JANUARY 12, 2018

By P R Chandrasekharan, IRS (Retd.)

THE phrase "For fools rush in where angels fear to tread" was first written by Alexander Pope in his poem "An Essay on Criticism" in 1711. The phrase alludes to inexperienced or rash people attempting things that more experienced people avoid. It has since entered the English lexicon as an idiom.

2. The proximate cause for invoking this quote is the recent Circular No. 28/02/2018-GST , dated January 8, 2018 issued by the Tax Research Unit. The said circular in paragraph 2 thereof clarifies,-

"2. The educational institutions have mess facility for providing food to their students and staff. Such facility is either run by the institution/ students themselves or is outsourced to a third person. Supply of food or drink provided by a mess or canteen is taxable at 5% without Input Tax Credit [Serial No. 7(i) of notification No. 11/2017-CT (Rate) as amended vide notification No. 46/2017-CT (Rate) dated 14.11.2017 refers]. It is immaterial whether the service is provided by the educational institution itself or the institution outsources the activity to an outside contractor."

3. Section 7 of the CGST Act, 2017 states,-

"7. (1) For the purposes of this Act, the expression "supply" includes–– (a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

………………………………………………………………………………………."

4. A plain reading of the above provision makes it abundantly clear that to be a taxable supply, the supply of goods or services or both should be in the course or furtherance of business. When an educational institution provides mess facility to its resident scholars, can it be said that it is in the business of catering? No rational mind can agree to such a proposition. The principal activity of any educational institution is to impart education to its students. If mess facility is provided to its resident scholars, even if for a consideration, it can, at best, be considered as an incidental or ancillary supply or support service to the primary supply of educational service.

5. Many a times the mess facility is run by student committees who run the service for themselves and the expenditure incurred is shared by the student members. Can a service to the self be considered as 'service'?Available literature on VAT/GST legislation all across the world loudly proclaims "NO".

6. Notification No. 12/2017 – Central Tax (Rate) dated 28-6-2017 which prescribes the rate of tax on various services, vide Sl. No. 66 provides that,-

6.1 Opening paragraph of the notification reads as,-

"……..the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts the intra-State supply of services of description as specified in column (3) of the Table below from so much of the central tax leviable thereon under sub-section (1) of section 9 of the said Act, as is in excess of the said tax calculated at the rate as specified in the corresponding entry in column (4) of the said Table, unless specified otherwise, subject to the relevant conditions as specified in the corresponding entry in column (5) of the said Table,namely:-"

6.2 Thus the exemption is on the intra-state supply of services of the description specified in column (3) and the Chapter/Heading No. etc. referred to in column (2) has no relevance. The exemption is on the "services provided by an educational institution to its students, faculty and staff"and there is no restriction, whatsoever, as to the nature of the service provided. Thus a plain, literal reading of the notification makes it crystal clear that service of catering provided by way of mess facility by an educational institution to its students, faculty or staff, falls squarely within the exemption clause and no tax liability arises. The amending notification 46/2017 –CT (Rate) dated 14-11-2017 does not at all affect the exemption provided vide Sl. No. 66 in any way.

6.3 The Circular issued by the Tax Research Unit appears to be contrary to the provisions of a statutory exemption notification, for achieving the policy objective of keeping the education sector outside the tax net. Section 168 (of CGST Act) empowers the Board, for the purpose of uniformity in the implementation of CGST Act, to issue such orders, instructions or directions to the central tax officers as it may deem fit, and thereupon, all such officers and all other persons employed in the implementation of the Act shall observe and follow such orders, instructions or directions. When this power is exercised, it is explicitly stated in the order/instruction/direction issued by the Board and the authority competent to issue the same is the Secretary to the Board (who is normally of the rank of Deputy Secretary or above). The impugned circular does not cite any authority for its issuance nor does it say with whose approval the same has been issued. In fact, there is no reference to the Board (CBIC/CBEC) at all anywhere in the circular. Thus the vires of the circular itself is in doubt.

7. Two case laws, one of the Supreme Court of the United Kingdom and another of the Court of Justice of the European Union (CJEU) will clarify the legal issue involved.

1) The first is of the UK Supreme Court in the case of British Airways Plc v Commissioners of Customs and Excise [1990 WL 753488] on appeal from the High Court of Justice, Queens Bench Division. British Airways carries on the business of transporting passengers and freight by air and is registered as a taxable person under VAT Act 1983. On all its domestic flights, BA tries to provide in-flight catering for passengers – 1) a bar service and a beverage and biscuit service; 2) a breakfast service on flights leaving before 9.30 am; and 3) a meals service on long distance flights. Passengers on British Airways flights pay the amounts determined for travelling to their destinations according to the types of tickets which they obtain, but pay nothing additional for or in respect of the in-flight catering provided to them during the flights.

Before the London V.A.T. Tribunal, the Commissioners successfully contended that meals and beverages supplied in- flight without payment were "goods supplied in the course of catering" and so subject to tax at the standard rate and not part of the "transport of passengers in any vehicle, ship or aircraft designed or adapted to carry not less than 12 passengers" which is zero-rated. British Airways appealed to the High Court and Otton J. reversed the decision of the tribunal; the Commissioners appealed to the Supreme court. Dismissing the appeal, the Court ruled -

"The reality is that transportation by air can be of different classes or qualities. Air carriers can and do provide alternative services which give the passengers the bare minimum of space both laterally and longitudinally or a great deal of space. They can and do provide the passengers with seats which do not recline at all, which recline to a limited extent or which, albeit only on long haul services, recline to a point at which they are virtually beds. They could have provided and have in the past provided transportation without any in-flight catering and at the present time they can and do provide it on greatly varying scales and with different degrees of luxury ranging from plastic containers adorned by a cup of tea or coffee and a biscuit to, at least on long haul services, a multi- course dinner served on china with high quality cutlery which would not disgrace a 5-star hotel. The air passenger chooses from what is on offer, and pays for, whichever degree of luxury or lack of it he requires, but the choice is between grades of air transportation, not between grades of transportation and separate grades of in-flight catering."

2) The Court of Justice of the European Union (CJEU) issued a preliminary ruling on a reference from the Court of Appeal (England & Wales) (Civil Division) (United Kingdom) in HMRC v. Brockenhurst College (case C-699/15) (decided on 4 May 2017). The facts and the ruling are summarized below:-

Brockenhurst College ran courses in catering, hospitality and the performing arts; this included a restaurant and stages performances, which were open to a limited public at a reduced price. The idea was to provide students with practical experience under the supervision of their tutors. The college contended that these supplies of catering and entertainment services were exempt as supplies 'closely related' to the provision of education.

The CJEU observed that, in order to be 'closely related' to education services, services must be ancillary to the education provided by the relevant establishment, which must constitute the principal supply. The court accepted that the practical training resulting from the supplies formed an integral part of the curriculum; the supplies of catering and entertainment services were essential in guaranteeing the quality of the principal supply of education.

The court also found that the basic purpose of the college was not to obtain additional income. The supplies were offered to a limited number of people and charged at 80% of their costs; they were not in direct competition with supplies by commercial providers.

The ratio of the above two rulings has significance and relevance to the issue under discussion.

8. Sec. 2(30) of the CGST Act defines a "composite supply" as follows:-

(30) "composite supply" means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration. - Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

8.1 If we apply the above definition to the cases referred to in the Circular dated 8th January, 2018, an educational institution offering hostel and mess facilities as incidental or ancillary service to the principal supply of education service should be given the same tax treatment as applicable to the "education service", notwithstanding charging of separate amounts for such ancillary services, in terms of the ratio of the decisions of the UK Supreme Court and the European Union Court of Justice discussed above. In fact, it will not be unreasonable to classify such services as "Other Educational support services" under Group 99929, Service Code 999299 . In any case, it is inimical to common sense to treat them as separate services of education service and catering service. However, the position would be different if the services are out sourced and is provided by a third party caterer.

9. It appears that the instant clarification/instruction has been issued without proper analysis of the legal provisions and judicial pronouncements on the subject. Such clarifications, issued in a hurry, will lead to more and more (avoidable) litigations. Let us not " act in haste and repent at leisure"!

(The author is a former Member (Technical) of CESTAT, Mumbai and is presently a Professor at the National Law School of India University, Bengaluru. The views expressed hereinabove are the personal views of the author and do not in any way represent the views of the organization he works for.)