By CA Surekha Ahuja
The ruling of the Tamil Nadu Authority for Advance Ruling in AGS Health (P.) Ltd. (185 taxmann.com 323) provides a focused clarification on a recurring issue under GST law—Input Tax Credit on motor vehicle leasing and hiring services used for employee transportation in light of the restriction under Section 17(5)(b) of the CGST Act, 2017.
The controversy arises in a specific compliance context: where employers are required to provide safe transportation to women employees working during night shifts under state labour law. The question before the Authority was whether GST paid on such motor vehicle leasing services would remain blocked or become eligible for ITC under the statutory exception.
The AAR has held that ITC is admissible, but only where the expenditure arises from a clear statutory obligation under law, and not from voluntary HR policy or general business convenience.
Statutory Position under GST Law
Section 17(5)(b) of the CGST Act, 2017 blocks Input Tax Credit on certain categories of services, including:
- leasing or hiring of motor vehicles
- passenger transport services
- employee conveyance arrangements
The intent of this provision is to restrict credit on expenditure that is typically in the nature of employee welfare or non-business consumption.
However, the law simultaneously provides a critical carve-out under the proviso to Section 17(5):
ITC shall be available where the employer is under an obligation under any law for the time being in force to provide such goods or services.
This proviso shifts the entire analysis from the nature of expenditure to the source of obligation.
Statutory Obligation under Tamil Nadu Labour Law
In the present case, the obligation arises from:
- Tamil Nadu Shops and Establishments Act, 1947 (Section 87-A)
- G.O. Ms. No. 60 dated 28.05.2019 issued by the Labour and Employment Department
These provisions mandate employers to ensure safe transport facilities for women employees working during night shifts, thereby converting what is otherwise an employee welfare measure into a statutory compliance requirement.
Facts and Issue Before AAR
AGS Health Private Limited, engaged in healthcare outsourcing services, incurred expenditure on leasing/hiring of motor vehicles exclusively for transporting women employees during night shifts in compliance with the above statutory requirement.
The issue was whether such GST would be blocked under Section 17(5)(b) or eligible for ITC under the proviso.
Ruling and Reasoning
The AAR allowed Input Tax Credit on the ground that once a statutory obligation exists under law, the nature of expenditure changes from optional to compulsory.
Accordingly, the proviso to Section 17(5) becomes applicable, and the restriction under Section 17(5)(b) does not operate in such cases.
However, the AAR emphasized that the benefit is not automatic. ITC is available only where there is a direct and demonstrable nexus between the statutory obligation and the expenditure incurred.
In other words, the decisive factor is not the use of the service, but whether the service is mandated by law.
Legal Principle Emerging
The ruling reinforces a narrow but important principle under GST law:
The restriction under Section 17(5)(b) yields only where expenditure is incurred under a binding statutory obligation imposed by law. It does not extend to discretionary employee welfare or business convenience arrangements.
This interpretation ensures that the proviso operates as a controlled override mechanism, and not as a general relaxation of blocked credit provisions.
Scope and Limitation of the Ruling
It is important to understand that this ruling is strictly fact-specific.
It does not lay down a general entitlement to ITC on employee transportation services. The benefit is confined to situations where:
- there is a clear statutory mandate under applicable law, and
- the expenditure is incurred exclusively to discharge that mandate
In all other cases, the restriction under Section 17(5)(b) continues to apply without dilution.
Compliance Perspective and Documentation
From a practical standpoint, the availability of ITC under this principle will depend heavily on documentation and audit readiness.
Taxpayers must be able to establish:
- the relevant statutory provision or government notification
- deployment of women employees in qualifying night shifts
- transport arrangements directly linked to compliance requirement
- vendor agreements reflecting statutory obligation
- proper GST documentation and invoice traceability
In litigation scenarios, the outcome will be determined not merely by interpretation, but by the strength of the compliance linkage on record.
Conclusion
The Tamil Nadu AAR ruling in AGS Health (P.) Ltd. provides a disciplined interpretation of the Section 17(5) proviso, reaffirming that Input Tax Credit is permissible only where expenditure is incurred under a statutory obligation imposed by law.
At the same time, it preserves the integrity of the blocked credit framework under GST by ensuring that internal HR policies, welfare measures, or operational conveniences do not inadvertently expand ITC eligibility.
Under GST law, Input Tax Credit is not driven by business necessity or employee welfare considerations, but strictly by statutory compulsion under law
