2019 (6) TMI 1236 - AAR - GST

Ministry of Defence liable for GST on services, ITC restrictions clarified

The court held that the applicant, an entity under the Ministry of Defence, is liable for GST on various services provided, including liquidated damages, ... Taxability of liquidated damages and forfeited security deposits as consideration - exemption for services provided by government entities - renting of immovable property - input tax credit - used or intended to be used in course or furtherance of business - blocked credits and exempt supplies (Section 17) - e-way bill exemption for defence formations - exemption for transport of defence or military equipment by GTA - reversal of ITC on goods lost, stolen or destroyed - proviso to section 16(2) - reversal where recipient fails to pay within 180 days - applicability of notifications granting nil-rate or reverse-charge consequences to government/PSU entitiesTaxability of liquidated damages and forfeited security deposits as consideration - exemption for services provided by government entities - Whether GST is payable by the applicant on liquidated damages deducted and on security deposits forfeited by the applicant - HELD THAT: - The Authority examined Notification No.12/2017 (Sr. No. 62) which exempts services provided by the Central/State Government by way of tolerating non-performance of a contract. The Authority found that the applicant (Ordnance Factory Bhandara) has industrial status and is not ''Government'' as defined in section 2(53) of the CGST Act. Consequently, the applicant cannot claim the government exemption. The Authority further held that forfeited security deposits constitute additional consideration arising from the supply and are includible in taxable value; accordingly GST is payable on such forfeitures. However, deposits merely unclaimed and recognised as income without intention to forfeit were found not to be consideration for supply and not taxable.GST is payable on liquidated damages and on security deposits forfeited; GST is not payable on security deposits merely left unclaimed and recognised as income after lapse of time.Taxability of catering services - exemption for services provided by government entities - Whether GST is payable on food and beverages supplied at the industrial canteen run by the applicant - HELD THAT: - The Authority treated supply of food and beverages at the industrial canteen as taxable catering services (tariff group/heading 9963). Because the applicant is not 'Government' under section 2(53), it cannot invoke the government-provided-services exemption (Notification No.12/2017 Sr. No.6). Therefore the canteen supplies made for consideration are taxable and GST is payable.Supply of food and beverages at the applicant's industrial canteen is taxable and GST is payable.Renting of immovable property - exemption for renting of residential dwelling - Whether GST is payable on (i) community hall let to employees and (ii) rent recovered from residential quarters - HELD THAT: - Renting of immovable property is a supply under Schedule II (Section 7). The community hall licensed to employees for personal use falls within renting and is taxable because the applicant is not a Government entity entitled to the government exemption. In contrast, renting of residential dwelling for use as residence is covered by Entry No.12 of Notification No.12/2017 and attracts nil rate; where the licence/charges relate to residential dwelling the supply is nil-rated.GST is payable on renting of the community hall; rent recovered for residential dwelling is covered by the nil-rate exemption for renting of residential dwelling.Exemption for transport of students/staff - exemption for services provided by government entities - Whether GST is payable on school bus facility provided to employees' children - HELD THAT: - Notification No.12/2017 (Sr. No.66) exempts transportation of students, faculty and staff where supplied to an educational institution. The applicant provides bus service to children of employees (not to an educational institution) and is not a Government within section 2(53); accordingly the specific exemption does not apply. The Authority therefore held the supply is taxable unless otherwise exempted.GST is payable on the school-bus facility provided to employees' children.Taxability of examination services - exemption for educational institutions - Whether GST is payable on fees charged for conducting examinations for recruitment - HELD THAT: - The Authority noted that the exemption for examination services (Notification No.12/2017 Sr. No.66(aa)) applies to educational institutions. The applicant is neither an educational institution nor a government as per section 2(53); hence the exemption does not apply and the activity of conducting examinations for vacancies is taxable.GST is payable on fees charged by the applicant for conducting examinations.Input tax credit - used or intended to be used in course or furtherance of business - blocked credits and exempt supplies (Section 17) - Whether ITC is available on (a) maintenance of gardens inside the factory, (b) maintenance and upkeep of estate area outside factory premises, (c) medicines and hospital upkeep, (d) maintenance of guest houses, and (e) purchase of LPG cylinders for industrial canteen - HELD THAT: - Applying section 16 and the exclusions in section 17, the Authority held: (a) gardening services within the plant do not qualify as used in furtherance of the applicant's manufacturing business and ITC is not available; (b) maintenance/upkeep of estate areas outside the factory are welfare/social activities lacking necessary nexus with manufacture and ITC is not available; (c) hospital/dispensary supplies for employees fall within the definition of clinical establishment and such services are exempt under Notification No.12/2017 (Sr. No.74), so ITC is blocked under section 17(2); (d) guest-house maintenance is a perquisite/personal accommodation facility and lacks nexus with business, therefore ITC is not available (section 17(5)(g)); (e) LPG cylinders used in the industrial canteen (a taxable catering service of the applicant) were held to be inputs for a taxable supply and ITC is available on their purchase.ITC is not available for garden maintenance inside factory, not available for upkeep of estate outside factory, not available for hospital/medicines and guest-house maintenance; ITC is available for LPG cylinders used in the industrial canteen.E-way bill exemption for defence formations - Whether the e-way bill exemption for 'defence formation under the Ministry of Defence' applies to the applicant and to movements to MOD units - HELD THAT: - Rule 138(14)(k) exempts generation of e-way bills where movement of goods is caused by a defence formation under the Ministry of Defence as consignor or consignee. The Authority observed that the applicant functions under the Ordnance Factory Board within the Department of Defence Production and found the applicant eligible for the benefit when goods are moved by or to defence formations (units, proof establishments, DRDO, etc.) under the Ministry of Defence.The e-way bill exemption under Rule 138(14)(k) is available to the applicant for movements involving defence formations under the Ministry of Defence.Exemption for transport of defence or military equipment by GTA - Whether exemption for transport by goods transport agency of defence or military equipments applies to goods transported by the applicant - HELD THAT: - Notification No.12/2017 (Sr. No.21 clause (h)) exempts GTA services transporting defence or military equipments. The Authority accepted that the applicant manufactures and transports propellants and explosives used in ammunition production and held that the exemption is available for such transport of defence/military equipment.Exemption for GTA transport of defence or military equipment applies to the applicant's relevant transport of such goods.Reversal of ITC on goods lost, stolen or destroyed - Whether ITC has to be reversed on finished goods destroyed during testing - HELD THAT: - The Authority examined section 17(5)(h) which denies ITC in respect of inputs/goods lost, stolen or destroyed. It held that where inputs have been legitimately used in manufacture and the finished samples are dispatched for testing and consumed/destroyed in testing, those inputs were used in the course of business and cannot be treated as inputs remaining unutilised for which reversal is mandated. The Authority therefore concluded that ITC need not be reversed for finished goods destroyed during testing.ITC is not required to be reversed on finished goods destroyed during testing.Proviso to section 16(2) - reversal where recipient fails to pay within 180 days - Whether proportionate ITC must be reversed when payment to supplier is reduced due to deduction of liquidated damages - HELD THAT: - Under the second proviso to section 16(2), failure to pay the supplier the invoice amount including tax within 180 days triggers addition to output tax liability. The Authority reasoned that liquidated damages are compensation for tolerating non-performance and treated as a supply; where the applicant ultimately pays a lesser amount to the supplier resulting in lesser GST remitted by the supplier, the recipient becomes entitled to ITC only to the extent of actual payment and must reverse proportionate ITC accordingly.Where payment to the supplier is reduced due to liquidated-damages deduction resulting in lesser payment of tax by the supplier, the recipient must reverse ITC proportionate to the reduction.Applicability of notifications granting nil-rate or reverse-charge consequences to government/PSU entities - Whether Notifications No.2/2018, No.3/2018 and No.36/2017 apply to the applicant and their impact - HELD THAT: - Because the Authority held that the applicant is not 'Government' under section 2(53), exemptions or special treatments applicable only to Central/State Government do not apply. Notification No.2/2018 (exemption for arbitrator/advocate services to Central Government) is not available to the applicant. Notification No.3/2018 makes renting of immovable property by government to a registered person subject to reverse charge - the Authority observed that renting of non-residential property by the applicant is taxable and reverse-charge implications should be examined as per that notification. Notification No.36/2017 (reverse charge on sale of used/seized/old/scrap goods by government) is inapplicable as a government concession to the applicant; the applicant must discharge GST on such sales as per the relevant notification and law.Notification No.2/2018 exemption is not available to the applicant; renting of non-residential immovable property by the applicant is taxable (and reverse-charge consequences arise as per applicable notification); the applicant must discharge GST on sale of used/old/scrap goods in accordance with the notifications and law.Final Conclusion: The Authority held that Ordnance Factory Bhandara is not 'Government' for purposes of the CGST Act and accordingly: GST is payable on liquidated damages and forfeited security deposits (but not on merely unclaimed deposits recognised as income); canteen supplies, community-hall rentals and examination fees are taxable; school-bus facility to employees' children is taxable; ITC is disallowed for garden maintenance inside plant, estate upkeep outside plant, hospital/medicines and guest-house upkeep, but allowed for LPG used in the industrial canteen; e-way bill exemption for defence formations and GTA exemption for transport of defence equipment apply to movements involving defence formations; ITC is not required to be reversed for finished goods destroyed in testing; proportionate ITC must be reversed where payment to supplier is reduced by liquidated damages; and the applicant cannot claim government-specific notification exemptions that apply only to the Central/State Government. Issues Involved:1. GST liability on various supply of services.2. Availability of Input Tax Credit (ITC) on specific expenditures.3. Exemption for 'defence formation' in generating E-way bills.4. GST exemption on transport of military or defence equipment.5. Reversal of ITC on finished goods destroyed during testing.6. Proportionate ITC reversal due to liquidated damages.7. Applicability of specific GST notifications.8. ITC on services of passenger vehicles hired (withdrawn).Detailed Analysis:1. GST Liability on Various Supply of Services:- Liquidated Damages: The applicant is not considered 'Government' under Section 2(53) of the CGST Act. Hence, liquidated damages deducted from suppliers' payments are taxable.- Forfeited Security Deposit: The forfeited security deposit due to non-fulfillment of contract conditions is taxable as it is considered additional consideration.- Unclaimed Security Deposit: Security deposits left unclaimed and recognized as income after three years are not taxable as they do not constitute consideration for supply.- Food and Beverages in Canteen: The supply of food and beverages in the industrial canteen is taxable under GST.- Community Hall Rental: Renting the community hall to employees is taxable as it is considered a supply of service.- School Bus Facility: The school bus facility provided to employees' children is taxable.- Conducting Exams: Conducting exams for vacancies is taxable as the applicant is not an educational institution.- Rent from Residential Quarters: Renting residential quarters is exempt from GST.2. Availability of Input Tax Credit (ITC):- Maintenance of Garden Inside Factory Premises: ITC is not available as it is not considered in furtherance of business.- Maintenance of Estate Area: ITC is not available for maintenance activities outside the factory premises as they are considered welfare activities.- Hospital Medicines and Maintenance: ITC is not available as the hospital services are exempt under Notification No. 12/2017.- Guest House Maintenance: ITC is not available as guest houses are for personal use and not in furtherance of business.- LPG Cylinders in Canteen: ITC is available as the canteen services are taxable.3. Exemption for 'Defence Formation' in Generating E-way Bills:- The applicant is considered a 'defence formation' under the Ministry of Defence and is exempt from generating E-way bills under Rule 138(14)(k) of the CGST Rules.4. GST Exemption on Transport of Military or Defence Equipment:- The applicant's transport of propellants and explosives used in ammunition is exempt from GST under Notification No. 12/2017.5. Reversal of ITC on Finished Goods Destroyed During Testing:- ITC need not be reversed for finished goods destroyed during testing as they are used in the course of furtherance of business.6. Proportionate ITC Reversal Due to Liquidated Damages:- ITC must be proportionately reversed if lesser payment is made to the supplier due to liquidated damages.7. Applicability of Specific GST Notifications:- Notification No. 2/2018: The applicant is not eligible for exemption as they are not considered 'Government.'- Notification No. 3/2018: Renting of immovable property for non-residential purposes is taxable.- Notification No. 36/2017: The applicant must discharge GST on the sale of used vehicles, seized goods, etc.8. ITC on Services of Passenger Vehicles Hired:- This question was withdrawn by the applicant and not addressed.Conclusion:The judgment comprehensively addresses the GST implications on various services and ITC eligibility for the applicant, an entity under the Ministry of Defence. The applicant is liable for GST on most services provided and must adhere to specific provisions regarding ITC and exemptions.