ITC on Food/Drink related expenses

Background

Under the Goods and Services Tax system, the tax treatment of expenses related to canteen facilities provided by factories and offices to their employees can be complex and has been a subject of debate.

In this context in the article the paper writer has examined the eligibility to food/drink credit, more specifically ITC on canteen credit, the issues therein and important decisions.

Blocked credit and food/beverage expenses

GST law has set out in section 17(5) the list of credit which is restricted. Therein it also sets out as under:

Section 17(5)(b) the following supply of goods or services or both-

(i) food and beverages, outdoor catering,........:

However, the input tax credit shall be available where an inward supply 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;

Further 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.

Analysis

Meaning of term "Food" is a substance which is taken into body to maintain life and growth.As per the Oxford Dictionary "beverage" means "a type of drink except water". In Webster's 3rd International Dictionary, "beverage" has been described as "liquid for drinking especially such liquid other than water (as tea, milk, fruit juice, beer) usually prepared (as by flavouring, heating, admixing) before being consumed".

Coming to outdoor catering the term is defined in notification 11/2017-CT(R) as follows:

2(xxxiii) ―Outdoor catering means supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, at Exhibition Halls, Events, Conferences, Marriage Halls and other outdoor or indoor functions that are event based and occasional in nature.

The ITC on food/drink outdoor catering is restricted but available when these inward supplies are used to make taxable outward supplies. Example could be catering services used for the outward supply of taxable seminar services, being billed to client on which GST is paid at 18%.

There is also the scenario where the inward food/drink supplies are used for making outward supplies of restaurant services/canteen /catering service on which outward GST is paid 5%. When outward GST is paid on these supplies at 5%, vide notification 11/2017-CT(R), the condition is that the credit related to such supplies is restricted. The provision at section 17(5) allows credit on food/beverages supplies, when used to make the outward taxable supplies, but the notification restricts. The provision would prevail over the restriction in the notification. But there are no judicial precedents in this regard in GST at present. Consequently this stand if taken could get disputed by revenue dept.

Important issues

When the factory with over 250 employees has canteen facility as required under Factories Act, can credit on canteen contractor bills be availed?

Yes under GST regime, credit on canteen facility can be availed when it is the expenses incurred in respect of the canteen services for providing food and beverages in canteen maintained and run by the employer where it is certainly required to establish under the Factories Act, 1948 (Section 46).

This is due to reason such canteen services provided to employees within factory premises in compliance of statutory requirement under Factories Act would get covered in eligible credit as it is obligatory for an employer to provide same to its employees under Factories Act being law for the time being in force.

In above example, whether credit on the canteen facility would be restricted by considering as personal consumption by employees?

Even if the GST dept were to dispute on these lines, it is defendable by assessee. As long as the credit is permitted for reason that it is being mandated to be provided to employees under Factories Act, it cannot be denied by treating it as barred citing personal consumption. Such an interpretation would reduce the enabling proviso to dead letter, which is not the intent at all.

 Further it cannot be said that such facility is being used for personal consumption, as it is consumed in course of discharge of official functions.

Judicial decisions

In a catena of decisions under erstwhile Central Excise/Service Tax regime, including CEA v. Stanzen Toyotetsu India (P) Ltd., reported in 2011 (23) S.T.R. 444 (Kar.), Commissioner of Central Excise v. Ferromatik Milacron India Ltd., 2011 (21) S.T.R. 8 (Guj.) credit on canteen services was held eligible. These decisions had a common thread which is that the credit was held eligible when it was mandatory requirement to have canteen in the factory of the manufacturer of goods, and thus had nexus in relation to the manufacturing activities, as for the purpose of carrying out its manufacturing activities, it was mandatory for the respondent to provide canteen facilities to its workers.

Also these above decisions were in context of Cenvat credit rules as existed pre- April 2011 when there was no specific restriction on credit on canteen expenses. However post April 2011, there was restriction on catering or such like the canteen expense when such services are used primarily for personal use or consumption of any employees.

In recent development, in Toyota Kirloskar Motor Pvt. Ltd. Vs Commr. Of C.T., Bangalore (2021 (50) G.S.T.L. 286 (Kar.) Outdoor Catering services specifically excluded from definition of 'input service' vide Rule 2(l)(c) of Cenvat Credit Rules, 2004 post-amendment w.e.f. 1-4-2011. Though expenses incurred in respect of canteen services for providing food and beverages in canteen maintained and run by employer included towards total cost of product and it was certainly required to be established under Section 46 of Factories Act, 1948, but fact remains that canteen established primarily for personal use or consumption of employees - Hence, Cenvat credit not available in respect of services received by appellant in capacity of employer for providing food and beverages in canteen maintained and run in factory as per mandate of Section 46 of Factories Act, 1948.

Supreme Court held that with effect from 1-4-2011, outdoor catering services which are used primarily for personal use or consumption of any employee have been excluded from definition of input services as provided in Rule 2(1) of Cenvat Credit Rules, 2004 - In view of above, impugned order denying credit on said services, agreed with - Credit not admissible. 2021 (55) G.S.T.L. 129 (S.C.)

Comments

It would do well to remember that this decision based on the denial of credit citing the canteen has been established mainly for personal use or consumption of the employees. This may not be correct. When food is consumed in course of discharging of official duties/business functions, may not be considered as personal consumption. Further when it is pertaining to canteen facility which is provided as an obligation by the employer to employees of company under Factories Act,such statutory compliance by employer cannot be equated with "primarily for personal use or consumption".

Conclusion

The credit pertaining to the expenses of food/drink can be studied and availed to extent it is eligible under GST law.

The author can also be reached at roopa@hiregange.com