No Supply on Salary deductions for Canteen Services & ITC available if Obligatory

The Gujarat AAR, in the case of M/s Allemia India Private Limited, In Re [Ruling No. GUJ/GAAR/R/2024/17 dated. July 02, 2024] ruled that the deduction made by the Applicant from employees' salaries for food provided at the factory premises does not qualify as a "supply" under Section 7 of the Central Goods and Services Tax Act, 2017 ("the CGST Act") and Gujarat Goods and Services Tax Act, 2017("the GGST Act"). Further, the Applicant is entitled to Input Tax Credit ("ITC") on GST charged by the canteen service provider ("CSP"), in accordance with Section 17(5)(b) (amended from February 1, 2019) and CBIC Circular No. 172/04/2022-GST dated July 6, 2022, read with Section 46 of the Factories Act, 1948 and Gujarat Factories Rules, 1963. However, ITC is restricted to the cost borne by the Applicant, excluding the proportionate credit embedded in amounts recovered from employees.

Facts:

M/s. Allemia India Private Limited ("the Applicant")was engaged in the business of manufacturing and selling seamless stainless steel pipes and tubes along with high resistance wires. The Applicant was also engaged in a CSPfor preparing and supplying food for their employees and recovers Rs.104/- on monthly basis as fees from each employee which was deducted from the salary of the employees who were availing the facility of food provided in the factory. As per Section 46 of the Factories Act, 1948since they have employed more than 300 employees, they are mandated to provide a canteen for their employees, that they have ultimate control over the affairs of the factory and would be considered as an occupierand they have set up the canteen facility having a separately demarcated area in the factory premises in accordance with compliance of the Factories Act,1948 that the canteen facility has a seating area with tables and chairs, cooking facilities with utensils, refrigeration, storage rooms for keeping the cooked food, washrooms and wash basin etc.

The Applicant provides the canteen facility in terms of contractual agreement entered between the employer and employee and it specifically provides the availment of benefits and allowances which include canteen services to employees so the deduction of the nominal amount from employees will become taxable under GST only if such amount qualifies as consideration towards the supply as defined under Section 7 of the CGST Act, any consideration by the employee to employer on account of the activities undertaken under the contract of employment is out of the scope of GST.

The Circular No. 172/04/2022 dated July 06, 2022, it is clarified that any basics provided to employees as part of the employment contract, so does not attract GST. Further, the activity does not fall within the ambit of business as defined under Section 2(17) of the CGST Act, 2017.

Further, the CSP provides the services to the Applicant in the preparation of food and maintenance of canteen premises, for the employees and such services are provided in pursuance of the Applicant's obligation to provide such facilities to its employees in the capacity of an occupier of the factory under the Factories Act,1948. The ITCcharged on the supply of services would only be allowed when such goods or services are used during the furtherance of business. The Applicant contended that the circular clarifies that the ITC on food and beverages, etc. covered under Section 17(5) of the CGST Act would not be restricted provided it is obligatory for an employer to provide the same to its employees under the law.

Therefore, the Applicant seeks an advance ruling for the deduction of a nominal amount from the salary of employees who are availing the facility of food provided in the factory premises would be considered as a Supply of Serviceunder the provisions of Section 7 of the CGST Act/the GGST Act and ITC to the extent of the cost borne by the Applicant, is available to the Applicant on the GST charged by the CSP for providing the catering services.

Issue:

Whether the GST is applicable on the nominal amount deducted from the salaries of employees and ITC can be claimed for the Canteen Service provided to its employees?

Held:

The Gujarat AAR, in Ruling No. GUJ/GAAR/R/2024/17 held as under:

· Relied on the Ruling of the Gujarat Appellate Authority for Advance Ruling in the case of M/s Tata Motors Ltd. Ahmadabad, In Re [Ruling No. GUJ/GAAR/R/39/2021] that the ITC on GST charged by the canteen service provider will be restricted to the extent of cost borne by the Applicant only.

· Ruled that, the deduction of the nominal amount made by the Applicant from the salary of the employees who are availing the facility of food provided in the factory premises would not be considered as the supplyunder the provisions of Section 7 of the CGST Act

· Further ruled that, the Input Tax Credit will be available to the Applicant in respect of foods and beverages as a canteen facility is obligatory to be provided under Section 46 of the Factories Act, 1948 read along with the Gujarat Factories Act, 1963.

Our Comments:

Numerous judicial precedents have established that Input Tax Credit is admissible when the provision of canteen services is statutorily mandated under the Factories Act, 1948. In pari materia case of M/s Shriram Pistons and Rings Limited, In Re [Ruling No. AP ADRG-16/2022 dated December 05,2022]held that the subsidized deduction made by the Applicant from the employees who are availing food in the factory would not be considered as the supply under the provisions of Section 7 of the CGST Act,2017 and the ITC on the GST paid on the canteen facility is admissible to the Applicant on the food supplied to employees of the company subject to the condition that burden of the GST have not been passed on the employees of the company.

Relevant provisions/circular for ease of reference:

Section 7. Scope of supply.-

(1) For the purposes of this Act, the expression "supply" includes--

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

Explanation.--For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another;

(b) import of services for a consideration whether or not in the course or furtherance of business and;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration;

(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.

(2) Notwithstanding anything contained in sub-section (1),--

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council,

shall be treated neither as a supply of goods nor a supply of services.

(3) Subject to the provisions of sub-sections (1), (1A) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as-

(a) a supply of goods and not as a supply of services; or

(b) a supply of services and not as a supply of goods.

Section 17. Apportionment of credit and blocked credits.-

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(a)……………;

(aa)……………;

(ab)……………;

(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.

OFFICIAL JUDGMENT COPY HAS BEEN ATTACHED