicant's contention that these services are perquisites provided under contractual employment terms was acknowledged, but the Authority distinguished that only the concessional or free portion (perquisite) is outside GST, while recoveries made from employees are taxable.

Treatment of Competing Arguments:

The Applicant's reliance on precedents and Schedule III was considered but the Authority noted that Schedule III excludes services by an employee to employer, not employer to employee. The CBIC Circular clarifying perquisites were considered, but the Authority held that recoveries from employees are consideration and taxable.

The Applicant's argument that the bus transportation is exempt under Notification No. 12/2017-Central Tax (Rate) Sl. No. 15(b) was examined. The Authority found that the Applicant is not the contract carriage permit holder and the buses are rented from a third party. The service provided by the Applicant to employees is not covered by the exemption, which applies to non-air-conditioned contract carriages directly providing passenger transport services.

Issue 3: Applicability of exemption under Notification No. 12/2017-Central Tax (Rate) Sl. No. 15

The Applicant contended that bus transportation services provided via non-air-conditioned contract carriages are exempt under Sl. No. 15(b) of the Notification.

The Authority observed that the Applicant is not the holder of contract carriage permits and merely rents buses from a third party service provider. The third party charges GST on its invoices to the Applicant.

Since the Applicant is not providing contract carriage services directly to employees, but rather supplying transportation services as an employer, the exemption does not apply. The services provided by the Applicant fall under taxable passenger transportation services under SAC 9964, liable to GST.

Issue 4: Valuation of recoveries for GST purposes

The Applicant submitted that if GST is payable, it should be on the amount recovered from employees, not on the full cost charged by third-party service providers.

The Authority agreed that the taxable value for GST purposes is the actual amount recovered from employees. The balance amount borne by the Applicant is considered a perquisite and not taxable.

Issue 5: Taxability of notice pay recoveries from employees

The Applicant argued that notice pay recoveries are compensation for breach of employment contract and do not constitute supply under GST. They are penalties or deterrents and no service is provided in return.

The Authority referred to CBIC Circular No. 178/10/2022-GST dated 3 August 2022, clarifying that notice pay recoveries are not taxable as they are not consideration for any service but penalties for premature quitting.

Accordingly, notice pay recoveries are excluded from GST.

3. SIGNIFICANT HOLDINGS

The Authority held:

"The activity of providing canteen services and transportation services to employees is in connection with or incidental or ancillary to the principal business of the Applicant and constitutes 'business' under Section 2(17) of the CGST Act."

"There are two distinct supplies: (i) third-party service providers supply services to the Applicant, who pays GST; (ii) the Applicant supplies these services to employees for consideration (recoveries), which is a taxable supply under Section 7(1) of the CGST Act."

"Schedule III entry 1 excludes services by an employee to employer, not employer to employee. Perquisites provided free or concessional to employees under contractual terms are not taxable, but recoveries made from employees constitute consideration and are taxable."

"The exemption under Notification No. 12/2017-Central Tax (Rate) Sl. No. 15(b) for non-air-conditioned contract carriage does not apply to the Applicant as it is not the contract carriage permit holder and is not directly providing contract carriage services to employees."

"The value on which GST is payable is the actual amount recovered from employees, not the entire cost incurred by the Applicant."

"Notice pay recoveries made by the Applicant from employees for not serving notice period are not taxable under GST as they are penalties and not consideration for any supply."

Final determinations on each issue:

1. Recoveries from employees for canteen facilities are taxable under GST.

2. Recoveries from employees for bus transportation facilities are taxable under GST.

3. The Applicant is not entitled to exemption under Sl. No. 15 of Notification No. 12/2017-Central Tax (Rate) for bus transportation services.

4. GST is payable on the amount actually recovered from employees.

5. Notice pay recoveries are not taxable under GST.