FEBRUARY 02, 2016

By Juhi Bansal

RECENTLY, the Authority of Advance Rulings (Central Excise, Customs & Service Tax) (hereinafter referred to as 'the AAR') vide its judgment in the case of J.P.Morgan Services India Pvt. Ltd., Mumbai v. Commissioner of Service Tax, Mumbai, - 2015-TIOL-12-ARA-ST (hereinafter referred to as 'JP Morgan ruling') has held that since the service(of 'making available a car') provided by an employer to its employee is during the course and in relation to employee's employment, therefore, the aforesaid activity would be out of the ambit of the Service tax net.

Legal Background

Under Chapter V of the Finance Act, 1994, post introduction of Negative list based taxation of services, as per Section 65B(44) of the Finance Act, 1994 (hereinafter referred to as 'the Act') as inserted by the Finance Act, 2012, the term 'service' has been defined to mean 'any activity carried out by a person for another for a consideration and includes a declared service'. However, the definition of the term 'service' under Section 65B(44)(B) of the Act specifically excludes a provision of service by an employee to the employer in the course of or in relation to his employment.

A Controversial Scenario

With the above insertion in the Act, a doubt arose if the above Section 65B(44)(B) of the Act would also include a provision of service by an 'employer' to the 'employee' in the course of or in relation to his employment.

After advent of the Negative list based taxation of services, for the first time the aforesaid issue popped up before the AAR seeking a verdict on whether a provision of service by an 'employer' to the 'employee' in the course of or in relation to his employment would be exigible to Service tax.

As per the facts of the JP Morgan ruling, the employer was providing service of 'making available' cars to its employees during the term of their employment for which the employer was charging only the car rent which in turn was paid to the car leasing company from which the employer had hired the car. Additionally, an option was given to the employee to ultimately purchase the car at the end of his employment. Accordingly, a question arose as to whether the above employer employee related transaction in relation to leasing out of cars would be leviable to Service tax. In this context, it is noteworthy that the only contention raised by the Revenue was that since the car was made available by the employer to the employee both for personal as well as for official use, thus, the aforesaid transaction would invite Service tax. Negating this argument, the AAR opined that owing to the unambiguous language of Section 65B(44) of the Act, it would be immaterial to consider whether the car was made available for official use, personal use or for both. For the sake of convenience, the relevant portion is extracted as follows:

8. Shri Dikshit, the learned representative of the Revenue, however, says that in this case, the car is being 'made available' to the employee both for official and personal use. Accordingly to Shri. Dikhshit, this task of 'making available' a car for personal and official use as well would invite the service tax. In our opinion, whether the car is given for official use, for personal use or for both will not make any difference. In view of the clear cut language of Section 65B(44)(b), we answer the question accordingly. The matter is directed to be disposed of.

In view of the JP Morgan ruling, it is noteworthy that on the afore referred issue of taxability of employer employee related transactions, the essential parameter that the definition of the term 'service' under Section 65B(44)(B) of the Act only excludes a provision of service by an 'employee' to the 'employer' and not vice versa, was not brought to the notice of the Hon'ble bench of the AAR. Moreover, the only point considered as relevant was that since the service was undisputedly provided by the employer to its employees which was 'in the course of' or 'in relation to' their employment, therefore, the transaction in question would fall within the four corners of Section 65B(44)(B) of the Act.

From a close scrutiny of the JP Morgan ruling, it seems that the judgement may raise some controversial issues in relation to taxability of employer employee related transactions. For example, in case where the employer has hired cars for transporting its employees for official purpose and recovers proportionate amount from its employees, would the employer be required to pay Service tax on the recoveries so made. As per the ratio of the JP Morgan ruling, such transaction may fall within the ambit of Section 65B(44)(B) of the Act and therefore, may not be leviable to Service tax.

Similar issue may arise with respect to recovery of cab charges from the employees wherein the employer is a SEZ unit. Not to mention the requirements of carrying out the necessary compliances ranging from issuance of invoices (to the employees) to discharging of Service tax on such recoveries etc., an additional doubt may arise regarding the aforesaid activity not forming part of the authorized operations as approved by the Unit Approval Committee for the SEZ unit (because SEZ unit may be construed as providing rent-a-cab as its output service/authorized operations). Accordingly, in case the SEZ unit has already obtained ab-initio exemption for rent-a-cab service (in terms of the Notification No. 12/ 2013 - ST dated 1 July 2013), then there may be a scenario where such specified service may lose nexus with the output services (authorized operations) which may result into withdrawal of the exemption both by way of ab-initio and refund mechanism. As an upshot of the above, this may inflate the cost of operations of the SEZ unit.

Another situation may be wherein facility of canteen/cafeteria is provided by the employer to its employees in the office premises. As a matter of fact, presently, the vendor (who supplies the meals) subject to the facility of air-conditioning / central air-heating in the office canteen, has been charging Service tax on its invoices raised on the employers. However, applying ratio of the JP Morgan ruling to this situation, a view may be taken that since the service is being provided by the employer to its employees which is 'in the course of' or 'in relation to' their employment, therefore, the activity may fall within the four corners of Section 65B(44)(B) of the Act and thus, out of the Service tax net.

Further, on the aspect of taxability of employer employee related transaction, the Department had put up a Draft Circular F.No. 354/127/2012-TRU dated 27 July 2012 (hereinafter referred to as 'the Draft Circular') clarifying that if the activities were carried out by the employer for the employees (assuming such activities were neither covered by the Negative List nor otherwise exempt) for a consideration, then such activities would fall within the definition of 'service' which would be leviable to Service tax under the Act. However, it is to be noted that this Draft Circular was put up only to elicit public responses which has not been officially issued by the Board till date. For the above reason, the Draft Circular cannot be relied upon.

Point of View

In light of the above discussion, it seems that though the JP Morgan ruling is given in the context of the service of leasing cars (making car available) by the employer to its employees, however, the ratio may be stretched to the various services rendered by the employers to the employees irrespective of the fact whether the service is used / consumed for official use, personal use or for both, by the employees. In this regard, a doubt may arise questioning the taxability of the various services like renting a cab or canteen or accommodation or telephone or training etc. provided by the employers to their employees (both for official or personal use).

Although, from a close scrutiny of Section 65B(44) of the Act, it seems that the afore referred services would be leviable to Service tax (to the extent out of the ambit of the Negative list or Mega Exemption Notification), however, in the light of the JP Morgan ruling, the above discussed services may be construed to be outside the Service tax net. Nevertheless, the undisputed fact remains that the statutory exclusion only extends to the provision of service by an 'employee' to the 'employer' and not the other way round. Thus, the JP Morgan ruling has caused a dilemma industry wide.

In this context, it is worthwhile to mention that the AAR is a quasi-judicial body whose rulings are binding on the applicant as well as on the tax Department. Although the rulings are binding on the applicant, however, being quasi-judicial in nature, the rulings are generally treated as a precedent having a high persuasive value. In other words, although the rulings are binding only on the applicant but other assesses also follow the principle laid by the AAR in its rulings. However any party feeling aggrieved by the AAR ruling may exercise its constitutional rights by going in Writ in the High Court or Special Leave Petition in the Supreme Court. Given the above, it seems that the JP Morgan ruling is binding on the tax authorities unless appealed against before the High Court or the Supreme Court.

Interestingly, it appears that the key point that only provision of service by an 'employee' to the 'employer' is excluded from the ambit of the definition of 'service' under Section 65B(44)(B) of the Act and not the other way around, may have lost the sight of the AAR.Does it mean that a close scrutiny of the above relevant statutory provision may have significantly impacted the ratio of the JP Morgan ruling? The answer seems to be in affirmative.

Hopefully, the Union Budget 2016 may have something for the employer vis-à-vis the employee conundrum?