| Nov-08-2022

No GST on recoveries on account of Notice Pay, Bond Forfeiture, Canteen Charges, ID Cards replacement Liquidated Damages etc.

The AAR, Haryana in the matter of M/s Rites Ltd. [Advance Ruling No. HR/ARL/19/2022-23 dated October 18, 2022], Re has passed a ruling on the taxability of amount collected or received or forfeited as Notice Pay Recovery, Bond forfeiture of contractual employees, canteen charges, recovery on account of loss or replacement of ID Cards, Liquidated damages due to delay in completion, Forfeiture of earnest money and security deposit and bank guarantee by applicant, and Amount written off as creditors balance in the books of accounts of the applicant.  

Facts: 

M/s RITES Ltd. (“the Applicant”) was established in 1974 and was incorporated as a Public Ltd. company under the Companies Act, 1956. It is a multi-disciplinary consultancy organization, which deals in the field of transport, infrastructure, and other related technologies. The nature of various amounts received or forfeited are as follows: 

1. Notice Pay Recovery
   Charges received by the company in cases where the employee is unable to serve the notice period as per the employment contract. It can also be understood as charges for not serving the notice period. 
2. Bond forfeiture of contractual employees
   The amount paid as surety is forfeited in case the minimum bond period is not served and the employee resigns before the conclusion of the contract. 
3. Canteen Charges
   For the purposes of ease in conducting business and for increase in efficiency, the Applicant deemed it fit to enter a contract with a third-party vendor to provide food and beverages to its employees. Rate of the meals is provided by that third party vendor and is finalized in advance by the applicant. An invoice for the agreed amount is also generated along with GST and a nominal amount is also deducted from the employees for the aforementioned reasons and the rest of the amount for the canteen services is borne by the Applicant company as a service to its employees. 
4. Recovery on account of loss or replacement of ID Cards
   In case of loss or mutilation of existing ID Card, new ID cards needs to be made and for the purpose of reissuance, some amount is charged. It is essential to note that the printing of the new ID cards and re-issuance is not through any third-party vendor, but through in-house facility itself. 
5. Liquidated damages due to delay in completion
   Since the Applicant receives construction work due to its expertise, it being affiliated with the Government of India, invites tenders and bids to carry out such construction activity that they are entrusted with. In case there is a delay in completion of the activity, the contractor is required to pay the agreed sum as liquidated damages, subject to maximum limit decided as per the contract.  
6. Taxability on forfeiture of earnest money and security deposit and bank guarantee by applicant
   Applicant receives earnest money from bidders and returns such money of the unsuccessful bidders except in certain situations. Similarly, Security Deposit and Bank Guarantee of the successful bidder maybe forfeited in situation where damages may arise. 
7. Taxability of amount written off in the books of accounts of the Applicant as creditor’s balance.
   A contractor whose security deposit is forfeited and when such contractor becomes eligible for refund of such amount but is untraceable and does not come forward to claim the said amount, then such amount shall be considered as expenditure to be incurred and would reflect on the liabilities side of the balance sheet and is written off as credit entry in P&L account.  

Issue: 

Whether the GST leviable on amount collected or received or forfeited as Notice Pay Recovery, Bond forfeiture of contractual employees, Canteen charges, Recovery on account of loss or replacement of ID Cards, Liquidated damages due to delay in completion, Forfeiture of earnest money and security deposit and bank guarantee by applicant, and Amount written off as creditors balance in the books of accounts of the Applicant and if yes, at what rate GST to be levied?

Analysis  

• Notice Pay Recovery and Bond forfeiture of contractual employees is not chargeable to GST due to the following reasons:
  1. Notice Pay Recovery is covered under Schedule III of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) and is out of the ambit of supply. 
  2. Amount received in lieu of unserved notice period is not consideration, but in fact compensation for breach of contract. Since there is absence of consideration, the scope of supply essential remains unfulfilled.
  3. The Applicant relied on Emcure Pharmaceuticals Ltd., In re, [Advance Ruling No. 119/2019-20/B-03 dated January 04, 2022], (AAR - Maharashtra) and Bharat Oman Refineries Ltd., In re, [Advance Ruling No. MP/AAAR/07/2021 dated November 8, 2021] (AAAR-Madhya Pradesh).
• Canteen charges are not chargeable to GST due to the following reasons: 
  1. The invoice is generated against the name of the Applicant while the service is being used by the employees, and there is nothing to say that the Applicant is the service provider. 
  2. GST has already been levied by the third-party vendor. 
  3. Catering services nowhere related to the actual business of the Applicant company; therefore, it cannot be said to be in furtherance of business. 
  4. Reliance was placed on and Bharat Oman Refineries Limited [Advance Ruling No. MP/AAAR/07/2021 dated November 8, 2021] (AAAR-Madhya Pradesh) and Tata Motors Ltd., In re, [Advance Ruling No. GUJ/GAAR/R/39/2021 dated July 30, 2021] (AAR - Gujarat).
• Recovery on account of loss or replacement of ID Cards is not chargeable to tax as the Applicant is not in the business of printing ID Cards. Applicant relied on Emcure Pharmaceuticals Ltd., In re, [Advance Ruling No. 119/2019-20/B-03 dated January 04, 2022], (AAR - Maharashtra) where nexus to principal business activity was discussed. 
• Liquidated damages due to delay in completion of the project is not taxable as the amount received is not lieu of any service rendered but as damages incurred on account of such delay. 
• Forfeiture of earnest money and security deposit and bank guarantee by Applicant is not chargeable to tax owing to the following reasons:
  1. Its nature is like that of liquidated damages and therefore, cannot be considered as consideration. 
  2. Security deposit is collected to pay for any damage or injury caused, post which the balance is refunded. 
  3. Forfeiture of bank guarantee is for the same reasons as forfeiture of security deposit.
• The amount written off as creditors balance in the books of accounts of the applicant, cannot be understood to be the amount received for rendering of a service, therefore, amount outstanding against goods or services received by the Applicant in the past is written off as not payable in the future in the books of accounts.

Held: 

The AAR, Haryana in Advance Ruling No. HR/ARL/19/2022-23 dated October 18, 2022, held as under: 

• Notice Pay Recovery- the CBIC vide Circular No. 178/10/2022-GST dated August 3, 2022, has clarified the issue regarding Notice pay recovery and surety bond forfeiture. further, the charges paid by an employee when he/she leaves without serving the mandatory notice period cannot be understood as consideration for any supply or services. It is in fact compensation in case either party frustrates the employment contract. 
• Surety bond forfeiture- Surety Bond Forfeiture by the Applicant of the employee, who leaves the company without serving minimum contract period as per the employment contract is not consideration. These are outside the scope of supply because the amount collected is covered under the ambit of Schedule III of the CGST Act, 2017. 
• Canteen charges- The nominal deduction from salary of the employee at fixed rate is outside the purview of GST as the third-party vendor is charging GST on the said supply and because the principal supply of the Applicant is that of transport, infrastructure, and related technology.
• Charges for re-issuance of ID Card- The Applicant uses in-house printing facility and therefore the same falls under the ambit of Schedule III appended with the CGST Act, 2017. 
• Liquidated damages due to delay in completion, earnest money, bank guarantee and security deposit- Non-taxable considering CBIC Circular No. 178/10/2022-GST dated August 3, 2022. 
• Taxability of amount written off in the books of accounts of the Applicant of the Applicant as creditors balance- The same is not taxable as no services were being provided or received in the said transactions, and the unclaimed amount in a way is an income and not a supply and therefore would be outside the scope of supply. 

On factual and legal aspects mentioned above, it was found that none of the above-mentioned amounts were chargeable to GST. 

 (Author can be reached at info@a2ztaxcorp.com) 

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