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Contrary to advance rulings issued under GST law


Goods and Service Tax (“GST”) was introduced in India i.e. July 1, 2017. Before GST, there were many different indirect taxes levied and collected by Central and State Governments. Centre collected service tax imposed on the provision of services while States mainly collected Value Added Tax levied on the sale of goods. Every state has its own Value Added Tax (“VAT”) Acts and Rules regarding the threshold for registration, VAT rate on products, exempted goods, etc.

Other than these, there were also many other indirect taxes imposed by the local state governments in their states like entertainment tax, octroi, entry tax, Central Sales Tax, Excise Duty, etc. The existence of so many indirect taxes created the cascading effect of taxes wherein another government again imposed a tax on the tax levied by one government with no mechanism of taking input tax credit of the taxes already paid. Thus, the existence of so many states taxes made India “One Nation with Multiple Taxes”.

The concept of “One Nation One Tax” was announced by rolling out GST in India to overcome this situation. All the indirect tax present before GST were subsumed in GST and brought the concept of supply of goods and services into existence instead of provision of services/sale of goods.

As GST was a new and different law for the taxpayers and tax practitioners, the concept of Advance Ruling was introduced just like it existed under the pre-GST regime. The purpose of Advance Ruling is that an applicant, before undertaking any business transaction for which he has doubts about the applicability of GST, may take clarity from the GST authorities.

However, even after 4 years of GST Authorities of Advance Ruling (“AAR”) existence in India, it seems that Advance rulings pronounced by GST Authorities had even created more jeopardy for the taxpayers for the reason that firstly, advance rulings are applicable only for the applicant who applied for it and secondly, these advance rulings have limited jurisdiction as they are applicable for the state in which they have been pronounced.

We shall be discussing some of the contrary advance rulings pronounced by the various States Advance Tax Authorities causing concerns over the various sectors/transactions:

Establishment of liaison office in India
Will the activities carried by the Head office located outside India and rendered to their Liaison office situated in India amount to the supply of services as envisaged under Section 7 of the CGST Act?

Applicant’s question
The World Economic Forum (“WEF”) is a public interest, not-for-profit organisation set up in 1971 and based in Switzerland, operates as an independent international organisation committed to improving the state of the world. The applicant is an Indian office of WEF established as Liaison Office (“LO”) to assist the WEF Head Office (“HO”) in undertaking liaising activities and act as a communication link between the HO and the companies in India to undertake the Fourth Industrial Revolution activities in India. Before setting the LO in India, the applicant has been granted permission from RBI as per FEMA regulations and shall not undertake any other activity of trading, commercial or industrial nature nor shall it will enter into any business contracts in its name.

The applicant further submitted that to operate LO in India, all the support for recruiting employees, setting up the necessary infrastructure, maintaining books of accounts etc are all being undertaken by HO. Therefore, the LO will not be generating any income in India. All the expenses incurred in India by LO for undertaking the liaising activities will be reimbursed by HO on a cost-to-cost basis without any markup. Thus, there is no source of income for LO. The applicant wants to seek clarity on the issue that support provided by HO from outside India in setting and operating  LO  in India (for carrying out the liaising activities) without any consideration would qualify as supply of services as per provisions of Sec 7 of the CGST Act or not and thus, liable to taxed as per GST law.

Ruling by AAR
In the advance ruling pronounced by Maharashtra AAR in case of World Economic Forum, India Liaison Office [Order No. GST-ARA-11/2019-20/B-50 dated 20.8.2021], the applicant’s submission were accepted and the authorities ruled in favour of the applicant by giving the following three reasons:

  1. Firstly, to operate the LO in India, the HO provides support from outside India, and for the said activities undertaken by LO, no consideration is paid by LO to HO
  2. Secondly, without the RBI approval, the LO cannot undertake any business or commercial activity for generating revenue and
  3. Lastly, the services received by LO from HO are not in the course or furtherance of the business of LO as LO is not doing any business in India, and neither HO is getting any business in India by establishing their LO.

Hence, AAR concluded that the services rendered by HO to LO would not qualify as supply of service as per provision of Sec 7 of the CGST Act and not subject to GST.

However, the same State AAR has given the contrary ruling in the case of Dubai Chamber of Commerce and Industry (“DCCI”) [Order No. GST-ARA-35/2019-20/B-14 dated 24.5.2021] on similar facts when DCCI, a Dubai-based not-for-profit organisation, had opened their LO in India. The concerned AAR stated that as per the definition of “business” given in Sec 2(17)(a) of the CGST Act, even if the applicant undertakes an activity is not for any peculiar benefit, still it will be treated as a business. Therefore, the reimbursement of expenses received by India LO from DCCI HO shall be treated as consideration towards the supply of services as per Sec 7 of the CGST Act. AAR also concluded that India LO provides intermediary services to its DCCI HO, for which it is liable to pay GST. So, the applicant is liable to seek registration under GST law and liable to deposit GST on the consideration received from DCCI HO.

Our comments
In our view, although the AAR pronounced in the case of WEF is correct, India Los is nothing but a mere extension of HO of foreign non-profit entities. As these LOs are being incorporated in India after seeking approval from RBI that they cannot enter into business dealings and/or transactions but are there to assist their HO in undertaking work which helps in the development of world and hence, reimbursement claimed by India LO from Foreign HO should not be subjected to GST in India.

Taxability of subsidised food by employers to their employees
Whether the GST is applicable on the nominal amount recovered by an employer from its employees for the provision of canteen facility in scenarios where it is obligatory for an employer to provide the same to its employees under any law for the time being in force?

Applicant’s question
As per the provisions of factories Act, 1948, any factory employing 250 or more workers is required to provide canteen facility to their employees. To ensure compliance with the said Act, Tata Motors, a company, has been providing canteen services to its employees. A third party canteen service provider runs the canteen and Tata Motors has not an active role in running the canteen. Tata Motors is responsible for making payment to the vendor for providing canteen services at their premises. So instead of recovering full canteen charges from the employees, Tata Motors bears the major portion of canteen expenses and recover only a nominal amount of expenses from employees using the canteen services. Tata Motors does not earn any profits from its employees while recovering, and such charges are recovered only to ensure the canteen facility is used only by authorised persons/employees. The applicant had clarified that they are not providing canteen service as they are manufacturing automobiles only. The question raised by the company is that whether the GST has to be recovered from employees on the nominal cost charged from employees.

Ruling by AAR
In the advance ruling pronounced by Gujarat AAR in Tata Motors Limited [Order No. GUJ/GAAR/R/ 39/ 2021 dated 30.7.2021], the applicant’s view was accepted and AAR ruled that no GST is liveable on the amounts collected from employees and paid to canteen vendor as there is no profit margin in such recovery made by the applicant.

This ruling though in favour of employer and employees but this ruling is contrary to practice followed by the corporates who are levying GST @ 5% while providing subsided foods to their employees as well as to the ruling issued by Kerala AAR in Caltech Polymers Pvt. Ltd. [Order No. CT/7726/2018-03 dated September 25, 2018]. The Kerala AAR opined that even if there is no profit involved in the recoveries made from the employers still the activity of supplying food and charging price for the same from the employees would surely get covered under the definition of supply as envisage in the Sec 7 of the CGST Act and GST has to be recovered on the nominal charges recovered from employees.

Our comments
The position of recovering GST on the nominal charges recovered from employees by the employer instead of providing subsidised foods was accepted and followed across the corporates. However, this favourable but contrary ruling issued by the Gujarat AAR against the settled corporate practice creates confusion and doubts in the existing practice followed by the corporates. We agree with this favourable ruling pronounced by Gujarat AAR as the employer must provide canteen services to their employees to ensure compliance with the Factories Act. However, the employer is primarily not in the business of supply of food and beverages. The employer claims reimbursement of the nominal cost of the food from their employers and makes the balance payment himself. Had this ruling being issued initially, then this would have become the corporate practice.

Automobile sector
Whether input tax credit on Demo Cars should be allowed to be availed in books as per provisions of Sec 16(2) the Central Good and Service Tax Act, 2017 (“CGST Act”) or should be disallowed as per provisions of Sec 17(5) of the CGST Act?

Applicant’s Question: The applicant, Khatwani Sales and Services LLP, is an authorised dealer of KIA for sales & services of vehicles. The applicant purchased the demo Motor vehicle from the supplier against tax invoices after paying tax and capitalises the demo vehicles in the books of accounts. The applicant raised the issue that since demo vehicles are used in the course or furtherance of business, therefore, the applicant should be entitled to avail input tax Credit (“ITC”). The applicant has submitted that they will not claim depreciation on the tax component of demo vehicles and such demo vehicles are usually replaced every two years of 40000 kms or upto the continuation of model, whichever is earlier and sold at the WDV after discharging due GST tax liability.

The applicant provided two reasons for the availment of ITC on demo vehicles. Firstly, as per the provisions of Sec 16 of the CGST Act, every registered person is entitled to take credit of input tax charged on any supply of goods or services or both which are used or intended to be used in the course or furtherance of his business. As the demo vehicle is displayed at various places like showroom, car dealers, exhibitions and malls for making people aware of the models available for sale and this method of sales promotion and advertisement is most effective way of generating revenue, so ITC should be allowed to be availed on demo vehicles. Secondly, the conditions specified in Sec 17(5), the basis on which ITC can be availed on vehicles, are fulfilled in the instant case. Since the demo vehicles are used for imparting training about the features of the car, manner of driving such vehicles to the prospective buyer which helps in furtherance of business and hence the one of the condition of Sec 17(5) has been adhered to for availing the ITC on demo motor vehicles.

Ruling by AAR
In the advance ruling pronounced by MP AAR in case of M/S Khatwani Sales And Services LLP [Order No. 13/2020 dated July 23, 2020], the applicant’s submission were rejected and the authorities pronounced that the eligibility of ITC on demo vehicles can only be decided as per the provisions of Section 17(5) (a) of CGST Act and as the demo vehicles are not used for the following three purposes

  • For further supply of such vehicle
  • For transportation of passengers
  • For imparting training for driving

So the applicant is not allowed to avail ITC on the demo vehicles purchased by him. The AAR further mentioned that the eligibility for ITC on demo vehicles cannot be decided on the basis that such demo vehicles are being sold after two years or even if they are capitalised in books of accounts.

It is worth mentioning that this ruling passed by MP AAR is contrary to the ruling issued by Goa AAR in Chowgule Industries Private Limited [Order No. GOA/GAAR/07 of 2018-19/4796 dated March 29, 2019], Kerala AAR in case of A.M. Motors [Order No. KER/10/28 dated September 26, 2018] and Maharashtra AAR in case of Chowgule Industries Private Limited [Advance Ruling No. GST-ARA-18/2019-20/B-121 dated December 26, 2019]. In all these rulings, the AAR had agreed that demo vehicle is an indispensable tool in the sale of vehicles by providing trial run, demonstrating car features, training the prospective customers and hence ITC is allowed as per the provisions of Sec 16 of the CGST Act.

Our Comments: In our view, Sec 16 of the CGST Act should forms the basis of availment of the ITC on goods and services used in the business of sale of vehicles or for the furtherance of business and not Sec 17(5). As the demo vehicles are necessarily required for generating revenue for business, so ITC should be allowed to be availed with regard to provisions of Sec 16. Further, we understand that the intention of restricting the availment of ITC on motor vehicles under Sec 17(5) is that as motor vehicles are used in every sector or industry for some or the other purposes, so those tax payers who are not in business of sale of motor vehicles should not be allowed to avail ITC on motor vehicles. Moreover, once the provision of Sec 16 are adhered to, so restriction mentioned on availment ITC under Sec 17 should not be taken into consideration.

Taxability of vouchers
Whether the supply of paper vouchers or e-voucher should be subjected to GST and if the answer is in the affirmative, then what tax rate should be levied?

Applicant’s question
The Appellant, Kalyan Jewellers India Ltd., is a manufacturer and trader in gold and other jewellery items. They sell their jewellry through retail outlets as well as through online portal. The appellant, as part of sales promotion, introduced the facility of different types of Prepaid Instruments (PPIs) viz., Closed System PPIs, Semi-closed System PPIs, Open System PPIs through its retail outlets, third party PPI issuers and online portals to their Customers that are generally called ‘Gift Vouchers/ Gift Cards’ in trade practice. The applicant provided these vouchers both in paper as well as the electronic/digital format. Amongst, the other questions, the appellant raised the question in the advance ruling filed that whether providing gift vouchers should be considered as supply of goods or supply of services and what should be applicable rate of tax.

As per the applicant, the PPIs are actionable claims or equivalent to money and issuing PPIs are not supply of goods or services under the CGST Act and hence should not taxable. Therefore, the tax should be levied only on the supply of that goods or services which instigated the applicant to issue PPIs to its customers as the applicant is not collecting any additional amount and/or GST for the PPIs issued.

Ruling by AAR
The Tamil Nadu AAR in the case of M/s Kalyan [Order 52/ARA/2019 dated 25.11.2019] passed a ruling that these Gift Vouchers are neither a claim to a debt nor does they give a beneficial interest in any movable property to the bearer of the instrument. In fact, if the holder of the vouchers loses or misplaces it and is unable to produce it before the applicant’s stores before the time limit specified on the voucher, the instrument itself becomes invalid. Then the customer cannot use it to pay for any goods. Thus, they are not actionable claim as defined under Transfer of Property Act. They can be used only an instrument for making consideration while purchasing the goods from the issuer. Further, these vouchers can be redeemed by anyone who produces the voucher at their stores irrespective of whether these vouchers were issued to any specific customer. The voucher has both a value and an ownership and is the property of whoever first redeems it. Therefore, it is neither money nor actionable claim as discussed above. Hence, the applicant’s gift vouchers/ cards are “Goods” as per Section 2(52) of CGST and TNGST Act. Hence, AAR concluded that GST at 12 % or 18% would be levied depending on whether on such pre-paid instruments are paper-based or magnetic strip based, respectively.

Aggrieved by the order mentioned above, the applicant filed an appeal before TN AAAR. The TN AAAR vide its order AAAR/11/2021 dated 30.03.2021 reversed the order passed by AAR by giving reasons that voucher is just a means of payment of advance consideration for a future supply, and per se is neither good nor a service. The AAAR pronounced that as the voucher can be redeemed against that particular good or service for which it has been issued, it should be taxed at the GST rate applicable on such good or service.

However, on the same issue, a contrary ruling has been pronounced by Karnataka AAR in Premier Sales Promotions Private Limited [KAR ADRG 37/2021 dated 30.07.2021] that voucher is a moveable property gets covered under the category of intangible goods. Further Schedule II to Sect 7 of the CGST Act stipulates the activities or transactions to be treated as supply of goods or supply of services. Para 1(a) of Schedule II to Sec 7 specifies that any transfer of the title in goods is supply of goods. The transaction of sale of vouchers in the instant case involves transfer of the title and hence they are covered under goods. We also observe that though both electricity and computer software are intangibles, they are covered under Tariff heading 2716 and 8523 respectively. Hence, we rule that the e-vouchers are taxable as per residual entry no. 453 of third schedule of Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017 at the rate of 18% GST.

Our comments
We agree with the views expressed by TN AAAR that the voucher should be taxed at the GST rate applicable on such good or service in regard to which these vouchers has been issued. The main reason for the issuance of these vouchers is these are being issued only after the supply of underlying good and service. Also, these vouchers have been issued only to promote the sale of underlying good or service.

These AAR were brought into existence in different states so that the taxpayers can take clarity in advance with regard to tax implications on the proposed transaction as per provisions of GST law. Also, this mechanism was thought to save time, effort and money spent by taxpayers and GST authorities on seeking judicial remedy against any disputed activity. However, even after 4 years of introduction, we are in the same position of “One Nation with Multiple Tax” as each state AAR is giving ruling on its interpretation of GST law and there is no central body to review the contrary rulings issued by different states on the same issue. In our view, a way to make the existence of AAR reliable, dependable and non-contrary is that before pronouncing any advance ruling the concerned state AAR should thoroughly understand and interpret any advance ruling already issued on the same issue by any other state or by the same state. If this does not happen on time, then the dream of making India as “One Nation One Tax” will remain only a dream.

Taxability of supply of pre-packed food items
Whether sale of bakery items will fall under restaurant services and be subjected to GST @5% with no ITC or sold at individual GST rates?

Applicant’s question
The applicant, Pioneer Bakers, submitted that generally, bakery products are either manufactured in the premises of the outlets from where such products are served to the customers or in a workshop located near to the premises of the outlet of the applicant. In the applicant’s case bakery items, cakes, ice-creams etc. are sold from the outlet and raw materials such as the raw chocolates, cookies, etc. are manufactured in the workshops as these goods require heavy machinery and are labour intensive in nature and are brought to the outlets for further customisation. No items are sold directly from the workshop and each and every item is brought to the outlet for sale. The outlets are equipped with all the facilities to dine, such as table and chairs, air conditioner, drinking water, and stylish lights to provide a nice ambience that provides an overall good experience to the customers. The customers are provided with the option of either enjoying their food in the outlets itself by utilising the facilities present in the outlets or they are at the liberty to take away their food. The question asked by the applicant is that whether the supply of such edible items would be covered under restaurant service and subjected to GST @ 5%.

Ruling by AAR
The Odisha AAR in the case of M/s Pioneer Bakers [Order 06/ODISHA-AAR/2020-21 dated 09.03.2021] passed a favourable ruling and confirmed that supply of such bakery items should be restaurant service and subjected to GST @ 5%. Aggrieved by the order, the Jurisdictional Officer has filed an appeal before the Odisha AAAR. The Jurisdictional Officer(“JO”) although agreed the applicant is running a bakery business, where different items likes cakes, bakery items, ice creams, chocolates, drinks & other eatable products are sold on take away basis but the facilities provided by the applicant in their outlets cannot be treated as restaurant service. The JO argued that CGST Act has defined the “Restaurant service” which means “supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied” but the word “restaurant” has not been defined. As per meaning of the “restaurant” provided in the Cambridge Dictionary, it is defined as, “a restaurant is a place where meals are prepared & served to the customer”. The JO stated that the applicant is running a bakery business where different items are sold on take away basis. Most of the items are not prepared in their premises. Hence, the services provided by the applicant cannot be considered Restaurant Services. The Odisha Appellate Authority of Advance vide Order No.02/Odisha-AAAR/Appeal/2021-22 dt.27.07.2021] passed the ruling against the aforesaid order of AAR and confirmed the submissions made by JO. The Odisha AAAR agreed the activities carried out by the applicant from their premises/outlets cannot be considered as restaurant services. Hence, the bakery items should be sold at their individual GST rates instead of 5% which is charged on supply of restaurant services.

However, the West Bengal AAR in case of Manoj Mittal [18/WBAAR/2020-21 dated 22.03.2021] had given a contrary ruling that the supply of food items, beverages and other bakery items which may not be prepared in the premises of the applicant but are prepared in their workshop and are sold by the applicant from the same premises which is an eating joint to be called as “restaurant” as well as where takeaway facility of bakery items is also available shall be treated as restaurant services and shall attract tax @ 5%.

Our comments
We are in conformity with the ruling issued by West Bengal AAR that irrespective of the fact whether the pre-packed foods or made to order food are being served from a restaurant or an place which offers both the facility of dine-in or take way, the GST on all the products supplied should be subjected @5% only and not individual GST rates of the food product sold.

At AJSH, we assist our clients with various GST matters (GST registration, GST advisory, GST assessments, filing of GST returns, claiming GST audits) by providing  them with adequate support and guidance from our end. If you have any questions or would like to know more about advance rulings issued under GST, kindly contact us.


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