APRIL 11, 2018

By Abhishek Ranjan

THE definition of 'input service' contained in Rule 2(l) of the CCR, 2004 ('Credit Rules') underwent a major amendment vide Notification No. 3/2011-CE(NT) dt.01.03.2011. Prior to the said amendment, the definition of input service comprised of a means portion and an inclusive portion, however, the said amendment restricted the scope of the inclusive portion by deleting the phrase 'activities relating to business' and introducing the 'exclusion portion' in the definition of input service. Amongst other services, the exclusion portion specifically excluded:

"………. such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee."

Although the definition of input service was amended several times post 01.04.2011 but the above reproduced portion remained unaltered. Circular No. 334/3/2011-TRU dated 28.02.2011 explained the above changes in the following terms:

"……… On the same lines, a service meant primarily for the personal use or consumption of employees will not constitute an input service. A list of specific services has also been given by way of example in the definition. Most of these services constitute a part of the cost-to-company package of the employee and are provided either free of charge or on concessional basis to company employees ."

From the above explanation, it may appear that the Legislation intended to disallow the credit of those services which form the part of CTC (Cost to company) package offered to the employees by the companies. However, the circular did not explain the meaning of the phrase 'primarily for personal use or consumption of any employee' and left the same open for interpretation by the assesses, Departmental Officers and subsequently by the Court of Law.

Webster's Comprehensive Dictionary defines the term 'use' :

1. To employ for the accomplishment of a purpose;

2. To put into practice or employ habitually;

Webster's Comprehensive Dictionary defines the term 'personal':

1. Pertaining to or characteristic of a particular person;

2. Belonging or relating to or constituting a person or persons, as distinguished from things;

3. Performed by or done to the person directly concerned;

4. Affecting or relating to one individually;

Webster's Comprehensive Dictionary defines the term 'consumption':

1. To do away with completely;

2. To spend wastefully;

3. Use up;

The Supreme Court in the case of State of U.P . vs. Ramagya Sharma Vaidya , AIR 1966 SC 78 has held that the word "use" must take its colour from the context in which it is used in the statute. Further, the Supreme Court while interpreting Entry 52 List II of the Seventh Schedule of the Constitution, in the case of Acqueous Victuals Pvt. Ltd. vs. State of U.P. and Others (1998) 5 SCC 474 has held that the coupling of three words 'consumption', 'use' and 'sale' connotes that the underlying common idea was that either the title of the owner is transferred to another, or the thing or commodity ceases to exist in its original form. In light of the said decisions of the Supreme Court, on a combined reading of the above-mentioned dictionary meaning of the words 'use', 'personal' and 'consumption' it appears that the phrase 'personal use or consumption of employees' would cover such services which are enjoyed by the employees of the company or benefit the employees directly or exhausted by the employees solely.

The illustrative list of services contained in the exclusion clause of the definition of input service also supports the above interpretation. However, the Tribunal in few of the cases has given a totally new dimension to the interpretation of the phrase 'personal use or consumption'. In the following cases, the Tribunal has held that only those services for which the cost is borne by the employees gets covered under the phrase 'primarily for personal use or consumption of the employees':

- Hindustan Coca-Cola Beverages Pvt. Ltd. vs. CCE, 2014-TIOL-2460-CESTAT-MUM

In this case, the Tribunal allowed the credit of the outdoor catering service availed by the company on the ground that the cost for the said service did not form part of the salary of the employee and is borne by the company.

- Nhava Sheva Intl. Container Terminal (P) Ltd. vs. CCE, 2017-TIOL-1263-CESTAT-MUM

In this case, the Tribunal followed the decision of Hindustan Coca-Cola Beverages P. Ltd. (supra) and held that the credit of outdoor catering service availed by the company post 01.04.2011, to the extent of the cost borne by the company shall be available. However, the credit to the extent of cost borne by the employees shall not be available.

- String Information Services Ltd . vs. CCE , 2018-TIOL-544-CESTAT-MAD

In this case the Tribunal has made an interesting observation at para 2, "…… Outdoor Catering Services was excluded if the same is used primarily for personal use or consumption of any employee. This evidently means that such services should be available to the employees of the company for their personal use, when they purchase eatables from their own pocket. If such 'Outdoor Catering Services' are not meant for personal use or consumption of the employees and is required to be provided as a statutory obligation; the same would be falling under the definition of 'Input Services'."

Although, the above discussed decisions are of the Single Member Bench (SMB) of the Tribunal but the existence of such legal reasoning with respect to the interpretation of the phrase 'primarily for personal use and consumption of the employees' points that the said reasoning is acceptable at the Tribunal level. Thus, in light of the above discussed decisions of the Tribunal, it appears that with respect to any particular service consumed by the employees, if any company is able to prove that the cost of the same is not borne by the employees but the company itself, the said service will not fall under the exclusion clause of the definition of 'input service' existing under the pre-GST regime. This, certainly is the dawn of a new jurisprudence and would be interesting to see how far this legal reasoning develops i.e. whether the said reasoning is approved by the higher legal forums or not. At this point of time, even the adjudicating authorities may be reluctant in following the legal reasoning adopted in the above discussed Tribunal decisions.

Post-GST regime: Impact

Section 17(5) of the CGST Act, 2017 contains the exclusion list of the services on which credit is not available under the GST regime. Clause (g) of Section 17(5) provides that credit shall not be available for 'goods or services or both used for personal consumption'. It is interesting to note that the words used in the exclusion clause of the definition of 'input service' contained in the Credit Rules were different from the wordings used in clause (g) of Section 17(5) of the CGST Act, 2017 and the effect of the same would be felt only when the litigation commences due to denial of credit under the GST regime. Further, only time would tell us whether the said difference in wordings would affect the operation and application of the legal reasoning adopted by the Tribunal in the above discussed cases. In view of the author, if the legal reasoning adopted by the Tribunal in the above discussed cases is approved by the higher legal forums, then the said reasoning would also apply under the GST regime.

(The views expressed are strictly personal.)