2021 (12) TMI 320 - AAR - GST

Employer-employee transactions: notice pay, insurance premiums, canteen charges constitute taxable supplies under GST Schedule II

The AAR, MP ruled on multiple GST issues involving an employer-employee relationship. Notice pay received by employer from employee for shortened notice ... Supply - Services by an employee to the employer in the course of or in relation to his employment - Tolerating an act - Schedule II clause 5(e) - Activities or transactions specified in Schedule III - Input Tax Credit - availability and blocked credits - Value of supply between related persons - Rule 28 valuation - Pure agent - Rule 33 (GST Rules) - Canteen services treated as 'restaurant service' (notification interpretation)Supply - Tolerating an act - Schedule II clause 5(e) - Services by an employee to the employer in the course of or in relation to his employment - GST applicability on notice pay recovered by employer from employee in lieu of notice period - HELD THAT: - The Authority held that when an employer accepts a shorter notice period and recovers notice pay, the employer is tolerating the employee's act or situation and therefore the transaction falls within clause 5(e) of Schedule II and is a supply liable to GST. The Authority rejected the applicant's contention that clause 1 of Schedule III (services by an employee to the employer) excludes such recovery, observing that Schedule III's clause 1 pertains to services by the employee (not employer-provided relief of an employee's act) and that the factual scenario involves tolerance of an act by the employer which attracts Schedule II. Prior Service Tax decisions on analogous facts were noted but distinguished as not being directly determinative of GST treatment.GST is applicable on notice pay recovered by the employer in lieu of notice period.Supply - Business - activities incidental or ancillary to main business - Pure agent - Rule 33 (GST Rules) - GST applicability on premium of group medical insurance recovered at actuals from non-dependent parents of employees and from retired employees - HELD THAT: - The Authority concluded that recovery of such premiums by the applicant is a supply within the ambit of Section 7 because the activity is in connection with or incidental or ancillary to the applicant's business. The Authority observed that if the applicant had acted as a pure agent under Rule 33, GST would not attach; however, as the applicant did not establish that it acted as the insurer's agent, the recoveries constitute the applicant's supply and are liable to GST.Premium recovered by the applicant from non-dependent parents and retired employees is a supply and liable to GST.Supply - Services by an employee to the employer in the course of or in relation to his employment - Value of supply between related persons - Rule 28 valuation - Canteen services treated as 'restaurant service' (notification interpretation) - GST treatment and valuation of nominal recoveries from employees for canteen facilities - HELD THAT: - The Authority held that canteen services provided by the employer to employees are supplies by the employer (not services by an employee) and therefore fall within the scope of Section 7. The employer-employee relationship makes them related-party transactions; consequently the value of such supply must be determined under Rule 28 rather than by the nominal amount recovered. The Authority further considered notifications treating canteen services as restaurant service and the related restrictive rules on claiming ITC (addressed separately).Recovery from employees for canteen facilities is a taxable supply; valuation is to be determined under Rule 28, not by the nominal recovered amount.Supply - Business - activities incidental or ancillary to main business - Input Tax Credit - availability - GST applicability on telephone charge recoveries from employees (over and above BSNL fixed rental) - HELD THAT: - The Authority found that provision of telephones and recovery of excess charges from employees is an activity incidental or ancillary to the applicant's business and thus constitutes a supply under Section 7. Accordingly, amounts recovered from employees towards telephone charges are taxable and the applicant is liable to pay GST on such recoveries.GST is applicable on telephone charges recovered from employees.Input Tax Credit - availability and blocked credits - Canteen services treated as 'restaurant service' (notification interpretation) - Value of supply between related persons - Rule 28 valuation - Availability of Input Tax Credit (ITC) in respect of premiums (Question II), canteen services (Question III) and telephone charges (Question IV) - HELD THAT: - The Authority ruled categorically on ITC: (A) ITC in respect of insurance premium paid to the insurer is available to the applicant to the extent of the applicant's further taxable supply (subject to Section 17(5) conditions); (B) ITC in respect of canteen services is not available in view of the notification interpretation that treats canteen as restaurant service attracting a mandatory reduced rate without ITC; (C) ITC is available on telephone charges paid to BSNL because such supplies are taxable supplies of the applicant and are not listed as blocked credits under Section 17.ITC: available for insurance premiums to the extent of further taxable supply; not available for canteen services; available for telephone charges.Activities or transactions specified in Schedule III - Supply - Value of supply between related persons - Rule 28 valuation - GST liability where canteen services are provided free of cost to employees - HELD THAT: - The Authority rejected the applicant's submission that free provision of canteen services to employees falls under paragraph 1 of Schedule III. It observed that paragraph 1 covers services by an employee to the employer, whereas free canteen provision is a supply from employer to employee. Even if no consideration is charged, the transaction is a supply and taxable; its value is to be determined under Rule 28 as a related-party transaction.Free canteen services provided by the employer to employees are taxable supplies and valued under Rule 28.Input Tax Credit - availability and blocked credits - Canteen services treated as 'restaurant service' (notification interpretation) - Availability of ITC on inputs and input services used to provide free canteen services to employees - HELD THAT: - Relying on the notification regime and its explanation that canteen services fall within 'restaurant service' attracting a mandatory reduced rate without ITC, the Authority held that the applicant is not eligible to claim ITC on goods and services used for providing canteen services, whether charged nominally or provided free.ITC is not available on inputs and input services used for providing canteen services to employees.Final Conclusion: The Authority ruled that (1) notice pay recovered from employees is a taxable supply under Schedule II clause 5(e); (2) premiums recovered for non-dependent parents and retired employees are supplies liable to GST (not being pure-agent transactions); (3) recoveries for canteen facilities and telephone charge recoveries are taxable supplies, with valuation of employer-employee canteen supplies governed by Rule 28; and (4) ITC is available for insurance premiums to the extent of further taxable supply, is not available for canteen services (per the notification treatment), and is available for telephone charges paid to BSNL. Issues Involved:1. GST applicability on notice pay by an employee to the employer.2. GST applicability on the premium of Group Medical Insurance Policy recovered from non-dependent parents of employees and retired employees.3. GST applicability on recovery of nominal amounts for canteen facilities.4. GST applicability on recovery of telephone charges from employees.5. Availability of full Input Tax Credit (ITC) for the applicant concerning the above issues.6. GST applicability on free canteen services provided to employees.7. ITC availability for goods and services used in providing free canteen services.Detailed Analysis:Issue 1: GST on Notice Pay- Applicant's Argument: The payment of notice pay is covered under clause 1 of Schedule III, which is not a supply under GST. It should not be considered as a supply of service under clause 5(e) of Schedule II.- Authority's Decision: GST is applicable on payment of notice pay by an employee to the employer under clause 5(e) of Schedule II of the CGST Act. The act of tolerating the employee's early exit is considered a supply of service.Issue 2: GST on Group Medical Insurance Premium- Applicant's Argument: The recovery of insurance premiums from non-dependent parents of employees and retired employees is not in the course or furtherance of business and should not be taxable.- Authority's Decision: The premium recovered from non-dependent parents and retired employees falls within the ambit of supply and is liable to GST. The applicant is not acting as a pure agent of the insurance company.Issue 3: GST on Canteen Facilities- Applicant's Argument: Canteen services provided to employees are part of the employment contract and should be treated as services by an employee to the employer under clause 1 of Schedule III.- Authority's Decision: The recovery for canteen facilities falls within the definition of 'outward supply' and is liable to tax. The valuation should be as per Rule 28 since the employer and employee are related persons.Issue 4: GST on Telephone Charges- Applicant's Argument: The recovery of telephone charges from employees is not in the course or furtherance of business and should not be taxable.- Authority's Decision: The recovery of telephone charges from employees is a supply and is liable to GST. It is an activity incidental or ancillary to the business of the applicant.Issue 5: Availability of ITC- Applicant's Argument: Full ITC should be available for the inputs and input services related to the supplies mentioned in Issues 2, 3, and 4.- Authority's Decision:- Insurance Premium: ITC is available to the extent of further supply.- Canteen Services: ITC is not available due to specific provisions in the Notification No. 11/2017-Central Tax (Rate).- Telephone Charges: ITC is available as these charges are not covered by the provisions of Section 17 relating to blocked credit.Issue 6: GST on Free Canteen Services- Applicant's Argument: Free canteen services provided to employees should fall under para 1 of Schedule III and not be subject to GST.- Authority's Decision: Free canteen services are considered a supply and are liable to tax as per value determined in accordance with Rule 28.Issue 7: ITC for Free Canteen Services- Applicant's Argument: ITC should be available for goods and services used in providing free canteen services.- Authority's Decision: ITC is not available for canteen services as per specific provisions in Notification No. 11/2017-Central Tax (Rate).Ruling:1. GST is applicable on notice pay under clause 5(e) of Schedule II of the CGST Act.2. Premium recovered for Group Medical Insurance from non-dependent parents and retired employees is liable to GST.3. Canteen facilities provided to employees are taxable, and valuation should follow Rule 28.4. GST is applicable on telephone charges recovered from employees.5. ITC is available for insurance premiums to the extent of further supply, not available for canteen services, and available for telephone charges.6. Free canteen services are taxable and should be valued as per Rule 28.7. ITC is not available for free canteen services as per specific provisions.Validity:The ruling is valid subject to the provisions under section 103 (2) until declared void under Section 104 (1) of the GST Act.