Whether GST is applicable on recovery of
nominal amount by the Applicant from employees for availing the facility of
Canteen at the factory premises
Authority For Advance Ruling:-Tamil Nadu
Advance Ruling No. 125/AAR/2023 Dated
20.12.2023
M/S Faiveley Transport Rail Technologies India
Private Limited
1.
Relevant Sections/Rules & Notification/Circulars on the
Subject:
Section 7(2)(a) of the CGST Act
Section 16(2) of the CGST Act
Section 17(5) of the CGST Act
2.
Facts and contentions submitted by applicant:
·
The applicant, a GST Registrant, is a Private Limited Company
under the administrative control of CENTER and they are engaged in the business
of manufacturing, supplying and exporting equipment for the Rolling Stock
Industries. The said equipment includes, inter alia railway door systems,
grills for train coaches, braking systems and pantographs for railways.
·
The Applicant has submitted that- They provide in-house
canteen facility to their employees on their own account, for which the applicant
recovers a nominal fixed amount from the salaries of the employees on a monthly
basis. They discharge GST @ 5% under SAC 996333 “Services provided in canteen
and other similar establishments”.
·
The provision of canteen services to employees is not being
carried out as a business activity, rather the same is rendered in order to
comply with the statutory requirement under the Factories Act, and that the
Applicant does not make any profit but only a nominal cost was recovered from
the employees. Further, as per Section 7(2)(a) of the CGST Act, read with Entry
1 of Schedule III, “services by an employee to employer in course of
employment’ shall be neither supply of goods nor services. The CBIC vide
Circular No. 172/04/2022-GST dated 06.07.2022 has categorically clarified that
services by employer to its employee in the course of or in relation to his
employment will not be considered as supply of goods or services and hence GST
is not applicable on services rendered by employer to its employee provided
they are in the course of or in relation
to employment. In this regard, the applicant had placed reliance on the ruling
of the Hon’ble Gujarat AAR in RE:Troikaa Pharmaceuticals Limited
[2022-VIL-231-AAR], the ruling of Maharashtra AAR in RE: Tata Motors Limited in
[2021-TIOL-197-AAR-GST], the appellate ruling by Gujarat in AAR in RE: Amneal
Pharmaceuticals Limited [GUJ/GAAAR/APPEAL/2021/07], and the Madhya Pradesh AAR
in a ruling in RE: Bharat Oman Refineries Limited [Order No. 02/2021 dated
07.06.2021].
·
Regarding the availment of ITC of GST paid on Canteen
facility, the applicant states that as per section 17(5) of the CGST Act, ITC
on food and beverages, outdoor catering, etc. is not available. However, it
would be available where the same is used in making outward supply (same
category of supply or as an clement of a taxable composite or mixed supply).
Further, .the proviso is provided to clarify that the ITC in respect of such
goods or services or both would be eligible where it is obligatory for an
employer to provide the same to its employees under any law for the time being
in force. Further, the 01310 vide Circular No. 172/04/2022- GST dated
06.07.2022 has clarified that the proviso after sub- clause (iii) of clause (b)
of sub- section (5) of section 17 of the COST Act is applicable to the whole of
clause (b) of the section 17(5) of the COST Act, which means that ITC would be
available on all the goods or services provided in section 17(5)(b) of the COST
Act, where it is obligatory for an employer to provide the same to its
employees under any law for the Lime being in force. Thus, in light of the
above-mentioned Circular, ITC is available on the GM paid in relation to
canteen charges. the applicant had placed reliance on the ruling of the Honlble
Gujarat AAR in RE: Troikaa Pharmaceuticals Limited [2022-VIL-231-AAR]. It was
also stated that E-Ton'ble Andhra Pradesh HO in RE: Ferro Alloys Corporation
Ltd. vs. Government of Andhra Pradesh Labour Employment and Technical Education
(Labour II) Dcptt. [2003 (96) FLR 160J has held that the mode in which the
specified establishment must set up a canteen is not provided in the factories
Act. It is left to the discretion of the concerned establishment to discharge
its obligation of setting up a canteen either directly or by employment of a
contractor.
3.
Questions raised before AAR:
·
Whether GST is applicable on recovery of nominal amount by
the Applicant from employees for availing the facility of Canteen at the
factory premises;
·
Whether Input Tax Credit is available on facility of canteen
services provided to employees by applicant as statutory obligation under
Factories Act.
4.
Discussion &Ruling by AAR:
A.
Whether GST is applicable on recovery of nominal amount bythe
Applicant from the employees for availing
the facility of Canteen
atthefactory premises:
·
The applicant states that they provide in-house canteen
facility to their employees on their own account, for which the applicant
recovers a nominal fixed amount from the salaries of the employees on a monthly
basis. They discharge GST @ 5% under SAC 996333 'Services provided in canteen
and other similar establishments'. However, they have argued that the provision
of the canteen services to employees is not being carried out as a business
activity, and that the same is rendered in order to comply with the statutory
requirement under the Factories Act and that they do not make any profit but
only a nominal cost was recovered from the employees. Further, as per Section
7(2)(a) of the CGST Act, read with Entry 1 of Schedule III, 'services by an
employee to employer in course of employment' shall be neither supply of goods
nor services. The CBIC vide Circular No. 172/04/2022 - GST dated 06.07.2022 has
categorically clarified that services by employer to its employee in the course
of or in relation to his employment will not be considered as supply of goods
or services and hence GST is not applicable on services rendered by employer to
its employees provided, they arc in the course of or in relation to employment.
·
Entry 1 of Schedule III states as follows: 'services by an
employee to employer in the course of or in relation to his employment"
shall be neither supply of goods nor supply of services. It could be seen here
that Schedule III basically deals with 'services by an employee to employer',
and not the other way round. Only as a corollary, the 'services by the employer
to the employee', especially when provided in the formof perquisites, has been
discussed in the CBIC Circular No. 172/04/202.2 - GST dated 06.07.2022 in its
para. 2 of clarification to issue No.5, wherein it has been explained as
follows: -
"Any perquisites provided by the employer
to its employees in terms of contractual agreement entered into between the
employer and the employee are in lieu of the
services provided by employee to the employer n relation to his employment.
It follows therefrom that perquisites provided by the employer to the employee
in terms of contractual agreement entered into between the employer and the
employee, will not be subjected to GST' when the same are provided in terms of
the contract between the employer and employee.
·
Notwithstanding the above aspect relating to employment contracts,
it may be seen that in order to place any service provided by the employer to
employee outside the ambit of GST, the same should be in the form of a
perquisite. Though the term `perquisite' has not been defined under the
provisions of GST, the same is discussed under the Income Tax Act, where II has
been stated in Section 17(2) as follows
"perquisite" includes- -
(a) the value of rent-free accommodation provided
to the assessee by his employer;
(b) the valve of any concession in the matter of
rent respecting any accommodation provided to the assessee by his employer
·
It could be further inferred from the above, that any service
rendered free of charge, or, any service rendered on a concessional basis shall
qualify as a perquisite. Here again, it is to be noted that only the
value/portion to the extent of concession offered by the employer is to be
treated as a perquisite and not the remaining portion/value that has been
charged by the employer. Applying the said analogy to the instant case, in
respect of the canteen services provided by the applicant to its employees, it
becomes clear that the exemption provided in Entry 1 of Schedule III to the
COST Act, 2017 applies only to the concession part extended to the employees
and not on the value charged on the employees.
·
Thereby, it becomes clear that the canteen service provided
by the applicant company on its own account to its employees, is a composite
supply which gets treated as a supply of service in terms of Entry No.6 of
Schedule Il to the CGST Act, 2017, that reads as follows:-
"6. Composite supply
The following composite supplies shall be
treated as a supply of services,
namely:
(a) works contract as defined in clause (119) of
section 2; and
(b) supply, by way of or as part of any service
or in any other manner whatsoever, of goods, being food or any other article of
human consumption or any drink (other than alcoholic liquor for human
consumption), where such supply or service is for cash deferred payment or
other valuable consideration."
And accordingly, we hold that the amount
charged on the employees by theapplicant, whether nominal or otherwise, is to
be treated as the consideration for such supply of canteen service on its own
account to its employees on which taxes under GST is liable to be discharged by
the applicant/employer.
B. Whether
Input Tax Credit is available on facilityof canteen service provided to
employees by applicant as statutory obligation under Factories Act
·
Regarding the availment of ITC of GST paid on Canteen
facility, the applicant states that as per Section 17(5) of the CGST Act, ITC
on food and beverages, outdoor catering, etc. is not available. However, it
would be available where the same is used in making outward supply (same
category of supply or as an element of a taxable composite or mixed supply). It
may be seen that a proviso after sub- clause (iii) of clause (b) of sub-
section (5) of section 17 of the CGST Act is provided to clarify that the ITC
in respect of such goods or services or both would be eligible where it is
obligatory for an employer to provide the same to its employees under any law
for the time being in force. This apart, the CBIC vide Circular No.
172/04/2022- GST dated 06.07.2022 has clarified that the proviso after sub-
clause (iii) of clause (b) of sub- section (5) of section 17 of the CGST Act is
applicable to the whole of clause (b) of the section 17(5) of the CGST Act,
which means that ITC would be available on all the goods or services provided
in section 17(5)(b) of the CGST Act, where it is obligatory for an employer to
provide the same to its employees under any law for the time being in force.
Thus, in light of the above-mentioned Circular, the applicant contended that
ITC is available on the GST paid in relation to canteen charges.
·
In this regard, it may be seen that Section 17(5) of the CGST
Act, 2017, provides for certain situations involving supply of goods or
services, where ITC is blocked, and it reads as below
(5) Notwithstanding anything contained in sub-section (1) of
section 16 andsub. section (1) of section. 18, input tax credit shall not be
available in respect of thefollowing, namely:
(a)
(b)
the
following supply, of goods or services or both
(i)
food and beverages, outdoor caleting, beauty
treatment health, services, cosmetic and plastic surgetv, leasing, renting or
hiring of motor vehicles, vessels or aircraft referred to in clause (r4 car
olause (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 goads or 6-et-vices 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 obligcxtart U31 employer- to provide the same to
·
We notice that the CBIC in its Circular No.172/04/2022- CGST
dated 05.07.2022 has clarified that the proviso after sub- clause (iii) of
clause (b) of subsection (5) of section 17 of the CGST Act, as reproduced
above is applicable to the whole of clause (b) of the section 17(5) of the CGST
Act, from which it becomes clear that ITC would be available on the supply of
all the goods or services referred in section 17(5)(b), where it is obligatoryfor
an employer to provide the same to its employeesunder any law for the time
being in force. The provisions of Section 46 of the Factories Act, 1948, which
deals with the obligation of providing canteen facilities by the employer to
its employees, reads as :-
46. Canteens,
(1) The State Government may make rules requiring that in any specified factory
where in more than two hundred and fifty workers are ordinarily employed, a
canteen or canteens shall be provided and maintained by the occupier for the
use of the workers.]
(2) Without prejudice to the generality of the foregoing
power, such rules may provide for
(a) the date by which such canteenshall be
provided;
(b)
the standards
in respect of construction, accommodation, furniture and other equipmentt of
the canteen;
(c)
the
foodstuffs to be served therein and the charges which may be made therefor;
(d)
the
constitution of a managing committee. for the canteen and representation of the
workers in the management of the canteen;
(e) the items of expenditure in the running of the canteen
which are not to be taken into account in fixing the cost of foodstuffs and
which shall be borne by the employer;
(f)
the
delegation to the Chief inspector, subject to such conditions as may be
prescribed, of the power to make rules under clause (c)."
·
It could be seen from the above, that when more than 250
employees are
ordinarily employed, the employer is mandatorily required to provide
canteenfacility to the employees. In this regard, the applicant had placed
reliance on the ruling of the Hon’ble Gujarat AAR in RE: Troika Pharmaceuticals
Limited [2022-VIL-231- AAR], wherein it was held that, ITC on GST paid on
canteen Facility is admissible on the food supplied to employees subject to the
condition that burden of GST have not been passed on to the employees of the
company. In other words, ITC on the above will be restricted to the extent of
cost borne by the applicant for providing canteen services to its employees,
but disallowing the proportionate credit to the extent embedded in the cost
recovered from such employees. This is in view of the fact that once the
incidence of tax is actually borne by the ultimate consumer of service, i.e.,
the employees, the employer cannot take credit of that part of the tax which
was borne by the employee. We also notice that the same view stands substantiated
by the Ruling of the Gujarat Appellate Authority For Advance Ruling Order No.GUJ/GAAAR/Appea_1/2022/23
dated 22.12.2022 in the case of M/s Tata Motors Ltd., Ahmedabad — 2022-viL-
100-AAA.R, and in the case of M/s TataAutocomp Systems Ltd., -
2023-V11,108-AAR, where the Gujarat Authority for Advance Ruling had held on
similar lines.
·
The concerned State authority under whose administrative
jurisdiction thetaxpayer falls; had opined that the applicant shall not be
eligible for the Input Tax Credit in respect of Canteen services in view of the
AAR Ruling Madhya Pradesh GST - Tvl, Bharat Oman Refineries Ltd. Case
No.17/2020, Order No.02/2021, dated 07.06.2021. It is seen that this ruling of
the Madhya Pradesh AAR referred above, has been appealed against by the
taxpayer and the Madhya Pradesh Appellate Authority for Advance Ruling in its Order
No_IVIP/AAAR/07/2021 dated 08.11.2021 had
overruled the same by pronouncing a verdict as below
"5(c) Input credit of GST paid to canteen service
provider would be available to the appellant in terms of proviso under Section
17(5)(b) that the input tax credit in, respect of such goods or services or
both shall be available, where it is obligatory for all employer to provide the
same to its employeesunder any
employees.
Accordingly, we hold.
that GIST charged on the inward supplies received, any, in relation to the
provision of food to the employees by the applicant is admissible as ITC to
them, provided the number of direct employees in the establishment is more than
250. Further, we also hold that while availing such ITC, the proportionate
credit to the extent of cost recovered from such employees is required to be
reversed by the applicant/employer.
5.
Ruling by AAAR:
·
GST is liable to be discharged by the applicant on the amount
charged on the employees by the applicant, for the supply of canteen service on
its own account to its employees.
·
ITC is eligible on the inward supplies received, if any, in
relation to the provision of food to the employees, provided the number of
direct employees in the establishment is more than 250. However, while availing
such ITC, proportionate credit to the extent to the extent of cost revcoveredfrom
such employees is required to be reversed by the applicant.
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Information is based on the notification, circular and order issued by the
Govt. authority and judgement
delivered by the court or the authority information is strictly for educational
purposes and on the basis of our
best understanding of laws & not binding on anyone.
