NOVEMBER 06, 2020

By Dr G Gokul Kishore

SOMETIMES silence can be deafening. Nothing can amply demonstrate such fact than the inferno of issues consuming time and money of taxpayers being "attended" by stoic silence by tax administration. While CBIC is credited with pro-active clarifications on ground-level issues many a time, the pace of proliferation of disputes dents such reputation. A few issues are discussed briefly in this 89th part in anticipation of breaking the silence and issuance of appropriate clarification by CBIC.

Contravention through compliance

The issue is not new. Reams of paper or mega-bytes have been spent. To comply with Factories Act when number of workers exceed the prescribed threshold, companies maintain canteen providing either food on subsidized basis or as part of perquisites without any separate deduction from salary by terming it is 'free'. Except for an isolated press release issued way back in 2017 attempting to clarify treatment of gifts to employees and taxation of perquisites, there has been no official, comprehensive and taxpayer-friendly clarification from CBIC on both liability and valuation in respect of food provided in factory canteen to employees. Several scenarios need to be addressed - whether deduction of nominal amount from salary will trigger liability and whether tax is required to be paid when it is part of perquisites as per employment contract / agreement.

Recovery of amount becomes the forbidden fruit - the moment an amount, however nominal it may be, is recovered from the employee, then employer becomes a service provider. Even a company manufacturing semi-conductors and ICs can become a catering service provider thanks to GST law. Industry is generally given the advice to avoid deducting or recovering any amount for canteen facility and to include such perquisite as part of terms of employment contract.

Even when the above advice is piously followed, the department, it seems, is of the view that such transaction is liable to GST. Because employer and employee are related persons, vice of Schedule-I of CGST Act treating transactions without consideration as supply gets attracted. What is the sanctity of employment contract then? Silence is the most potent weapon to tackle such interrogatives. The ruling by Authority for Advance Rulings (AAR), Tamil Nadu may not be detailed as to reasoning but sufficient to disclose the department's stand on such issue [MFAR Hotels and Resorts Pvt. Ltd. - 2020-TIOL-275-AAR-GST]. The applicant had produced the employment contract and the terms were shown to include provision of such free food and the fact that no separate consideration is charged from employees was also demonstrated. The AAR did not accept the contention on non-liability. To fortify its stand, the AAR ruled that Rule 28 of CGST Rules will apply for valuation in such cases. Open market value of food to be served to employees in the canteen could not have been part of plans when promoters contemplated setting up the factory. The ultimate solution may lie in amendment to law as the literal interpretation of provisions may lead to conclusion as adopted by AAR. However, to at least partly address this issue, CBIC should come out with a full-fledged clarification.

Storm clouds gathering over valuation skyline

When tax is payable on ad valorem basis, valuation becomes the main theatre of interpretational combat. Two advance rulings have been delivered holding that cost of fuel reimbursed on actuals by the service recipient would be includible in the taxable value as per Section 15 of CGST Act [Pulluri Mining & Logistics - 2020-TIOL-186-AAR-GST and Global Vectra Helicorp Ltd. - 2020-TIOL-241-AAR-GST]. The general practice in hiring / renting contracts is to provide the vehicle / equipment with consumables like fuel being the responsibility of service recipient but to the extent service provider himself incurs expenses on this account, the same is to be reimbursed by the recipient and for this purpose, a separate debit note is raised. Such reimbursement is not a consideration for supply of renting service as the latter is independently reflected in the invoice.

Payment made by recipient of supply is also covered under the definition of consideration and this is taken as the basis by AAR to pronounce such rulings. While law is required to be applied to facts, such application cannot ignore the contractual terms and obligations of parties. Law does not operate in vacuum. This issue has the potential of becoming a major dispute area draining the resources of taxpayers if the CBIC does not stem the same at this juncture. A nuanced and detailed circular is required. The circular should also discuss how taxpayers can satisfy the conditions relating to pure agent in such situations so that the department may not view such transactions adversely.

Business suffers from divergent meaning of business

Foreign companies do business by selling products or offering services in different geographies. To act as communication channel between such customers in a different country (India) and the foreign company located abroad, a liaison office is established as per relevant FEMA regulations and as permitted by Reserve Bank of India. The very name indicates that the role of such office is liaison only and it is expressly restricted from undertaking business activity or any income generating activity. Advance rulings have so far held that such LOs are not liable to get registered and therefore, not liable to pay any GST.

In a recent ruling, AAR, Karnataka has opted to tread a divergent path [Fraunhofer-Gessellschaft Zur Forderung der angewwandten Forschung - 2020-TIOL-267-AAR-GST]. According to it, definition of business in CGST Act includes activities ancillary to business and RBI might have placed restrictions on LO in undertaking business but the same cannot decide the scope of business under GST and, therefore, LO would be liable to GST for its activities. Because LO meets its expenses out of inward remittances received from the foreign entity, there is no consideration involved insofar as LO's activities are concerned. However, AAR has relied on Section 15 of CGST Act to hold that persons who are associated with the business of one another are deemed to be related and, therefore, LO being engaged in promotion of business of head office, they are related persons in which case, LO's activities would come under supply though consideration is absent.

While the AAR denied export of service benefit after taking the view that LO would be an 'intermediary', they can be considered as an aberration and need not be discussed. But, the core issue of status of LO, prohibition on undertaking business as per the regulatory authority and applicable law, LO being merely an extension of foreign entity, etc., have got tangled.

CBIC should step in to clarify non-liability of LOs. Aatma Nirbhar Bharat is also dependent on cross-border trade and an authoritative circular may provide reassurance to foreign entities having presence in India.

[The author is an Advocate practising independently. Views expressed are personal]

See - Part 88