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 the input tax credit as residential accommodation is an exempted supply.
The 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.
Source : economictimes.indiatimes.com