The Ld. Authority for Advance ruling Maharashtra vide its Order dated 04.01.2022 in the matter of M/s Emcure Pharamaceuticals Limited in the Advance Ruling Application No. 119 dated 28.02.2020 held that the recovery made from the employees towards canteen facility, transportation facility provided by the employer and notice pay recovery are not subject to GST.

Questions seeking Advance Ruling – The application was filed by the Applicant seeking advance ruling that whether GST would be payable on (a) Recoveries at subsidized rate from its employees for the canteen facility provided by third party vendor, (b) Recovery at subsidized rates from employees for transportation facility also provided by third party vendor; and, (c) Notice Pay recovery, i.e. compensation collected from the employee for not serving the stipulated notice period.

Facts of the Case – The facts of the case are that the applicant provides canteen and transportation facility to its employees as part and parcel of the Employment agreement and engages a third-party service provider for the same. The Applicant later on makes recoveries from the employees at the subsidized rates for providing aforesaid canteen and transportation services, however, it recovers a nominal portion of the consideration paid to the third-party service provider. Further, the Applicant also deduct salary for the tenure of notice period as compensation for breach of terms of Employment Agreement from the employees who resign without serving the mandated notice period, in part or full.

Applicant’s Submissions – The Applicants contention and interpretation of Law in the instant matter was as follows –

Regarding recoveries for Canteen Facility provided to the employees

• That the Applicant is in the business if pharmaceutical products and providing the canteen facility to its employees is neither the business of the Applicant of incidental/ancillary to the main business, hence cannot be taxed under GST.
• The Applicant relies on the judgment of the Hon’ble Supreme Court in the matter of State of Gujarat vs. Raipur Manufacturing Co. Ltd. (Civil Appeal No. 603 of 1966), the Hon’ble Madras High Court Judgment in the matter of Deputy Commissioner of Commercial Taxes Thirumagal Mills Ltd. [1967 (20) STC 287 Mad.] and finally on the judgment of the Hon’ble Delhi High Court in the matter of Panacea Biotech Limited v. Commissioner of Trade and Taxes – [(2013) 59 VST 524 (Del.)] to substantiate that aforesaid recoveries in respect of canteen and transport facility are not incidental or ancillary.
• It was further submitted that any activity or transaction, in this case, canteen services, which is undertaken in the course of or in connection with employment, has been specifically excluded from the ambit of Supply by virtue of Section 7(2) read with entry 1 of Schedule III.
• The employee recovery would not qualify as supply under GST relying on the judgments in the case of M/s Jotun India Private Limited 2019 (29) GSTL 778 (A.A.R. – GST)  and on POSCO India Processing Centre Private Limited  2019 (21) GSTL 351 (A.A.R. – GST)

Regarding recoveries for Bus transportation provided to the employees

• The Applicant is procuring third-party bus transportation for transportation of its employees in Non-AC Buses, the service provider issues a invoice with applicable GST to the Applicant.
• The Applicant recovers subsidized amount for the said transportation facility from its employees.
• The Applicant is not in the business of bus transportation.
• The Bus transportation facility provided is excluded from the scope of supply as per clause (a) of Section 7(2) read with Schedule – III of the CGST Act.
• It is a settled position under GST regime that recoveries from the employee do not amount to supply and the submissions made by the Applicant in respect of canteen facility recoveries equally applies to the bus transportation facility provided.
• Local transportation of passengers through buses are covered under Tariff 996411 as per Notification 11/2017 – CTR dated 28.06.2017 which provides the manner for classification of services, thus even if the transportation facility is considered as a supply it would fall under Tariff 9964 only and would be exempt as per exemption Notification 12/2017 – CTR dated 28.06.2017.
• Moreover if the transportation facility amounts to supply, the buses in question used for employee transportation would qualify as contract carriage and would be exempt as per SI No. 15(b) of the exemption Notification – 12/2017 dated 28.06.2017.

Regarding notice pay recovery from the employees

• The Notice pay recovery by the Applicant from its employees is excluded from the scope of supply as per clause (a) of Section 7 read with entry 1 of Schedule III of the CGST Act being recovered in course of employment or in relation to the employment.
• That as per the Employment agreement, notice pay recovery is merely a recovery of the salary paid by the Applicant to its employees and thus an integral part of the salary benefits and deductions which is provided in the course of employment and not exigible to GST.
• Further the Applicant relied on the judgments in the matter of GE T&D India Limited 2020 (35) G.S.T.L. 89 (Mad.), the Hon’ble Tribunal judgment in the matter of HCL Learning Ltd. and on the judgment in the matter of Uniparts India Ltd. v. Commissioner (Appeals), C. Ex. Meerut, 2020 (33) G.S.T.L. 233 (Tri- All.) and various other orders to strengthen its contention that the notice pay recovery is not exigible to GST.
• Further notice pay recovery does not qualify as ‘Consideration’ and any activity of supply of goods/services would not amount to supply as per Section 7(1) (a) and same should be treated as penalty for non compliance of the terms of the agreement.
• Notice pay collected by the Applicant from its employees are in the nature of compensation for damages from breach of Contract and such compensation is a legal and statutory right provided under Section 73 and 74 of the Indian Contract Act, 1872.
• The notice pay recovery does not amount to supply as per Section 7(1)( c) read with Schedule- I as it states about the supply between the related person even without consideration would tantamount to supply if such supply is in the course of furtherance of business, however in the instant matter the Applicant is in the business of pharmaceutical products and the notice pay recovery is not in relation to the business of the Applicant.

Ruling – The Ld. Advance Ruling Authority Maharashtra, after taking cognizance of all the submissions, held that –

In respect of recoveries from employees for canteen facility

• The Applicant is providing the canteen facility to its employees based on its Human Resource (HR) policy for which it avails the service of third party who are raising tax invoices on the Applicant, with applicable GST and the Applicant recovers a certain portion, a subsidized amount, as deduction from the employee salary. The employees are vital resources to carry out the day to day affairs of the Applicant Company and provision of canteen facility to the employees is welfare measure, also mandated by the Factories Act and is not at all connected to the functioning of business of the Applicant.
• The applicant is not providing any canteen service to its employees and is not the output service of the Applicant since it is not in the business of providing canteen service, moreover the Applicant is not the provider is the receiver of the canteen service.
• It was further observed that GST has already been discharged by the vendors providing canteen facility on the gross value of bills
• Since the provision of canteen facility by the Applicant to its employees is not in the course or furtherance of business, the canteen services provided by the Applicant to its employees cannot be considered as ‘supply’ under the relevant provisions of CGST Act. Thus the Applicant is not liable to pay GST on recoveries made from the employees for providing canteen facility at subsidized rates.

In respect of recoveries from employees for bus transportation facility

• The provision of bus transportation facility to the employees is a welfare, security and safety measures and is not at all connected to the functioning of business of the Applicant.
• The Applicant is not providing the transportation facility to its employees since it is not in the business of providing transport service and the service has been provided by the third-party vendor. Moreover the GST has already been discharged by the third-party vendors on the gross value of the bills raised on the Applicant.
• The Ld. authority relying on the advance rulings in the matter of M/s Tata Motors Ltd, M/s North Shore Technologies Pvt. Ltd. 2021 (419) GSTL 315 (A.A.R. – GST – U.P.), and on the recent ruling passed by the same (Maharashtra) Advance Ruling Authority in the matter of M/s Integrated Decisions and Systems India Pvt. Ltd. held that the transportation facility provided to the employees is not an activity which is incidental or ancillary to the business of the Applicant, nor it is an activity done in the course of furtherance of developing, manufacturing or marketing of pharmaceutical products. Hence GST is not payable on the recoveries made from the employees for providing transportation facility.

In respect of notice pay recovery

• The employee opting to resign by paying amount equivalent to month of salary in lieu of notice, has acted in accordance with the contract and no question of any forbearance or tolerance arises and resignation by the employee is not subject to any acceptance or approval.
• There is neither any activity nor any passive role played by the employer.
• There is no consideration within the meaning of Section 2(31) (b) of the CGST Act, 2017 flowing from an act of forbearance in as much as there is no breach of Contract.
• The Ld. Authority considering the decisions in the matter of Bharat Oman Refineries Limited (MPAAAR) and Madras High Court decision in the matter of GE T&D India Ltd. Vs. Deputy Commissioner of Central Excise, Chennai, 2020 (35) G.S.T.L. 89 (Mad.) and other decisions referred by the Applicant and analysis made in detail held that the notice pay recovered by the Applicant from its employees is not liable to GST.