GST Caselaw

#GSTCase-106-Recovery of Health insurance Premium by Employer from employee is not covered under the scope of Supply-A Double Edged Sword

#GSTCase-106-Recovery of Health insurance Premium by Employer from employee is not covered under the scope of Supply-A Double Edged Sword

 

Jotun India (P.) Ltd., [2019] 110 taxmann.com 184 (AAR – MAHARASHTRA)

  1. Query:

Whether recovery of 50% of Parental Health Insurance Premium from employees, amounts to supply of service under Section 7 of the Central Goods and Service Tax Act, 2017

 

  1. Facts:

Applicant introduced Parental Insurance Scheme for employees’ parents. Applicant is mainly engaged in manufacture of paints and powder coating. The applicant is paying parental insurance premium amount to the insurance company and out of that, recovering 50% of the premium amount from the employees. 

 

  1. Observation by AAR

Mediclaim insurance policy has been issued by “The Oriental Insurance Company Ltd”. The applicant initially pays entire premium along with taxes and then recovers 50% of the premium rough salary in one instalment in case of staff and in three instalments in case of operators as the case may be. The Applicant is not in the business of providing insurance coverage. Secondly, to provide parental insurance cover, is not a mandatory requirement under any law for the time being in force and therefore, non-providing parental insurance coverage would not affect its business by any means. Therefore, activity of recovery of 50% of the cost of insurance premium cannot be treated as an activity done in the course of business or for the furtherance of business.

 

The activity undertaken by applicant like providing of mediclaim policy for the employees’ parent through insurance company neither satisfies conditions of section 7 to be held as “supply of service” nor it is covered under the term “business” of section 2(17) of CGST ACT 2017. 

 

  1. Held:

Applicant 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.

 

  1. Comment:

 

a) Divergent View between AAAR Kerala and AAR Maharashtra

 AAR has followed the rationale laid down in Posco India Pune Processing Center (P.) Ltd., [2019] 102 taxmann.com 21 (AAR – MAHARASHTRA) and has laid down that services of collecting insurance premium (on insurance cover provided to employees and their parents) by an organisation engaged in manufacture of paints is not “in the course or furtherance of business”. The application is not in the business of providing insurance, therefore recovery of insurance premium is not supply covered under section 7 of CGST Act, 2017. However, when a similar matter came up in Caltech Polymers (P.) Ltd. [2018] 98 taxmann.com 355 (AAAR-KERALA) wherein applicant was engaged in the manufacture and sale of foot wear and recovered charges for food expenses from employees for the canteen service provided by the company. The company contended that the activity does not fall within the scope of ‘supply’, as the same is not in the course or furtherance of its business. The company is only facilitating the supply of food to the employees, which is a statutory requirement, and is recovering only the actual expenditure incurred in connection with the food supply, without making any profit. But AAAR Kerala held that appellant company has admitted that they are serving food to the employees for cash, though there is no profit involved in the transaction. In spite of the absence of any profit, the activity of supplying food and charging price for the same from the employees would surely come within the definition of “supply” as provided in Section 7(l)(a) of the GST Act, 2017. Consequently, the appellant would definitely come under the definition of “supplier” as provided in subsection (105) of Section 2 of the GST Act, 2017. Moreover, since the appellant recovers the cost of food items from their employees, there is “consideration” as defined in Section 2(31) of the GST Act, 2017.

 

b) Whether any activity being “mandated in the law for the time being in force” should have any impact on “in the course or furtherance of business”

AAR Maharashtra in its decision has provided that provision of parental insurance is not a mandatory requirement under any law for the time being in force, therefore non provision of medical insurance would not affect the running of the business. Mandatory requirement of provision of medical insurance under any law for the time in force can be relevant for the purpose of Section 17(5) but that it would affect the scope of supply is uncalled for. An activity can be in the course or furtherance of business both for Input Tax credit and Supply without being mandated in the law for the time being in force unless restricted by the operation of law by an express provision with a provisions similar to Section 17(5). Further, provisions of Schedule I needs to be taken care of in case of employer and employee. Schedule I considers Gifts exceeding Rs 50000/- as supply from employer to employee then what about the treatment of “no recovery” or “short recovery” from employees.

 

(c) “In the course or furtherance of business”-A Double Edged Sword

It’s a double-edged sword. If the activity is in the course or furtherance of business, then it is eligible for Input Tax Credit (subject to provisions of Section 17(5) and other provisions of CGST Act, 2017) but at the same time when it’s in the course or furtherance of business for the purpose of Input Tax Credit whether any recovery towards the same would not be satisfying the same test for being covered under provision of Section 7(1)(a). Section 7(1)(a) being reproduced as under:

 

  1. (1) For the purposes of this Act, the expression “supply” includes —

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

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 :-

  1. with a view to bring profits or monetary advantage either today or tomorrow.
  2. to render the assessee immune from impending or reasonably apprehended litigation.
  3. in order to save losses in foreseeable future.
  4. for effecting economy in working which may pay dividends to-day or to-morrow.
  5. for increasing efficiency in working
  6. for removing inefficiency in the working.
  7. 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.
  8. 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 :-

  1. for a mere altruistic consideration.
  2. 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.

  1. for illegal, immoral or corrupt purposes or by any such means or for any such reasons.
  2. mainly in order to oblige a relative or an official.
  3. mainly in order to earn the goodwill of a political party or a politician.
  4. mainly in order to show off or impress others with his affluence or for ostentatious purposes.
  5. 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.
  6. 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.
  7. it must not be a bogus, fictitious or sham transaction.
  8. it must not be unreasonable and out of proportion.
  9. it must not be an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith.
  10. 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 :

  • one of the positive tests must be attracted whereas, (2) none of the negative tests should be attracted.

 

So a taxpayer needs to be very careful, while claiming Input Tax Credit on the premises of “in the course or furtherance of business” but at the same time he should consider the supply part as per Section 7 of CGST Act, 2017 read with the relevant provisions of “Pure Agent”. The decision is nor the first one in the list of litigation and not the final word in the future litigation to come.

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