Is GST Applicable on Notice Pay Recoveries made from the employees?

Maharashtra AAR: Held that GST is not payable on the recoveries made from the employees towards providing canteen facility in factory, bus transportation facility and on the notice pay recoveries made from the employees on account of not serving the full notice period.

M/s Emcure Pharmaceuticals Limited; Maharashtra AAR; 04.01.2022; NO.GST-ARA-119/2019-20/B-D3

Facts:

• Applicant is a pharmaceutical company engaged in developing, manufacturing and marketing of pharmaceuticals products, provides canteen and bus transportation facility to its employees as a part and parcel of the employment arrangement vide letter of employment (employment agreement) to employees, which contains the terms & conditions of employment as per its HR policy.
• Applicant has entered into a contract with a third party outdoor catering service provider for providing cooked food, to its employees, in the canteen area facility in the factory and office premises. The catering service provider raises invoices on the Applicant.
• The Applicant is making recoveries at subsidized rate from its employees for the canteen facility.
• Similarly, Applicant has also engaged bus transportation service provider for arranging transportation service provider for arranging transportation of its employees.
• The bus transportation service provider is raising invoices on Applicant who makes recoveries at subsidized rate from its employees.
• Applicant also makes notice pay recoveries from its employees on account of not serving the full notice period.
• The present application has been filed by the applicant seeking an advance ruling in respect of following questions:

Observations and Findings:

Question no.1: Whether the GST would be payable on recoveries made from the employees towards providing canteen facility at subsidized rates in the factory and office?

• The applicant is providing canteen facilities to its employees based on its Human resource (HR) Policy for which it avails services of third party service providers who are raising tax invoices on the applicant, with applicable GST and to whom the Applicant pays consideration.
• Applicant recovers certain portion, a subsidized amount, as deduction from the employee’s salary. The applicant has also submitted that the canteen is mandatorily required to be maintained by it as per provisions of section 46 of the factories act,1948. It is not availing any ITC on the input services of canteen.
• It was submitted by the applicant that by virtue of section 7(2) read with Entry (1) of Schedule III, the subject canteen facility provided to their employees, does not amount to supply.
• In terms of section 7 of the CGST Act, 2017 for a transaction to qualify as supply, it should essentially be made in the course or furtherance of business.
• It was found that the applicant was engaged in the business of developing, manufacturing and marketing a broad range of pharmaceutical products from its various manufacturing units, Research and Development Centers and branch offices.
• The provision of canteen facility to the employees is a welfare measure, also mandated by the Factories Act and is not at all connected to the functioning of their business of developing, manufacturing and marketing pharmaceutical products. Further, the said activity is not a factor which wills take the applicant’s business activity forward.
• It was found that the applicant was not supplying any canteen service to its employees in the instant case. Further, the said canteen facility was not the output service of the applicant since it is not in the business of providing canteen service. Rather, it was found that this canteen facility is provided to employees by the third party vendors and not by the applicant.
• Therefore, in the present case, the applicant is not providing any canteen facility to its employees, in fact the applicant is a receiver of such services.
• It was observed that the GST is discharged on the gross value of bills raised on the applicant by the third party vendors, providing canteen facility. It was further observed that the partial amounts recovered by the applicant from its employees in respect of use of such canteen facility are a part of the amount paid to the third party vendors which has already suffered GST.
• Since the provision of canteen facility by the applicant to its employees is not a transaction made in the course or furtherance of business, and in terms of section 7 of the CGST Act, 2017, for a transaction to qualify as supply, it should essentially be made in the course or furtherance of business.
• It was found that the canteen services provided by the applicant to its employees cannot be considered as a “supply” under the relevant provisions of the CGST Act, 2017 and therefore the applicant is not liable to pay GST on the recoveries made from the employees towards providing canteen facility at subsidized rates.

Question 2: Whether the GST would be payable on the recoveries made from the employees towards providing bus transportation facility? If yes, whether the Applicant is exempted under Notification No. 12/2017 Central Tax (Rate)?

• The applicant has submitted that, its submissions made in respect of canteen facilities provided by it to employees equally applies in the case of Bus Transportation facility provided to the employees. Therefore, Applicant has stated that, it is not engaged in the business of bus transportation and accordingly, the said facility provided by the Applicant to its employees does not amount to supply under the GST regulations.
• In terms of section 7 of the CGST Act, 2017, for a transaction to qualify as supply, it should essentially be made in the course or furtherance of business. It was found that, the applicant is engaged in developing, manufacturing and marketing of pharmaceutical products.
• The provision of bus transportation facility to the employees is a welfare, security and safety measure and is not at all connected to the functioning of their business. Further, the said activity is not a factor which will take the applicant’s business activity forward.
• It was further found that the applicant is not supplying any bus transportation service to its employees in the instant case. Further, Bus transportation service is also not the output service of the applicant since they are not in the business of providing transport service.
• Rather, this bus transportation facility is provided to employees by the third party vendors and not by the applicant. Therefore, in the subject case, the applicant is not providing bus transportation facility to its employees, in fact the applicant is a receiver of such services.
• It was observed that the GST is discharged on the gross value f bills raised on the applicant by the third party vendors. It was further observed that the partial amounts recovered by the applicant from its employees in respect of use of such bus transportation facility are a part of the amount paid to the third party vendors which has already suffered GST.
• Relying of several decisions including an advance ruling application filed by M/s Integrated Decisions and Systems India Pvt. Ltd., [GST-ARA-116/2019-20 dated 16.12.2021], it was held that , part recovery of amounts from employees in respect of the transport facility provided to them would not be treated as ‘supply’ as per provisions of GST Laws and therefore GST would not be leviable on the same.
• Accordingly, the tribunal was of the view that for the applicant, arranging bus transportation facility for their employees is definitely not an activity which is incidental or ancillary to the activity of developing, manufacturing and marketing of pharmaceutical products, nor can it be called an activity done in the course of or in furtherance of developing, manufacturing and marketing of pharmaceutical products as it is not integrally connected to the business in such a way that without this, the business will not function.
• Hence, it was held that GST would not be payable on the recoveries made from the employees towards providing bus transportation facility.

Question 3: Whether the GST would be payable on the notice pay recoveries made from the employees on account of not serving the full notice period?

• It was submitted that at the time of appointing any employee, they enter into an ‘Employment Agreement’ wherein it is mentioned that, either parties shall serve a certain time period’s mandatory notice to terminate the said Agreemnt.
• As per the relevant clauses of the Emplyment Agreement, the employee shall have a right to resign by serving prior written notice of 30/90 days applicable to the Employee’s grade, as company policy or upon payment of money compensation in lieu of notice period as mentioned in the company policy as per Employee’s Grade at the time of separation. Thus one to three months’ notice is mandatory for all employees/employer.
• In case, if any employee doesn’t serve the notice period after tendering the resignation, then as per contract (appointment letter) condition, company is entitled to recover the notice pay from the agreed portion of salary to compensate the loss to company.
• Thus, Employees who resign from their job are expected to serve notice period as mentioned in the appointment letter. If the employee does not serve such notice period, the salary of the unserved portion of notice period is retained by the employer, which is called as “Notice Pay Recovery”.
• Relying on several rulings based on the similar facts and section 7 of the CGST Act, 2017, i.e. Scope of Supply, it was held that the levy under CGST Act, 2017 is on “supply” of goods or services or both. The word “such as” used preceding the words sale, transfer, barter, exchange, etc. indicates that the forms of supply shall be those which are enumerated therein or of similar character but not of other dissimilar forms of supply. The expression “such as” indicates the character of the transactions.
• Furthermore, the CGST (Amendment) Act, 2018 introduced sub action (1A) to section 7 of the CGST Act, 2017 with retrospective effect 01.07.2017 in place of section 7(1)(d), which seeks to levy tax on certain declared “supply” of goods or services referred to in schedule II of the CGST Act, 2017.
• As per section 7(1A), where certain activities or transactions, constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II wherein it has been prescribed that, a particular activity shall be treated either as supply of goods or as supply of services. However, Schedule II comes into play only if an activity is qualifies as supply under section 7 of CGST Act.
• Besides above, Services by an employee to the employer in the course of or in relation to his employment are activities or transactions which shall be treated as neither supply of goods nor supply of services under Schedule III of section 7 of the CGST Act 2017.
• The employee opting to resign by paying amount equivalent to month of slary in lieu of notice, has acted in accordance with the contract and that being the case no question of any forbearance or tolerance does arise. Further, as per the agreement, the resignation by the employee is not subject to any acceptance or approval and employee is free to tender his resignation, make payment of notice period salary to leave.
• Hence there is neither any activity nor any passive role played by the employer. It must be noted here, that there is no consideration within the meaning of sec 2(32)(b) of the CGST Act, 2017 flowing from an act of forbearance in as much as there is no breach of contract, as a question of any consideration for forbearance would arise in case of breach of contract.
• Therefore, it was concluded that recovery of notice pay from dues of employee/payment of notice pay by the employee who could not serve the notice for the period as per contractual agreement/appointment letter dos not amount to supply and therefore as per section 7(1A) of the CGST Act, 2017, the provisions of Schedule II does not come into play.
• Relying on the reasoning and decision given by the MPAAAR bearing Advance Ruling No. MP/AAAR/07/2021 dated 08.11.2021;filed by M/s Bharat Oman Refineries Limited and decision of the Hon’ble Madras High Court in W.P. Nos. 35728 to 35734 of 2016 in the case of GE T&D India Ltd. vs Deputy Commr of Central Excise, LTU, Chennai-2020-VIL-39-MAD-ST it was held that, the notice pay recovered by the applicant from its employees is not liable to GST.

Held:

Question No.1:- Answered in negative.

Question No.2:- Answered in negative.

Question No.3:- Answered in negative.