2022 (10) TMI 949 - AAR - GST

Company recoveries for notice pay, surety bonds, canteen subsidies, and penalty forfeitures ruled outside GST scope under Schedule III

In Re: M/s. Rites Limited,

The Haryana AAR ruled that several transactions by the applicant company are outside the scope of GST supply. Notice pay recovery from employees leaving ... Supply or not - Levy of GST - rate of GST - amount collected by the Applicant company as Notice Pay Recovery from the outgoing employee - amount of Surety Bond forfeited/encashed by the Applicant company from the outgoing contractual employee - nominal & subsidized recoveries made by the Applicant from its employees towards provision of canteen facility by 3rd party service provider to Applicant's employees - amount collected by the Applicant company from its employees in lieu of providing a new identity card (ID Card) - amount collected by the Applicant as liquidated damages for non performance/short-performance/delay in performance - amount forfeited by the Applicant company pertaining to Earnes Money, Security Deposit & Bank Guarantee - amount of Creditors balance unclaimed/untraceable and written off by the Applicant by way of crediting P&L Account. Notice pay recovery - surety bond forfeiture - HELD THAT:- The amount received as notice pay recovery by the applicant from the employees who leave the applicant company without serving mandatory notice period mentioned in the employment contract is not a consideration for any supply or services. Similarly, the action of surety bond forfeiture by the applicant (which is furnished by the contractual employee at the time of joining) of the employees who leave the company without serving minimum contract period as per the employment contract is also not a consideration per se. These amounts are covered under Schedule HIM and not clause 5(e) of schedule II appended with the CGST Act, 2017. So, it is outside the scope of supply because the said amount recovered by the applicant is in lieu of un-served notice period/non serving the contract period by the employees. It cannot be regarded as a consideration which has been defined in the section 2(31) of the Act - both are excluded from the definition of Supply under the GST Act. Provision of the canteen facility at its premises by the applicant company for its employees - HELD THAT:- The facility of canteen is being provided by the companies to its employees under the Factory Act, 1948 wherein it is mandatory to the applicant to make provisions of the canteen facility to its employees. There is no independent contract between the applicant and the employees for setting up the canteen facility at the company's premises. It is being undertaken on account of the legal obligation case upon the applicant. So, it is concluded that the said transaction of recovering the part payment of the meals from the staff by the applicant is outside the purview of scope of supply. Whether the charges for re-issuance of ID card to the employees by the applicant company is an taxable event under the GST Act? - HELD THAT:- It is noticed that the applicant uses the in-house printing facility for the services i.e. re-issuance of identity cards to the employees. Fee of Rs. 100 per card is charged for re-issuance by the applicant form its respective employee for issuance the new identity card. No third party contractor is availed for the printing of Id-cards. The Id-card is reissued in case of loss of the same or the card is in non serviceable condition - the authority is of view that this transaction does not fall under the taxable event under the GST as it's covered under the schedule III(1) appended with the CGST Act, 2017. Taxability - transaction of liquidated damage charged due to delay in completion of work and forfeiture of Earnest Money/ Bank Guarantee /Security Deposit - HELD THAT:- The authority is of view that the matter stands clarified in the circular dated 03.08.2022 of the Board - the amount received as a compensation due to delay in completion of work will not be taxable due to the reason that it is not recovered on account of any services rendered to another person and instead, is claimed towards damages incurred on account of delay/any other reason as stipulated in the agreement. Amount forfeited by the Applicant company pertaining to Earnest Money, Security Deposit & Bank Guarantee - HELD THAT:- The forfeiture of amount received as Earnest Money/Security Deposit or release/forfeiture of Bank Guarantee cannot be chargeable - The nature of Earnest Money is equivalent to penalty charged by the tenderer which is similar to the nature of 'liquidated damages' and therefore, cannot be treated to be 'consideration' - The Security Deposit is collected by the Applicant for the reason that if there is any break, deface, injure or destroy any part of building in which they may be working, or any building, road, road kerb, fence, enclosure, water pipe, cables, drains, electric or telephone post or wires, trees, grass or grassland. etc, the same may be adjusted and the balance shall be refunded back to the contractor - Bank Guarantee is also forfeited for the same reasons as Security Deposit is forfeited - thus not taxable. Taxability - amount written off in the books of account of the applicant as creditors balance - HELD THAT:- The authority is of view that there are no services received or provided by the applicant company in this situations/transactions. So, this transaction of writing off unclaimed amount of the contractors/other creditors is basically an income and not a supply, hence outside the purview of scope of supply under the GST Act - not taxable. Issues Involved:1. Taxability of Notice Pay Recovery2. Taxability of Surety Bond Forfeiture3. Taxability of Canteen Facility Charges4. Taxability of Charges for Re-issuance of ID Cards5. Taxability of Liquidated Damages6. Taxability of Forfeiture of Earnest Money, Security Deposit, and Bank Guarantee7. Taxability of Unclaimed Creditors Balance Written OffDetailed Analysis:1. Notice Pay Recovery and Surety Bond Forfeiture:The authority referred to the CBIC circular dated 03.08.2022 and concluded that amounts received as notice pay recovery and surety bond forfeiture are not consideration for any supply of services. These amounts are covered under Schedule III of the CGST Act, 2017, and are outside the scope of supply. The authority emphasized that notice pay does not result in the provision of services by either party and is a form of compensation rather than consideration.2. Provision of Canteen Facility:The applicant provides a canteen facility through a third-party vendor, charging employees a nominal amount. The authority determined that this transaction is outside the purview of taxability under the GST Act. The principal supply of the applicant is consultancy services, not catering services. The third-party vendor already charges GST on the supply of food, and the applicant merely recovers part of the cost from employees.3. Charges for Re-issuance of ID Cards:The applicant uses in-house facilities for re-issuing ID cards and charges Rs. 100 per card. The authority concluded that this transaction does not fall under a taxable event under the GST Act, as it is covered under Schedule III(1) of the CGST Act, 2017.4. Liquidated Damages and Forfeiture of Earnest Money, Security Deposit, and Bank Guarantee:The authority referred to the CBIC circular dated 03.08.2022 and decided that amounts collected as liquidated damages and forfeiture of earnest money, security deposits, and bank guarantees are not taxable under GST. These amounts are not considered consideration for any supply of goods or services.5. Unclaimed Creditors Balance Written Off:The applicant writes off unclaimed amounts from contractors and other creditors as a credit entry in the profit and loss account. The authority concluded that these transactions do not involve services received or provided by the applicant and are outside the scope of supply under the GST Act.Conclusion:Upon examining the factual and legal aspects, documentary evidence, and various rulings, the authority concluded that none of the transactions on which the applicant sought advance ruling fall under the scope of supply under the CGST Act, 2017.Ruling:1. Notice Pay Recovery - Not taxable under GST.2. Surety Bond Forfeiture - Not taxable under GST.3. Canteen Facility Charges - Not taxable under GST.4. Re-issuance of ID Cards - Not taxable under GST.5. Liquidated Damages - Not taxable under GST.6. Forfeiture of Earnest Money, Security Deposit, and Bank Guarantee - Not taxable under GST.7. Unclaimed Creditors Balance Written Off - Not taxable under GST.