MAY 27, 2020

By S Narayanan, Advocate

A Facts in brief on law :

i. SECTION 7(1)(c) of CGST Act, 2017 covers as Supply - "the activities specified in Schedule I, made or agreed to be made without a consideration".

ii. Clause (2) of SCHEDULE I issued as per Section 7 refers as - "Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made" in the course or furtherance of business" - "Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both"

iii. As per Explanation (iii) to Section 15 (which deals with Value of taxable supply) it states as - For the purposes of this Act, "persons shall be deemed to be "related persons", if such persons are employer and employee".

iv. Section 9(1) of CGST Act, 2017 refers "………there shall be levied a tax called the Central goods and services tax on all intra-State supplies of goods or services or both".

v. While Section 7 (2) of CGST Act, 2017 emphatically mentions as - "Notwithstanding anything contained in sub-section (1), so as to necessarily cover within its ambit -" (a) activities or transactions specified in Schedule III "as" supply", but such notwithstanding clause is conspicuously absent, "for the activities" specified in Schedule I, made or agreed to be made without a consideration, u/s 7 (1)(c), which only means that Schedule I is subject to the provisions of Section 7 and cannot travel beyond the Scope and ambit of said Section 7.

vi. As per Clause (1) of SCHEDULE III issued u/s 7 (2) of CGST Act, 2017, activities or transactions in the nature Services by an employee to the employer in the course of or in relation to his employment, shall be treated neither as a supply of goods nor a supply of services.

vii. To sum up, from the above vital provisions of law referred, for any "activities or transactions" between "employer to employee" to be regarded as "Supply" and to come under the scope and ambit of levy u/s 7 of CGST act, 2017, it has to be necessarily carried out "in the course or furtherance of business" as specified in main part of Section 7 (1)(a) r/w Clause (2) of SCHEDULE I (issued as per Section 7).

B Issue under reference :

i. Some of the employers, for the sake of convenience of employees arrange insurance/ canteen / transport facilities/ housing loan facilities from the bankers etc ., by sourcing the same from 3rd party Suppliers, who are the actual persons, rendering the said "Supplies to the employees" and employers are mere conduit, for making such an arrangement.

ii. The employer by arranging the above few named "transactions or activities" from 3 rd party for the benefit of employees, while in or during their service of employment with the Company, it avoids the hassle of 3 rd party entering in to agreement / contract with individual employees and also it eases collection of money for such 3 rd parties.

iii. In case of certain Companies, a part of the consideration so paid to the 3 rd party Supplier is recovered from the employees or in some of the Companies nothing is recovered from employees, for arranging the said facilities from 3 rd party and it all depends on terms of employment contract. In either case, as far as the Companies are concerned, what is paid to the 3 rd party Suppliers, becomes a cost to the Company either in full or part. Further, even if some Companies pay tax under GST, on such recovery of amount from its employees, the Companies do not recover any such tax paid, from its employees and the same is absorbed as "cost to the Company".

iv. In the given situation, it can never be construed as per GST law that "employer" is rendering the said Supplies for the employees "in the course or furtherance of business" [as specified in main part of Section 7 (1)(a) r/w Clause (2) of SCHEDULE I"}, so as to constitute "Supply u/s 7 to attract any levy of GST.

v. Further, when employer does not engage in any activity of Supply u/s 7, the question of payment of tax on that part of cost recovered /not recovered from employee do not arise at all. When such facility being arranged by the employer for the employee from 3 rd party is not even a "Supply", the question of determining fair market value, for the purpose of paying tax treating it as related party transaction, in terms of Valuation rules also do not arise .

vi. It is also relevant to note that even "Company's memorandum and Articles" do not permit Company to carry on such business of insurance, canteen, transport etc. The said Supplies are indeed wholly made by 3 rd party Suppliers, who do take GST registration and discharge the applicable taxes, which is also collected from the Companies.

vii. The Advance Ruling authorities in the case of JOTUN INDIA PVT LTD bearing No. GST-ARA-19/2019-20/B-108 (MAHARASHTRA) reported in 2019-TIOL-312-AAR-GST and in the case of M/s POSCO India Pune Processing Centre Private Limited (POSCO IPPC) (MAHARASHTRA )vide Order NO.GST-ARA-36/2018-19/B-110 Mumbai dated 07-09-2018 reported in - 2019-TIOL-25-AAR-GST have held a view in the case of insurance that "applicant ( i.e. the Company) is not rendering any services of health insurance to their employees' parent and hence there is no supply of services in the instant case of transaction between employer and employee". The said findings, in principle, applies to other facilities provided by Companies, which has been referred in earlier paras.

viii. For the sake of better understanding of the issue under reference, as to what indeed constitutes "in the course or furtherance of business", we would like draw a few example, which at best can come under the scope of levy, when Employer provides to his employees and to name a few in our humble opinion are -

a) If the Company is engaged in producing and supplying "laptops" and then offer to their employees such laptops free of cost ( without / or part consideration ), then as per Schedule I this will constitute supply, since they are in the business of supply of laptops.

b) Likewise, for example Airways offer free air ticket to employees then this will constitute supplies though on free of cost basis.

c) Another example could by Hospital providing medical facilities also offer free of cost medical check-up etc. then this will constitute supply of services though without consideration in GST law.

Suggestions:

i. To avoid any confusion and different interpretations on the issue under reference, which may result in spate of unwarranted litigation and costs and uncertainties, it is earnestly requested that CBIC may provide a clarification or to make it explicitly clear in law that - only when the Employer provides any Supply to employee which is in the similar line of business as is being regularly carried out by them, then only it needs to be considered that such supplies to employees carried out "in the course or furtherance of business" and not otherwise .

ii. Alternatively, after proviso to Clause (2) of SCHEDULE - I, another proviso can be added as under -

Any activity or transaction between "employer to employee" would constitute supply u/s 7 only when employer is engaged in the similar line of business of the facility so arranged to employee .

iii. If CBIC has any other view due to which such facility arranged from 3 rd party is held as "taxable outward Supply by employer to employee" and employee recovery is leviable to tax u/s 7 of CGST act, 2017 and that applicable GST has to be paid on value as determined u/s 15 r/w Valuation Rules in CGST Rules, 2017, then entire ITC credit of the tax charged by 3 rd party, needs to be allowed to the Company .

The above is also due to the reason that if such an activity is regarded as "outward taxable supplies" at the hands of Company, on the premise that it is carried out "in the course or furtherance of business", then for the purpose of allowing ITC credit as well, u/s 16 of CGST Act, 2017, since the coined phrase in law which has been used, therein, is also same i.e. "in the course or furtherance of business", then these are two sides of the same coin and department cannot given two different treatment, when words employed are one and the same. More so, due to the reason that proviso to Section 17(5)(b) which carves out an exception to allow ITC credit, also states as -

"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 "

[The views expressed are strictly personal.]