The Hon’ble Advance Ruling Authority, Haryana vide its order dated 18.10.2022 in the matter of M/s Rites Limited in Advance Ruling No. – HR/ARL/19/2022 – 23, held that amounts recovered by the Applicant on account of Notice Pay, Bond Forfeiture of the Contractual Employee, Canteen Charges, Replacement of ID Cards would not be taxable under GST.  Besides that, the amount recovered on account of Liquidated Damages and Forfeiture of Earnest Money and Security Deposit would also not be liable to GST.

Facts of the Case: –

• That the Applicant, Rites Ltd., is a Government of India Enterprise was established in 1974, under the aegis of Indian Railways. Rites Ltd. is incorporated in India as a Public Limited Company under the companies Act, 1956 and is governed by a Board of Directors which includes person of eminence from various sectors of engineering and management.
• It is a multi-disciplinary consultancy organisation in the fields of transport, infrastructure and related technologies.
• The Applicant during the course of provision of its output services charges or recovers various charges towards the following: –

1. 1. Notice Pay Recovery: – Whenever the Applicant hires an employee in the organization, it enters into an employment agreement with such employee. As per the terms of the agreement if the employee resigns from the organisation, then such employee has to mandatorily serve the minimum notice period as mentioned in the agreement. That notice period in case of the employee resigning during the probation period would be one month and if the employee resigns after the probation period, it would be three months.  However, in case, such notice period is not served as stipulated in the employment agreement and the employee leaves the company before such period, the applicant recovers certain amount namely Notice pay recovery i.e., charges for not serving notice.
   2. Bond Forfeiture of the Contractual Employee: – That in addition to the notice pay, the Applicant offers job to the candidates with a pre-condition that the employee has to serve a minimum period, know as a ‘Bond Period’, and the same is mentioned in the terms of the contractual agreement. For that purpose, a Surety Bond of a fixed sum is executed by the Applicant from such employee at the time of joining itself. Now, if such employee decides to leave the organisation before the completion of the ‘Bond Period’, the surety bond furnished by such employee is being forfeited by the company as a compensation of loss caused to it due to non-completion of bond period by the contractual employee.
   3. Canteen Charges: –The Applicant entered into contract with 3^rd party service vendor i.e., M/s Gemini Associates, for providing canteen facility to its employees. The third-party vendor charges Rs. 58 plus applicable GST on per meal basis from the Applicant. However, the Applicant charges a nominal amount/subsidized amount from its employee for the meals consumed by them and deducts a nominal subsidized amount of Rs. 650, which roughly comes out to be 29.55 per meal, on the monthly basis from the salary of the employee.  The vendor raises an invoice upon the applicant with applicable GST, for the said services provided.
   4. Recovery on account of Loss/Replacement of ID Cards: –Each employee, in case of loss of card or when the card is damaged/or becomes unserviceable, has to apply for issuance of fresh identity Card (ID Cards). The Applicant company charges Rs. 100 per card from the employee for re-issuance of the ID card, and for this purpose, no service of third-party vendor was availed.  The expense of printing the identity card is transferred by the Applicant to general expense i.e., printing expenses.
   5. Liquidated Damages: – The Applicant due to expertise possessed by it, enters into contract or is awarded work by various organisations who wish to get certain infrastructure developed. For getting such infrastructure developed, the Applicant hires certain contractors who perform the construction activity and the Applicant supervises the same as per the technical expertise possessed by it.  The Applicant being a Government of India enterprise, floats tenders & invites bids for various types of works/activities for which the Applicant wish to find a vendor.  However, if there is a delay in completion of project, the contractor has to pay an agreed sum to the Applicant as Liquidated damages, which is computed as a percentage of tender value of contract subject to maximum limit as envisaged under the contract.
   6. Forfeiture of Earnest Money and Security Deposit/Bank Guarantee by the Applicant – The Applicant receives Earnest Money (EM) from the tenders/bidders who applies for the tender and the amount will be refunded if, the tender bid is not found acceptable. However, in certain situation the amount received as Earnest Money, Security Deposit/Bank Guarantee is liable to be forfeited owing to any damages.
   7. Amount written off as Creditors balance in the books of accounts of the Applicant – That on completion of work, if the contractor does not come to seek refund of security deposit, for a certain period of time or sometimes becomes untraceable. In such cases, after the management’s decision, such amount of security deposit of the contractor lying with the Applicant, showing on the liabilities side of the Balance Sheet of the Applicant, is written off by way of credit entry in Profit & Loss Account.

Question on which advance ruling has been sought by the Applicant: –

1. Whether the amount collected as Notice Pay recovery would be taxable under GST, if yes, at what rate?
2. Whether the amount of Surety Bond forfeited/encashed by the Applicant from the outgoing employees would be taxable under GST, If yes, at what rate?
3. Whether GST would be payable on the charges recovered for providing the Canteen facility to the employees, if yes, at what rate?
4. Whether the amount collected for replacement of ID Cards would be liable to GST, if yes, rate of GST thereupon?
5. Whether the amount collected by the Applicant as liquidated damages for non-performance/short-performance/delay in performance would be chargeable to GST, if yes, rate of GST thereupon?
6. Whether the amount of Earnest Money, Security Deposit & Bank Guarantee collected by the Applicant would be liable to GST, if yes, at what rate?
7. Whether the amount of Creditors balance unclaimed/untraceable and written-off by the Applicant by way of crediting P&L Account is taxable, if yes, at what rate?

 Contentions of the Applicant with respect to queries: –

• With respect to Notice Pay Recovery & Surety Bond Forfeiture, it was submitted that the Applicant charges Notice Pay Recovery from the outgoing employees, in case they leave the organisation without serving the mandatory notice period as mentioned in the employment contract. Further, in addition, the company executes a surety bond with the contractual employees of the company as per the employment contract entered by them.  Thus, if an employee leaves the organisation without serving minimum contract period, then the Applicant forfeit the surety bond furnished by the outgoing employees.  Hence, the view of the Applicant is the aforesaid amounts recovered are not taxable under GST.
• The amount received as Notice Pay recovery is covered under Schedule III of CGST Act, 2017 and thus, the same shall be out of the ambit of supply.
• Without prejudice to above, it was submitted that the amount received in lieu of un-served notice period does not qualify as ‘consideration’ instead it is a compensation due to breach of the terms of the Employment contract. Hence, due to absence of ‘consideration’ the scope of supply itself is not fulfilled.
• Further the amount recovered is a compensation for the loss caused to the Applicant’s due to untimely and immediate leave of its employee without service of due notice period.
• Reference was made to the advance ruling decisions and other decisions, where it has been categorically held that no liability to pay tax on Notice Pay Recovery & Surety Bond Forfeiture received from outgoing employee arise both, in the GST and Service Tax regime.
• With respect to Canteen Facility for the employees, it was submitted that the applicant company enters into a contract with the 3rd party service vendor to provide food facility directly to the employees of the company for which the invoice is raised by the 3rd party service vendor upon the Applicant. The Applicant company charges a nominal amount from its employees and bears the remaining portion from its own pocket.
• However, the Applicant view is that the amount received by him in respect of arranging the food facility for the employees is not chargeable to tax as the service the services are provided by the 3rd party to the employees of the company and not by the Applicant, though, the invoices were raised upon the Applicant, and the services have been availed by the employees.
• Further, the GST has already been charged by 3^rd party vendor on the transaction. It is to be noted that the business of the Applicant is not that of providing canteen or outdoor catering services instead it is consultancy organization and engaged in providing consultancy in the field of transport, infrastructure and related technologies.
• The basis of the interpretation of the Applicant is the advance ruling orders wherein, it has been categorically held that canteen charges recovery by employer from its employees would not be taxable under GST.
• With respect to loss/replacement of ID Cards, it was submitted that the Applicant is of the view that the amount received for reissuance of identity card is not chargeable to tax due to the reason that the applicant is not engaged in the business of printing the identity cards. Reliance was placed on the order of Emcure Pharmaceuticals Ltd – AAR Maharashtra, wherein it was held that definition of business (for the purposes of scope of ‘supply') is attracted only if the impugned transaction has nexus with the principal business activity of the company.
• With respect to Liquidated damages charged due to delay in completion of work, it was submitted that the Applicant has entered into a contract vide which if the contractual obligations are not fulfilled within the time prescribed by the contractee or extended time, if any, then the contractor shall be liable to pay agreed sum which is referred to as ‘liquidated damages' in the contract itself. This amount would not liable to tax as 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.
• With respect to forfeiture of Earnest Money, Security Deposit and Bank Guarantee, it was submitted that the applicant forfeit the Earnest Money, Security Deposit and Bank Guarantee of the tenderers /Contractors when after bid opening, but before expiry of bid validity or issue of Letter of acceptance, whichever is earlier, any tenderer (i) Withdraws his tender; (ii) Makes any modification to the terms and conditions of tender which are not acceptable to the employer; or (iii) in case any information/document which may result in the tenderer’s disqualification is concealed by the Tenderer or (iv) if any information/document furnished, is subsequently found to be false or fraudulent or repudiated by the said Bank/Agency/Third party, (v)  in case if the Tenderer fails to furnish the performance Guarantee within the period specified under Clause I of “Clauses of Contract” or fails to commence work without valid reasons.
• It is the view of the Applicant that said forfeiture would not be taxable under GST as Earnest money is in the nature of a penalty and cannot be treated as ‘Consideration’. Moreover, the amount is charged 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 etc, the same may be adjusted and the balance shall be refunded back to the contractor; and,
• Bank Guarantee is also forfeited for the same reasons as Security Deposit is
• With respect to amount written off in books as creditor's balance, it was submitted that the amount written off cannot be considered as the amount received for rendering any supply of service or goods to another person and instead, merely written off its outstanding expenses (creditors) which Applicant will not pay in future. Therefore, this entry merely amounts to writing off – its outstanding expenses, i.e, amount outstanding against services or goods received by the Applicant in past is written off in books of accounts as not payable in future.
• Reliance was placed on the following decisions by the Applicant: – Emcure Pharmaceuticals Ltd – AAR Maharashtra; Amneal Pharmaceuticals Pvt. Ltd – AAR Gujarat; b. Dishman Carbogen Amcis Ltd – AAR Gujarat; c. Bharat Oman Refineries Limited, bearing no. MP/AAAR/07/2021 dated 08 November 2021 (AAAR – MADHYA PRADESH); d.  Tata Motors Ltd – AAR-UTTAR PRADESH; e. Integrated Decisions & Systems India Pvt. Ltd- bearing no. GST-ARA 116/2019-20/B-113 dated 16 December 2021; f. M/S XL Healthcare Corporation India Private Limited v. Commissioner of Central Tax, Bengaluru South Commissionerate[Bangalore CESTAT Final Order No. 20225-20226/2022]; g.  Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. v. Commissioner of Central Goods and Services Tax, Customs and Central Excise, Jodhpur; h.  M/s GE T&D India Limited v. Deputy Commissioner of Central Excise LTU, Chennai; i. M/s Uniparts India Limited v. Commissioner (Appeals), Central Excise, Meerut; j. M/s HCL Learning Limited Vs Commissioner of Central Goods & Services Tax, Noida; k. South Eastern Coalfields Ltd. v. Commr. of C. Ex. & S.T., Raipur, cited in 2021 (55) G.S.T.L. 549 (Tri. – Del.); l.  M/s Neyveli Lignite Corporation Limited – Chennai Tribunal cited in 2021 (53) G.S.T.L. 401 (Tri-Chennai); m.  M/s M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. v. Principal Commissioner CGST&CE CESTAT New Delhi; Commr. of C. Ex., Chandigarh v. H.F.C.L. (Wireless Division) – 2015 (321) E.L.T. 300 (Tri.-Del.); n.  M/s. Priyaraj Electronics Ltd. v. Commissioner of Central Excise, Bangalore; o.  United Telecom Limited – 2006 (204) E.L.T. 626 (Tri. – Bang.).

Personal Hearing was attended by C.A. Anmol Gupta on behalf of the Applicant company on 08.07.2022.  He briefed the authority regarding factual and legal details of each query. Besides, additional submissions dated 13.09.2022 were also submitted.

Held: –

• The Hon’ble Advance Ruling Authority after considering the submissions made, facts of the case, law applicable and the judgments referred, found that Notice pay recovery and surety bond forfeiture both, the issues have been clarified in the circular dated 03.08.2022 of the CBIC. The authority is also of same view 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 surety Bond forfeiture by the applicant 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 III 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 un­served 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.
• With respect to Canteen facility at its premises by the applicant for its employees, it was found by the Hon’ble Authority that that the transaction/deduction of nominal amount from the salary of the employees at fixed rate is outside the preview of the taxability under the GST The principal supply of the applicant is of consultancy in the field of transport, infrastructure and related technology and not of any catering services. Further Tax already stands charged by the third- party service provider from the applicant for the supply of food to the employees of the company. The applicant is charging a nominal amount from its employees to recover part of its cost.
• Referring to the order of the Appellate Authority of Madhya Pradesh in M/s Bharat Oman Refineries Ltd, Bina dated 08.11.2021, wherein it was held that ‘GST is not applicable on the activity of collection of employees' portion of amount by the appellant without making any supply of goods or services by the appellant to its employee’ it was held that no contrary fact in the present matter was found, 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. Therefore, 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.
• With respect to charges collected for re-issuance of ID Cards to the employees, it was found that the applicant uses the in-house printing facility for the services i.e. re-issuance of identity cards to the employee and a fee of Rs. 100 is charged for that purpose. No third-party contractor is availed for the printing of ID Cards.  Therefore, it was held by the Hon’ble Authority 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.
• With respect to taxability on the transaction of liquidated damage charged due to delay in completion of work, it was found on the examination of facts and details of the copy of the Tender flouted/issued by the applicant for works that the matter stands clarified in the circular dated 03.08.2022 of the Board and the same is decided accordingly.
• With respect to taxability of the amount written off in the books of the account of the applicant as creditors balance, it was found by the Hon’ble Authority that there are no services received or provided by the applicant company in the above-mentioned 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.

The Hon’ble Advance Ruling Authority with the above findings, held that on examination of the factual and legal aspects and documentary evidence and the rulings of various authorities submitted by the applicant and from the above discussion and in the light of legal provisions and the circular of the Board dated 03.08.2022, it can be said that none of the above transactions on which the applicant has sought the advance ruling regarding the taxability under the CGST Act, 2017 falls under the scope of supply.  Hence not taxable under GST.