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#GSTCase-140- Eligibility of ITC with respect to expenses incurred by employer for facilities like Residential Housing, Health, Housekeeping etc provided to employees Case-Kandla Port Trust (GST AAR Gujarat)

1. Facts: M/s. Kandla Port Trust (Deendayal Port Trust), CDC Section, Sewa Sadan- III, Kandla, Kachchh (hereinafter referred to as the “Applicant” for the sake of brevity), is engaged in port service to various clients. The Applicant, vide Annexure-I of their application dated 23.03.2018, has sought for advance ruling for eligibility of Input Tax Credit (ITC) with respect of below mentioned specific expenses occurred by the applicant:-

A) Purchase of medicines for employees as prescribed by their doctor from outside on contractual basis.

B) Purchase of movable medical equipment at hospital.

C) AMC for repair and maintenance of residential colony and hospitals and school (other than new constructions, ITC for which is blocked u/s 15 of CGST Act, 2017).

D) Telephones & Mobiles at residence of officers and at hospitals.

E) Caretaking /housekeeping services at Guest House.

2. Contention by the Applicant–The employees are backbone for any organization for providing output services to customers/clients. It is not possible for any organization to do business activities without employees. Accordingly, expenses are incurred in the course and furtherance of business. Further, as directed during the personal hearing held on 12.07.2018, they have submitted the copy of the Chapter V of Major Port Trust Act, 1963 (Object clause). They further submitted that as the “Deendayal Port Trust” is carrying out its activities as per the provisions of the Major Port Trust Act, 1963 and as per the directions of ministry of shipping, there is no any Memorandum and Article of Association like in case of other organizations.

3. Observation by AAR- Applicant is engaged in supply of port services to various clients. Said expenses are for providing common facilities to their employees within the residential colony and the same are not relates to furtherance of their business/output service i.e. “Port Service”. It is very clear from the provisions of Sub Section (1) of Section 16 and Sub section (1) of Section 17 of the CGST Act, 2017, that a registered person is entitled to take credit of input tax charged on 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 only. In view of the above, the applicant is not entitled to take credit of input tax charged in respect of above-mentioned expenses as the same is not used in furtherance of their business.

4. Held-

The applicant is not entitled to take credit of input tax charged in respect of above-mentioned expenses, as the same is not used in the course or furtherance of his business.

5. Comment-

1. Other Judicial Pronouncements on similar Matter-: There are three other cases on the above matter which have been provided as below-

  • National Aluminium Company Ltd. [2019] 102 371 (AAAR-ODISHA) –Similar view was taken in the matter of National Aluminium Company Ltd. [2019] 102 371 (AAAR-ODISHA) wherein in addition to holding that these services are not in the course or furtherance of business, it was also observed that provision of housing to its employees by Appellant is nothing but a perquisite. As clarified by the CBIC vide its Press Release dated 10.10.2017, referred to by the Appellant-I, perquisites are not subjected to GST. Therefore, since the perquisites are outside the scope of GST, input tax credit shall not be available to the Appellant-I in respect of tax paid on goods and services procured by it for management, repair, renovation, alteration or maintenance services (including watch and ward services, security services, Plantation/Gardening/Landscaping services, etc.) pertaining to residential accommodation for its employees in township/colony.
  • General Manager Ordnance Factory Bhandara [2019] 106 246 (AAR – MAHARASHTRA)-Similarly, in this case, it was held thatprovision of guest houses is a perquisite for their employees and therefore tax paid on maintenance and upkeep of guest houses cannot be allowed as ITC. Guest houses are generally used for temporary accommodation of employees as well as outsiders. Such provision of guest house cannot be treated as an activity in course or furtherance of its business and related to the applicant’s business. Further, it is found that the goods or services, or both pertaining to Guest House are used for personal consumption of the employees/guests and are not used or intended to be used in the course or furtherance of business. As such in view of the provisions of section 17(5)(g), no ITC is available to the applicant. Hence, it is held that they are not eligible for ITC on taxes paid for maintenance and upkeep of guest houses
  • Posco India Pune Processing Center (P.) Ltd., [2019] 102 21 (AAR – MAHARASHTRA)-In this case, it was held thatHotel Accommodation is being used by applicant as a residential premises of their MD/GM which is for personal comfort of both and therefore in view of the provisions of Section 17(5)(g) we hold that they are not eligible to claim the ITC for the same.

On a perusal of the above cases and the case discussed in detail today, it can be seen that out of the four cases, all the four cases have held that provision of Residential and similar services is not in the course or furtherance of business and only one of them i.e. AAAR Odisha referred to the aspect of perquisites to the employees.

2. Eligibility of ITC in case of Perquisites or otherwise: While these services are treated as perquisites and therefore part of salary, there would be question mark over the Input Tax Credit part and might result in denial of ITC and if these services are not provided as part of perquisites, they might be subject to Para 2 of Schedule I of CGST Act, 2017. Therefore, in either way taxability or reversal of ITC might have to be considered by the taxpayer.

3. Restricted Meaning of “used in the Course or furtherance of Business” being taken by AAR: Irrespective of the allowability of Input Tax Credit in the above cases, it can be observed that restricted meaning of term “in the course or furtherance of business” is being taken by Authorities. While assessing Output Tax Liability, even PPF and savings bank account Interest has bene considered (Shree Sawai Manoharlal Rathi (GST AAR Gujarat)) as in the course of business and therefore part of supply but while assessing the Input Tax Credit eligibility, restricted meaning of “In the course or furtherance of business” is being considered. One might say that this is no different then the past. Even ITC on Guest Houses are being disallowed treating the same as not in the course or furtherance of its business and not related to the applicant’s business.

Let’s take an example, wherein there is an outstation posting for a month and company has to provide residence to their employees. Whether such provision of accommodation would not be treated as “in the course or furtherance of business”.

It has to be seen that 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”. 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.​

  • 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 :

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

There is plethora of judgements over this and broader views needs to be taken for the meaning of the term “in the course or furtherance of business”. Any restricted meaning might defeat the intention of the law.