Tax Vista Your weekly tax recap Edn. 19 - 26 October, 2020 By Dr. G. Gokul Kishore

Supply of free food to employees in canteen liable to GST

GST regime was rejigged several times for hospitality sector. Amendments in the notifications seldom address the ambiguities. The applicant running hotels and resorts sought advance ruling on various questions. Supply of aerated water and beverages to casual (non-resident) guests at the restaurant was perceived as standalone supply of goods by the applicant. However, the Authority for Advance Rulings, Tamil Nadu (AAR) has held that when a guest orders from the menu card, both supply of the ordered items (goods) and supply of service (use of facilities / staff) are involved and these are naturally bundled and would be a composite supply. Schedule-II to CGST Act has also been relied on to arrive at this conclusion. After taking note of various amendments relating to restaurant service by hotels based on declared tariff, the AAR has held that, in the present case, supply of such beverages whether to casual guest or as in room service, is taxable at the rate of 18% GST. On the question of sale of cigarettes, the ruling states that it is not naturally bundled with restaurant service and therefore, it is liable to 28% GST along with applicable rate of compensation cess. Supply of liquor whether in the restaurant or in the room on which VAT is paid, has been held to be not liable to GST.

The above may not raise eyebrows but the ruling on supply of free food in a separate canteen by the hotel to employees is certain to aggravate the pain of taxpayers as the same has been held to be liable to GST by the AAR. Though employment contract has been produced and the terms include provision of such free food and no separate consideration is charged from employees, yet the ruling casts liability. Schedule-I of CGST Act on transactions without consideration being treated as supply and employer and employee being related persons have been taken as the basis for such conclusion. Taxable value will be as per Rule 28 of CGST Rules according to the ruling. CBIC has not issued any circular so far to clarify this issue though every industry is confronted with the same. The only support taxpayers have is a solitary press release which also does not clarify unequivocally non-applicability of GST on provision of food to employees in canteen as part of employment contract. Till the time either Schedule - I is amended or CBIC issues an authoritative circular directly addressing this issue, taxpayers have to prepare themselves for a long battle [MFAR Hotels and Resorts Pvt. Ltd. - 2020-VIL-296-AAR].

Liaison office liable to GST - AAR delivers contra ruling

AAR, Karnataka has differed from other AARs by ruling that liaison office of a foreign entity set up in India as per permission granted by Reserve Bank of India in terms of FEMA regulations would be liable to pay GST on the services rendered by it. The understanding so far has been that liaison office is merely an extension of the head office, it is not a distinct entity, it meets its expenses out of inward remittances from HO, it is not permitted to undertake the business of the HO but is allowed to act only as a communication channel and therefore, it is not engaged in any business per se. The facts are similar in this case also but the AAR's view is not.

The main reason for such conclusion is that definition of business in CGST Act includes activities ancillary to business and LO may be restrained by RBI in undertaking business but such "RBI's injunction on business for the applicant can't decide the scope of business for the purpose of GST." It went on to hold that as per Section 15, persons who are associated with the business of one another are deemed to be related and because LO promotes business of HO, they are related persons and thus activities of LO would be covered under supply even in the absence of consideration. As per AAR, being establishments of distinct persons, export of service benefit would also be not available to such LO. The LO facilitates supply between foreign HO and customers in India and hence, LO is also an 'intermediary', as per AAR.

The ruling places reliance on FEMA regulations when it comes to definition of LO but when the issue of restraint on business as per such regulations is discussed, opts to ignore the same by adopting literal interpretation of business as provided in CGST Act. This ruling reveals glaring holes in the provisions relating to distinct persons, export of service, LO, intermediary, etc. GST law is business law and it should be interpreted as business understands it and if the provisions are susceptible to contrary interpretation, then amendment is the solution [Fraunhofer-Gessellschaft Zur Forderung der angewwandten Forschung - 2020-VIL-295-AAR].

Sale of developed plot - Members of AAR differ on GST applicability

The plot in the story of sale of developed plot is getting interesting now. In general, it has been held in advance rulings that development activity is a service and therefore, sale of developed plot whereby demarcation, laying of roads, sewage pipelines and other infrastructure works are undertaken, is liable to GST. When this issue was raised by an applicant before Uttarakhand AAR, the Members expressed difference of opinion and the matter has been referred to Appellate AAR.

According to the one Member, the applicant would be executing sale deed for sale of land in favour of the buyers after development of such land and as per paragraph 5(b) of Schedule - II of CGST Act (relating to construction service), GST will not apply if entire consideration is received after completion certificate and in this case, since no complex, etc., has come into existence, such certificate does not arise. Based on such reasoning, it has been held that such activity would not be covered under entry relating to construction service. It has been further noted that legislature has given the same meaning to developed plot and undeveloped plot in Schedule-III as per which sale of land is neither a supply of goods nor supply of service and thus, not liable to GST. Another Member has expressed the view that as per precedent judgment of Supreme Court, transfer of site with development is a service and Schedule-III covers only sale of undeveloped land and therefore, not the present transaction involving sale of developed plot. In this differing opinion, it has been held that sale of plot after undertaking development works would be liable to GST.

When previous advance rulings on this issue were discussed in this column dated 22 June, 2020, it was observed that immovable property is prone to litigation and when it gets fused with "complex" tax laws, the consequences can be catastrophic for taxpayers and to clear such "land" mines, one has to wait for an authoritative pronouncement from the Supreme Court when such issues are carried in an appropriate case. Let us, therefore, wait [Uttarakhand AAR - 2020-VIL-303-AAR].

GST on liquidated damages - AAR refrains from issuing ruling

In a reasoned ruling, the Tamil Nadu AAR has held that supply of educational aids like school bags, footwear, geometry box, pencils, woollen sweater, etc., to government and government aided schools as per State Government's education policy by the applicant - a government entity - would be a supply under GST law but exempt. The exemption is admissible since the applicant receives reimbursement of both the cost and incidental expenses from the Government as part of budgetary allocation in the nature of grants. Notification No. 2/2017-Central Tax (Rate) provides exemption to supply of goods by a government entity to Central or State Government (local authority also) where consideration received is in the form of grants. As per the ruling, because the supply is exempt, input tax credit of GST paid on purchases would not be available. The applicant stated that supply of rain coats, etc., to students in hilly areas is made without consideration but the AAR noted that funds allocated by the government have to be used for such purpose and therefore, such supply would also be covered under the above exemption notification.

However, the AAR has adopted a strange position on the question of applicability of GST on liquidated damages / penalty received by the applicant for delay in supply of goods by vendors or not meeting quality standards. It has held that advance ruling cannot be given on such issue as the ruling has been sought on a supply to be received by the applicant and advance ruling is available only in respect of supply made or to be made. The question posed was whether the amount received as damages / penalty would be treated as consideration for the activity of tolerating an act or situation as per Schedule - II of CGST Act. The person receiving the consideration is treated as supplier and therefore, the question is within the powers of the AAR to provide a ruling. The AAR could have ruled either way - the amount is liable to GST or otherwise but there cannot be any jurisdictional issue [Tamil Nadu Textbook and Educational Services Corporation - 2020-VIL-301-AAR].

Driver is not the 'person aggrieved' - Service of order on driver not a service

Section 107(1) of CGST Act, 2017 commences with the words "Any person aggrieved by any decision or order passed." The statutory right to file appeal against an order has been vested with the person aggrieved by such order. An appeal filed by the taxpayer was rejected by the appellate authority on the ground of limitation. But the taxpayer filed writ petition contending that the order was not served on the consignor or consignee and as per precedent decision, when tax is demanded and penalty is imposed by an order, the same should be served only on the person aggrieved. The department was of the view that service of order on driver of the vehicle used for transporting the goods was sufficient.

The Allahabad High Court did not find merit in department's stand and quashed the order with the direction to treat the appeal as having filed within time-limit. While many officers exercising quasi-judicial powers have capacity constraint in terms of understanding the nuances of law, as seen in the orders impugned before courts, the executive machinery appears to be equally clueless on procedures as well [Jindal Pipes Ltd. v. State of U.P. - 2020-VIL-507-ALH]

Annual Return for 2018-19 - Last date extended again

The last date for filing Annual Return (GSTR-9) and Reconciliation Statement (GSTR-9C) for the financial year 2018-19 has been extended to 31-12-2020, as per a press release issued on 24-10-2020. Earlier the extension was to operate till this month end. While extension of filing dates is a routine affair in GST mostly due to system related issues, this time, pandemic has pushed the date further. While the requirement of such return is being doubted in certain quarters, relieving small taxpayers from such compliance burden can be seen as mitigating hassles to an extent.

(The author is an Advocate practising independently. The views expressed are personal)