‘By CA. (Dr.) Gaurav Gupta
Section 17(5)(b) of the Central Goods and Services Tax Act, 2017 (“CGST Act) has been substituted vide Central Goods and Services Tax (Amendment) Act, 2018 (“Amendment Act”) w.e.f. 01.02.2019. The substituted provision reads as under:
(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
(b) the following supply of goods or services or both—
(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:
Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre; and
(iii) travel benefits extended to employees on vacation such as leave or home travel concession:
Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.
The question which is troubling recently is as to whether the proviso at the last of clause (b) is restricted to sub clause (iii) or applies to entire clause (b) of section 17(5) of CGST Act. If it is to be read to apply to the last sub clause (iii), then it shall mean that if ITC on travel benefits extended to employees shall not be disallowed if such travel benefits are obligatory for an employer to provide. However, if it is read as proviso to entire clause (b), it would give larger meaning to the entire sub section and would mean that ITC shall be allowed on all goods and services mentioned in clause (b) if it was obligatory for an employer to provide them to the employees.
We shall now examine the scope of a proviso and intent of legislation to introduce one.
Scope of Proviso
It is a cardinal rule of interpretation, that a proviso to a particular provision of a statute only embraces the field that is covered by the main provision to which it has been enacted as a proviso and to no other. Thus, it cannot be read as an independent provision but only as encircling the very provision for which it is introduced. Craies in his book ‘Statute Law’ (7th Edn.) while explaining the purpose and import of a proviso states at page 218 thus:
“The effect of an excepting or qualifying proviso, according to the ordinary rules of construction, is to except out of the preceding portion of the enactment, or to qualify something enacted therein, which but for the proviso would be within it…The natural presumption is that, but for the proviso, the enacting part of the section would have included the subject- matter of the proviso.”
Sarathi in ‘Interpretation of Statutes’ at pages 294-295 has collected the following principles in regard to a proviso:-
(a) When one finds a proviso to a section the natural presumption is that, but for the proviso, the enacting part of the section would have included the subject-matter of the proviso.
(b) A proviso must be construed with reference to the preceding parts of the clause to which it is appended.
(c) Where the proviso is directly repugnant to a section, the proviso shall stand and be held a repeal of the section as the proviso speaks the later intention of the makers.
(d) Where the section is doubtful, a proviso may be used as a guide to its interpretation; but when it is clear, a proviso cannot imply the existence of words of which there is no trace in the section.
(e) The proviso is subordinate to the main section.
(f) A proviso does not enlarge an enactment except for compelling reasons.
(g) Sometimes an unnecessary proviso is inserted by way of abundant caution.
(h) A construction placed upon a proviso which brings it into general harmony with the terms of section should prevail.
(i) When a proviso is repugnant to the enacting part, the proviso will not prevail over the absolute terms of a later Act directed to be read as supplemental to the earlier one.
(j) A proviso may sometimes contain a substantive provision.”
Various precedents have held that a proviso provides for the exclusion which otherwise would have been included in the provision to which such proviso relates to. We need to look into some of the precedents to understand the purpose and the manner of interpretation of a proviso.
- Mullins v. Treasury of Survey [1885 (5) QBD 170], when one finds a proviso to a section the natural presumption is that, but for the proviso, the enacting part of the section would have included the subject-matter of the proviso. A proviso must be construed with reference to the preceding parts of the clause to which it is appended.
- In S. Sundaram Pillai v. V.R. Pattabiraman it was observed
“Normally, a proviso is meant to be an exception to something within the main enactment or to qualify something enacted the in which but for the proviso would b. within the purview of the enactment. In other words, a proviso cannot be ton apart from the main enactment nor can it be use, to nullify or set at naught the real object of the main enactment. While interpreting a proviso sure be taken that it is used to remove special cases from the general enactment and provide for them separately. In short, generally speaking a proviso is intended to limit the enacted provision so as to except something which would have otherwise been within it or in some measure to modify the enacting clause.” - In the case of In ‘Indo-Nippon Chemicals Co. Limited v. Union of India [2005 (185) ELT 19 Guj] observed that the normal function of a proviso is to except something out of the enactment or to qualify something enacted therein which, but for the proviso, would be within the purview of the enactment. To this real nature of proviso is also another principle of interpretation that the proper function of a proviso is that it qualifies the generality of the main enactment by providing an exception.
- If the proviso when read in a restrictive manner leads to an absurd interpretation, the proviso should be read to apply to the complete section. In Jennings and another v. Kelly reported in 1939 All. E.R. 464, Lord Russell of Killowen said thus,“Although a proviso may well be incapable of putting upon preceding words a construction which they cannot possibly bear, it may without doubt operate to explain which of two or more possible meanings is the right one to attribute to them………… The words preceding the proviso would prima facie point to the former view. One must, however, read the whole clause before attempting to construe any portion of it, and a perusal of the proviso fixes the meaning of the words which precede it.”
- In the same judgment, Lord Wright has said thus, “The section must be construed as a whole. The second part of the section must be taken into account (whether or not it is properly called a proviso) in order to ascertain the true effect of the first part.”
- In Ram Narain Sons Ltd., v. Assistant Commissioner of Sales Tax reported in AIR 1955 SC 765, the Hon’ble Supreme Court has held that, a proviso to a particular provision of a statute only embraces the field which is covered by the main provision. It carves out an exception to the main provision to which it has been enacted as a proviso and to no other.
- It is a fundamental rule of construction that a proviso must be considered with relation to the principal matter to which it stands as proviso “. Therefore it is to be construed harmoniously with the main enactment (Per Das, C. J.) in Abdul Jabar Butt v. State of Jammu & Kashmir.
- In Commissioner of Income-Tax v. Indo Mercantile Bank Ltd., reported in AIR 1959 SC 713, the Hon’ble Supreme Court, held as follows: “The proper function of a proviso is that it qualifies the generality of the main enactment, by providing an exception and taking out as it were, from the main enactment, a portion which, but for the proviso would fall within the main enactment. Ordinarily it is foreign to the proper function of a proviso to read it as providing something by way of an addendum or dealing with a subject which is foreign to the main enactment. ” It is a fundamental rule of construction that a proviso must be considered with relation to the principal matter to which it stands as proviso “.
- Lord Macmillan in Madras & Southern Mahratta Railway Co. v. Bezwada Municipality [(1944) L.R. 71 I.A. 113] laid down the sphere of a proviso as “The proper function of a proviso is to except and deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case. Where, as in the present case, the language of the main enactment is clear and unambiguous, a proviso can have no repercussion on the interpretation of the main enactment, so as to exclude from it by implication what clearly falls within its express terms “.
- In Dwarka Prasad v. Dwarka Das Saraf reported in AIR 1975 SC 1758, the Hon’ble Supreme Court held “…. If the rule of construction is that prima facie a proviso should be limited in its operation to the subject matter of the enacting clause, the stand we have taken is sound. To expand the` enacting clause, inflated by the proviso, sins against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction.”
- In Ishverlal Thakorelal Almaula v. Motibhai Nagjibhai [(1966) 1 SCR 367], it was held that the main object of a proviso is merely to qualify the main enactment.
- In Madras and Southern Maharatta Railway Co. Ltd., v. Bezwada Municipality [ATR 1944 P.C. 71] Lord Macmillan observed : “The proper function of a proviso is to except and to deal with a case which would otherwise fall within the general language of the main enactment, and its effect is confined to that case.“
- In the case of Sales Tax Officer, Circle 1, Jabalpur v. Hanuman Prasad ([1967] I S.C.R. 831), Bhargava, J. Observed: “It is well-recognised that a proviso is added to a principle clause primarily with the object of taking out of the scope of that principal clause what is included in it and what the legislature desires should be excluded.”
Thus, applying the above precedents, it would be safe to conclude that if the ordinary and proper function of a proviso is to limit that general enactment in certain instances. If it is not limiting the very provision for which it is brought and is going in some other direction, the same is being interpreted incorrectly. A proviso is added to an enactment to qualify or create an exception to what is in the enactment. Absentia of the contents of the proviso in the original provision to which it is being related to would make the very purpose of the proviso void. The precedents were very clear in stating that a proviso does not travel beyond the provision to which it is a proviso. It craves out an exception to the main provision to which it has been enacted as a proviso and to no other.
Scope of ‘proviso’ in the present context
It is important to note the language of proviso provides as an exception from “input tax credit in respect of such goods or services or both”. It is also important to draw attention to the ITC blocking as provided in clause (iii) which blocks ITC on travel benefits extended to employees. Thus, there is surely no goods in such provision and thus, there was no need to bring out such exception from this provision. However, the clause (b) of Section 17(5) provides that input tax credit shall not be allowed on the following supply of goods or services or both. Thus, the very provision matches the intent of the proviso and thus, it would then be safe to interpret that the exception is carved out for the entire clause (b) and not merely sub clause (iii).
One need to also refer to the purpose of amending Section17(5) which is provided in Notes to Clauses of CGST Amendment Bill, 2018 which reads: “Clause 9 of the Bill seeks to amend section 17 of the principal Act relating to “Apportionment of credit and blocked credits”, in order to further expand the scope of eligibility of input tax credit.”
Thus, even the Notes provided that the Section has been amended to expand the scope of eligibility of Input Tax credit and not to restrict it. Thus, the exclusion should be read to meet the very purpose for which it was brought – expanding the scope of eligible Input tax credit to the assesses. By reading this proviso as applicable to entire clause (b), it would mean that all inward supplies which are mandatory for the employer shall be eligible for Input tax credit. Thus, provision of food to workers when mandatory under Factories Act, 1948 would make Input tax credit on catering services eligible when procured for workers. Similar would be the reading of availability of Input Tax credit in the case of health and life insurance which would mean that under certain hazardous working environments when it is mandatory for the employer to obtain such policies on the life and health of employees, Input Tax Credit on such availed services would be available to the employer by application of the proviso. If such inward supplies are not mandated under any statute, they remain under blocked credits.
As a word of caution, one must also refer to the judgment of Panaji Municipal Council v. Devidas 2001 (Supp.2) Bom. C.R.544, wherein the issue was whether the proviso to Section 5 of the Goa Rights of Information Act, 1997 as was placed after the various provisions was restricted to the last clause or it applied to the entire section. The learned Single Judge while construing the effect of the proviso, restricted it only to Sub-Sections 5(e) and not to Section 5(a),(b),(c) and (d) as otherwise according to the learned Judge the Section was liable to be struck down as being violative of Article 21 of the Constitution of India.
Thus, I would like to highlight in this case also that the proviso was so interpreted to make it live through the test of vires of constitution and thus, merely the placement of a proviso without looking into its very purpose would not be a correct interpretation.
The territory of a proviso therefore is to carve out an exception to the main enactment and exclude something which otherwise would have been within the section. It has to operate in the same field and if the language of the main enactment is clear it cannot be used for the purpose of interpreting the main enactment or to exclude by implication what the enactment clearly says unless the words of the proviso are such that that is its necessary effect. Any reading of proviso which would find the exclusions missing in the parent provision is not correct reading of proviso. Thus, when proviso is wide, its parent provision must be wider enough to allow such carving from itself.
Conclusion
Thus, in my humble opinion the proviso to Section 17(5)(b) after clause (iii) serves its very purpose only when it is read as a proviso to the entire clause (b) and not merely clause (iii) as clause (iii) misses the very Input Tax Credit which the proviso wish to exclude. Thus, reading it as exclusion to the entire clause (b) would make it possible for assessee to avail the Input tax credit on goods and services as provided in the proviso.
