Perquisites provided by the employer to the employee under the contractual agreement would not be considered as Supply under GST

The Gujarat AAR in the matter of Kohler India Corporation (P.) Ltd., In re [Advance Ruling No. GUJ/GAAR/R/2024/03 dated January 05, 2024], held that where the Applicant under the Factories Act, 1948 ("the Factories Act") entered into a contract with the canteen service provider ("CSP") to provide canteen facilities to workers, then the deductions made by the Applicant from the employees availing food in the factory would not be considered as a 'supply'. Thus, the GST would not apply to the employee's portion. Further, an Input Tax Credit ("ITC") will be available to the Applicant with respect to food and beverages as the canteen facility is obligated under the Factories Act.

Facts

Kohler India Corporation Private Limited ("the Applicant") was engaged in the manufacturing of plumbing products for kitchens & bathrooms. Their manufacturing facility was in Gujarat and was governed by the provisions of the Factories Act. In terms of Section 46 of the Factories Act, if more than a specified number of workers are employed, the employer must provide canteen facilities. Therefore, the Applicant entered into a contract with the CSP to provide canteen facilities to their workers of the factory premises.

As per the agreement with the CSP, the Applicant allows the CSP to use utensils like tea urns, glass tumblers, eating plates steel bowls, and other utensils necessary for the preparation of food and serving food items at the canteen. The CSP raised the invoice along with the applicable GST for its canteen services. The invoice was raised based on the consumption by the employees of the Applicant, which was tracked based on employees of the Applicant who availed the canteen facility. A part of the canteen charges was borne by the Applicant and the remaining is borne by their employees.

The employees’ portion of canteen charges were collected from employees’ salaries and paid to the CSP by the Applicant on behalf of the employees. The amount so collected was without any commercial objective, or profit margin and to maintain discipline. The Applicant accounted for the canteen expenses based on the invoice raised by the CSP in its statement of profit and loss account. Further, the amount collected by the Applicant from its employees was credited to the expense account in which the canteen expenses were booked.

Hence, the Applicant filed an advance ruling on the following questions:

Issues

1. Whether the subsidized deduction made by the Applicant on the employees who are ultimate recipients of the canteen facility provided in the factory/ corporate office be considered as 'supply' under the provisions of Section 7 of the CGST Act and the GGST Act?

2. If the answer to the above is affirmative, the value at which the GST is payable?

3. Whether the Company eligible to take the ITC for the GST charged by the CSP for canteen services, where the canteen facility is mandatory in terms of Section 46 of the Factories Act?

Held

The Gujarat AAR in the matter of Advance Ruling No. GUJ/GAAR/R/2024/03 held as under:

• Observed that, in terms of Circular No. 172/04/2022-GST dated July 06, 2022, it is clarified that perquisites provided by the 'employer' to the 'employee' in terms of the contractual agreement entered between the employer and the employee, will not be subjected to GST when the same is provided in terms of the contract between the employer and employee. There is no dispute as far as the canteen facility is provided by the Applicant as mandated in Section 46 of the Factories Act is concerned. The Applicant had provided a sample copy of the HR Manual. In view of the foregoing, the deduction made by the Applicant from the employees who are availing food in the factory would not be considered as a 'supply' under the provisions of Section 7 of the CGST Act. Since the answer to the above is not in the affirmative, the ruling sought in respect of the second question is rendered infructuous.
• Relied on, the Ruling of the Gujarat Appellate Authority for Advance Ruling in the case of M/s. Tata Motors Ltd, Ahmedabad [Order No. GUJ/GAAAR/Appeal/2022/23 dated December 22, 2022], wherein it was held that the ITC on GST charged by the CSP will be restricted to the extent of the cost borne by the Applicant only.
• Held that, that ITC will be available to the Applicant in respect of food and beverages as canteen facility is obligatorily to be provided under the Factories Act read with Gujarat Factories Rules, 1963 as far as the provision of canteen service for employees is concerned.