SKP Tax Alert
| Volume 8 Issue 26
Service tax implication on providing vehicles to employees through 'car lease schemes'

Under the service tax legislation, services provided by an employee to an employer in the course of employment have been specifically excluded from the ambit of service tax. However, service tax levy on services provided by the employer to an employee has been a disputed issue under the negative list regime.

In this regard, it is interesting to note the recent Advance Authority Ruling (AAR) in the case of M/s JP Morgan Services India Private Limited, Mumbai[1], on whether car lease schemes providing vehicles to employees would be regarded as a service provided by the employer and hence, be liable to service tax in the hands of the employer.


Facts of the case
  • M/s JP Morgan Services India Private Limited (the Company or the applicant) floated a scheme for its employees under an employment retention programme.
  • Under the scheme, the Company intended to provide cars to its employees during their employment. In this regard, the Company would hire the cars from car leasing companies and provide these to its employees who continue to remain its employees and accept this option.
  • The Company would charge/recover the amount payable to car leasing companies (without any mark-up or additions) from employees.
  • Furthermore, there is an option given to the employee to purchase the car at the end of his employment.
  • In this regard, the Company contended that the aforesaid activity undertaken is in the course or in relation to the employment and excluded from the ambit of service as it is covered by the exception created to the definition of 'service' by section 65B (44) of the Finance Act, 1994, reproduced as under:-
    "Service means any activity carried out by a person, for another person for consideration, and includes a declared service, but shall not include ….(b) a provision of service by an employee to the employer in the course of or in relation to his employment."
  • The revenue argued that in the particular case, the car was being 'made available' to the employees for official and personal use and, therefore such activity would attract service tax.
Ruling
The Authority for Advance Rulings noted that the definition of service (as quoted above) stipulates two conditions which are to be excluded from the term ‘service’ and have been fulfilled in the case as follows:
  1. Should be provided in the course of employment; or
The agreement between the applicant and employee suggests that the option will be available only during the course of his employment.
  1. Should be provided in relation to employment
The second condition is also satisfied as it is only because the employee is in employment that the car leasing facility is made available, and in that sense, the service is in relation to his employment.

Accordingly, the Authority held that the activity of leasing cars to employees is covered under the exclusion provided under the definition of service (as quoted above) and will not amount to 'service'. Furthermore, the authority did not agree with the revenue’s contention and stated that whether the car was given for official use, for personal use or both will not make any difference.
 
[1] Advance Ruling No AAR/ST/16/2015
SKP's comments
  • On perusal of the definition of service (as quoted above), it can be noted that ‘provision of service by an employee to the employer’ is excluded and services provided by an ‘employer’ to the employee is not. This aspect (i.e. services provided by employers to employees not being excluded from the definition of service) has not been dealt with in the aforesaid ruling. Accordingly, the standing of the aforesaid AAR may be questionable for activities performed by employers for employees against consideration.
  • A reference can also be drawn from the Directorate General of Central Excise Intelligence (DGCEI) circular[2] which has directed revenue offices to collect service tax on notice pay or other recoveries of similar nature by the employer from employees. The circular states that "these services are being provided by the employers to its employees and consideration in terms of forfeiture of security deposit or other payments is being received by the employers in lieu of these services. Hence, service tax would be leviable on employers for providing these services.” Thus, it implies that the services provided by the employers to the employees are not excluded from the definition of service.
  • Other entities entering into similar transactions may place reliance on the principle laid down in the AAR, treating such ruling as a precedent having a high persuasive value. However, it is relevant to note that the AAR ruling is binding only on the applicant (who had sought it) and the tax authorities in respect of any matter referred therein. Furthermore, a Writ Petition in the High Court/Special Leave Petition in the Supreme Court/representation with the authorities can be filed against the decision of the AAR subject to certain conditions. In this regard, it would be interesting to see if the revenue authorities challenge the aforesaid ruling with the relevant authorities.
  • It would also be important to analyse state Value Added Taxes (VAT) implications on such lease transactions. The car lease scheme as discussed above can also be perceived as a ‘transfer of the right to use’ (involves transfer of possession and effective control) in respect to the vehicles provided to the employees and thus may be liable to VAT/Central Sales Tax (CST).
     

[2] Forfeiture of Security Deposit by Employees - Liability to pay Service Tax - DGCEI MO Circular

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