GST Vidhi | GST Advance Ruling

Whether recovery of subsidized value from employees for providing canteen facility would (a) amount to 'supply' under the CGST Act and (b) whether the recovery would attract Goods and Services Tax(GST)

Authority For Advance Ruling - Tamilnadu

Advance Ruling No: 108/AAR/2023                                     Dated: 05.09.2023

Name of Applicant: M/s. Sundaram Clayton Limited

A.   Relevant Sections/Rules & Notification/Circulars on the Subject:

·        Schedule 2 of the CGST Act

·        Section 2(17) of the CGST Act

·        Section 2(31) of the CGST Act

·        Section 2(83) of the CGST Act

B.   Facts and contentions submitted by applicant:

·        M/s. Sundaram Clayton Limited, Auto Ancillary, SEZ, AA5, VI Avenue, Mahindra World City, Natham, Kanchipuram, Chennai 603002 (herein after referred to as 'The Applicant'), are registered with GST and hold GSTIN 33AAACS4920J2ZI. The Applicant is engaged in the manufacture and supply of die-casting parts for use in automobiles.

·        The Applicant submitted that they have over 250 people working at their plant which includes employees and trainees, who are in their payrolls and also include contractual workers who are on the rolls of third party. Section 46 of the Factories Act, 1948, prescribes that-

"46.Canteens: (1) The State Government may make rules requiring that in any specified factory wherein 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"

·        The State Government of Tamil Nadu has provided for mandatory provision of canteen facility under the Tamil Nadu Factories Rules, 1950, which states that-

"65(2) The occupier of every factory notified by the State Government and wherein more than two hundred and fifty workers are ordinarily employed shall provide in or near the factory an adequate canteen according to the standards prescribed in these rules".

·        In compliance with the said requirement, a canteen is provided in the factory premises; The food supplies are bought by them and they have hired a cook, who is their employee, to prepare the food. They recover a subsidized amount from the workers, as given below, and the remaining cost is borne by them.

·        In their interpretation of law/facts in respect of the questions raised, the Applicant submitted that –

As per the scope of the term 'supply' as enumerated in Section 7(1) of the CGST Act, for applicability of GST on any transaction there should be the following ingredients:

1.     Supply of goods or services

2.     Such supply is made or agreed to be made for a consideration; and

3.     Such supply should be for furtherance of business.

·        The first requirement is that there should be a legal intention and agreement between the parties to supply and receive goods or services or both. The absence of such intention would not amount to 'supply' within its meaning under the CGST Act and in this regard reliance was placed on judgement of European Court of Justice in the case of R.J.Tolsma V Inspecteur Omzetbelasting Leewarden in the case C-16/93. There is no legal intention between them and the workers to provide canteen services for a consideration, but it is only a statutory obligation under the Factories Act; There is no actual agreement between them and the workers with a positive act for consideration; The mention of provision of canteen facility in the HR policy and the Wage Agreement with employees cannot be called an agreement entered into by the parties to provide/avail canteen facility; The HR policy and the Wage Agreement merely specifies the facilities that are available to the workers, which are common to all and hence cannot be equated with an agreement to supply goods or services.

·        The second requirement is the presence of 'consideration' against the supply; If an activity is undertaken but there was no agreement between the parties, any payment received by a party cannot be automatically linked to a supply for the purpose of levying GST; In this regard, reliance was place on the judgment of Bombay High Court in the case of Bai Mumbai Trust, Vithaldas Laxmidas Bhatia, Smt. Indu Vithaldas Bhatia Vs Suchita [Commercial Suit(I) no.236 of 2017 decided on 13.09.20191; The amount collected from the workers towards canteen charges is merely to reimburse the cost incurred by them and it does not give rise to reciprocal obligations between the parties; Therefore, in absence of identifiable supply, the activity of recovery would not constitute a 'supply' and hence GST not leviable.

·        The last requirement for a transaction to qualify a 'supply' is for it to be in course of furtherance of business. The activity of providing canteen facility does not fall under any of the clauses of the definition of 'business'. Their main business is manufacture and supply of die-casting parts and provision of canteen facility is not incidental or ancillary to their main business. Therefore, taxability under Schedule I also fails

C.   Question Raised Before AAR:

·        Whether recovery of subsidized value from employees for providing canteen facility would

(a) amount to 'supply' under the CGST Act and

(b) whether the recovery would attract Goods and Services Tax(GST)

D.   Discussion and Findings of the Authority:

·        We have considered the submissions made by the applicant in their application for advance ruling and the submissions made by their AR during the course of personal hearing and additional submissions made thereon with reference to the issues involved and relevant facts.

·        It is seen that the Applicant had set up a canteen facility in their factory for the benefit of its employees and workers. There is no supply between the Applicant and the employees and the Applicant is not engaged in the business of provision of canteen services. The amount received from the employees is in the nature of recovery and not consideration. The recovered amount is directly paid to the third-party vendor without any profit element in the hands of the Applicant.

·        Subsidised food is a perquisite to employees(excluding contractors) forming a part of the wage agreement and HR policy of the Agreement; As per Schedule III of the CGST Act, services by an employee to the employer in course or in relation to his employment shall be treated neither as a supply of goods nor a supply of services.

·        Firstly, the first part of the question i.e. whether recovery of subsidised value from employees for providing canteen facility would amount to 'supply' under the CGST Act, is taken up The term 'Outward supply', is defined in Section 2(83) of the CGST Act, 2017, as below:

`Outward Supply' in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, license, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business".

·        Accordingly, the applicant has established the canteen in their premises and bears certain running cost while collecting the nominal rate as fixed by the Managing Committee, which is an activity in furtherance of their business. Thus supply made by a taxable person in the course or furtherance of business is an 'Outward supply'. It has been brought out above, that establishing canteen is in the furtherance of business of the Applicant. Thus, the provision of food in the canteen for a nominal cost is a 'Supply' for the purposes of GST.

·        It was also the contention of the Applicant that the amount received from the employees is in the nature of reimbursement of the cost incurred by the Applicant and there is not enforceable reciprocal obligations. However, we find that as stated supra, the running of canteen in the premises of the Applicant is in the course of furtherance of business. It is also clear that in running of such a canteen, the employer, i.e., the Applicant is mandated to bear certain costs. Provision of canteen facility and bearing certain costs in running of canteen are mandated on the part of the employer as per the Factories Act. Accordingly, such canteens are provided. It has been established that the supply of food in the canteens are `Supply of Service' by the Applicant. 'Consideration' is defined in Section 2(31) of the CGST Act 2017 as:

'Consideration' in relation to the supply of goods or services or both includes,- a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government.

·        In the instant case, the Appellant had established the canteen in their premises and has been bearing a part of the cost for providing the food/beverages to their employees and a part of the cost is being collected from employees, by adopting subsidized rates. The supply of the food/beverages, although at subsidized rates, by the Applicant to their employees is certainly an activity amounting to supply of service and attracts levy of GST on that part of the consideration being charged for such supply. The supply of food by the employer, i.e, the applicant to their employees is composite supply of food held as 'Supply of service' as per Schedule-II of the GST Act and the amount collected by the Applicant is a 'Consideration' on which GST is liable to be paid.

·        The next contention of the Applicant is that subsidized food is a perquisite to employees forming a part of the wage agreement and HR policy of the Applicant. The Applicant stated that the perquisites forming part of employment contract were excluded from GST as per the Circular no. 172/04/2022-GST dated 06.07.2022 of CBIC. The relevant extract of the said circular is reproduced hereunder for ease of reference:

·        As per the contents of the employment appointment orders issued to their employees, it is evident that, inter alia, there exists a clause stating that "You will be entitled to use the canteen facility within the Factory premises as mandated under the Factories Act, 1948 and the Company will recover charges on a subsidized basis for availing the canteen.". We find that there exists an express mention in the terms of agreement between the Applicant and the employees.

·        At this juncture, we find that it is pertinent to see the definition of the term Perquisite'. As per Section 17(2) of the Income Tax Act, 1961, "Perquisite" is defined as

"any casual emolument or benefit attached to an office or position in addition to salary or wages."

·        Thus a 'perquisite' is a non-cash benefit attached to an office or position which is in addition to salary or wages. Generally, such perquisites being a part of the salary or Cost to Company of the employee are free of cost i.e. the employee does not pay anything additional for a perquisite.

·        A combined reading of the Circular and the term 'perquisite', we find that the intention of the Circular is to clarify that tax is not applicable on perquisite which is part of the employee agreement and which may be free of cost for the employees. Accordingly, in case where a recovery is made against a supply, even if it is subsidised, the same will be subjected to tax.

E.   Ruling by AAR:

Recovery of subsidised value from employees for providing canteen facility will amount to 'supply' under the CGST Act and GST is to be levied on the amount recovered by the Applicant from the employees towards provision of canteen facility

Disclaimer: All the 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.