#GSTCase-103- Input tax credit not available on health facilities provided under statutory obligation to employees in hospital maintained by employer
Chennai Port Trust  108 taxmann.com 466 (AAR – TAMILNADU)
Whether applicant is eligible to take input tax credit on the inward supply of medical, diagnostic equipment, apparatus, instruments, consumables, disposables, spares and repairing services for being used to provide health facilities to its employees in its hospital.
Applicant is engaged in supply of port services and incidental supply of goods like disposal of discarded assets. Applicant is notified as a major port by Central Government under Section 3(8) of Indian Ports Act 1908 w.s. 2(m) of Major Port Trusts Act, 1963.
They have an in-house hospital for their employees, dependents, pensioners and family pensioners for in-patient and out-patient treatments. This provision of free medical care is mandatory as per the Regulations made under Major Ports Act. The hospital is a cost center and the inward supply of medicine is provided to the employees and pensioners without charging any separate consideration. The retired employees and dependents are eligible only on payment of a nominal lump sum after retirement and the expenditure for providing the medical benefit is met from Chennai Port Trust Employees Welfare Fund.
- Observation by AAR
Hospital run for employees, retirees and their dependents is a free center where all services and medicines are provided free to the employees. No consideration is charged from the employees for this. This provision of free medical care is mandatory as per the Regulations made under Major Ports Act. These are mandated to be provided to the applicant’s employees, their dependents, pensioners and family pensioners for their own in-patient and out-patient treatments.
These goods and services are used for providing personal medical care to the individuals who are the employees and pensioners of the applicant. They are in effect used for personal consumption of the employees, pensioners and dependents. Therefore, as per Section 17(5) (g) of CGST/TNGST ACT, input tax credit is not available for medical, diagnostic equipment, apparatus, instruments, consumables, disposables, spares and repairing services for these which the applicant is procuring for the consumption of its employees and pensioners and their dependents.
The applicant is not entitled to take credit of input tax charged on the inward supply of medical, diagnostic equipment, apparatus, instruments, consumables, disposables, spares and repairing services for these, which are used to provide medical facilities to the employees, pensioners and dependents in the in-house hospital.
A very narrow view has been taken by AAR for the words “Supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business”. The services which have been mandated under the law to be provided to the employees has been treated to be for the personal consumption of the employees. The term “in the course or furtherance of business” is a much wider term and cannot be restricted to the meaning of the term “used for making outward supply”. Further, Commissioner Of Income-Tax, … vs Navsari Cotton & Silk Mills Ltd. on 23 March, 1981 Equivalent citations: 1982 135 ITR 546 Guj.
The term used in Section 37 of Income Tax Act “laid out or expended wholly and exclusively for the purpose of the business or profession” is similar to “in the course or furtherance of business”. The term has been extensively dealt in the Income Tax Act. Hon’ble Gujarat High Court in the matter of Commissioner Of Income-Tax, … vs Navsari Cotton & Silk Mills Ltd. on 23 March, 1981 Equivalent citations: 1982 135 ITR 546 Guj laid down following test to arrive at commercial expediency of any expenditure under section 37 of Income Tax Act. The test are as follows:
The tests can be divided into two categories, namely, (1) positive tests, (2) negative tests. One (at least one) of the positive tests must nod its head and none (not even one) must do so in order to affirmatively hold that the expenditure is a business expenditure – inter alia, incurred on account of commercial expediency.
- Positive tests
If the expenditure incurred :-
- with a view to bring profits or monetary advantage either today or tomorrow.
- to render the assessee immune from impending or reasonably apprehended litigation.
- in order to save losses in foreseeable future.
- for effecting economy in working which may pay dividends to-day or to-morrow.
- for increasing efficiency in working
- for removing inefficiency in the working.
- where the expenditure incurred in such as a, (i) wise, (ii) prudent, (iii) pragmatic, (iv) ethical, man of the world of business would conscientiously incur with an eye on promoting his business prospects subject to the expenditure being genuine and within reasonable limits.
- where it is incurred solely by way of a civil duty owed by the assessee to the society having regard to the nature of his business which brings him profits but results in some detriment to the public at large either by way of health hazard or ecological pollution or serious inconvenience to the citizens with a view to mitigate the aforesaid evil consequences and consequences of a like nature, subject to its being genuine and within reasonable limit.
- Negative tests
If it is incurred :-
- for a mere altruistic consideration.
- mainly in order to satisfy his philanthropic urges.
Explanation – Factors (1) and (2) are laudable but the altruistic or philanthropic urges can be satisfied at one’s own cost or sacrifice. Not at the cost of public exchequer or other taxpayers and those living below the poverty line.
- mainly in order to win applause or earn garlands or public appreciation.
- for illegal, immoral or corrupt purposes or by any such means or for any such reasons.
- mainly in order to oblige a relative or an official.
- mainly in order to earn the goodwill of a political party or a politician.
- mainly in order to show off or impress others with his affluence or for ostentatious purposes.
- Apparently for a factor listed as a positive factor in the left side column but in reality for one of the obnoxious purposes listed hereinabove.
- On a nebulous plea or pretext by way of an alibi in the name of winning profits in remote future or promoting business prospects by really for one or the other of the above mentioned purposes.
- it must not be a bogus, fictitious or sham transaction.
- it must not be unreasonable and out of proportion.
- it must not be an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith.
- the advantage to be secured by incurring the expenditure must not be of the nature of a remote possible advantage depending on “ifs” and “buts”, and if at all, to be secured at an uncertain future date which may be considered too remote.
- As we pointed out earlier :
(1) one of the positive tests must be attracted whereas, (2) none of the negative tests should be attracted.
Like CSR Activity, judgement by AAR is one amongst long list of judgements which are indicating towards a long battle between the revenue and the assessee i.e. Whether any act carried out under Statutory Obligation is an act in the course or furtherance of business or not”.