SUPPLY OF FOOD TO THE EMPLOYEES OF THE UNIT IN ‘SEZ’ IS NOT ZERO RATED SUPPLY

Zero rated supply

The expression ‘zero rated supply’ is defined under section 16(1) of Integrated Goods and Services Tax Act, 2017 as any of the following supplies of goods or services or both, namely:–

• export of goods or services or both; or
• supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.

Issue

The issue to be considered in this article whether supplying of food to the employees of the Unit situated in a Special Economic Zone’ amounts to supply under the definition of ‘zero rated supply’ with reference to decided case law before the Appellate Authority for Advance Rulings in ‘Merit Hospitality Services Private Limited’ – 2018 (11) TMI 335 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA – order No. MAH/AAAR/SS-RJ/12/2018-19, dated 01.11.2018.

Facts of the case

The appellant is providing catering services to the various corporate offices on regular basis under contract.    The appellant is supplying snacks and breakfast, lunch, evening tea and dinner to the employees of various companies.  The food is prepared on their own in the location of the appellants and distributed to the various companies under contract.  There are four type of supplying foods to the employees as under-

1. Contract with ‘A’ Limited – The appellant supply the food in the premises of ‘A’ limited as per the specification entered in the contract.The food is supply to the employees directly by ‘A’ Limited.The appellant billed every month to ‘A’ limited and the payment is made directly to the appellant by ‘A’ limited.
2. In the second case the supply of food is as per item no.1.In addition to food supply to the employees is done by the appellant.The appellant raises bill separately for distribution of food to the employees.
3. In the third case the respondent company forms a ‘Employees Co-Operative Society which is running a canteen for the employees.The appellant entered contract with the Co-operative society for supply of food and not with the company.
4. In the fourth case the appellant entered a contract with a company which has units in SEZ.The food is supplied to the employees of the Unit and the payment is received by the appellant from the employees.

The appellant filed an application before the Authority for Advance Ruling raising the following questions-

1. Whether the activity in the first case amounts to canteen services and GST @ 5% is applicable?
2. Whether the supply of food and distribution of food to the employees amount to canteen service and GST rate @ 5% is applicable?
3. Whether the supply of appellants amount to running a canteen?
4. In respect of supply to the unit in a SEZ the following are the questions-

• Since the food is directly supplied by the appellant whether GST is not applicable?
• Whether the supply by the appellant amounts to running a canteen in a SEZ unit and GST is not applicable to such supply?
• Whether the appellant can claim the supply as a ‘restaurant service’ which attracts 5% GST.

The Authority for Advance Rulings gave rulings against the appellant for the first three cases.  In respect of the SEZ issued the Authority gave the ruling as follows-

• For the first issue the Authority did not give any ruling due to lack of information furnished by the appellant.
• For the second issue and third issue the Authority gave ruling against the appellant.

Aggrieved against the order of the Authority the present is filed by the appellants.

Submission of the Appellant

The appellants put forth the following contentions before the Appellate Authority-

• The Authority erred in not answering the specific questions under the circumstances mentioned in the application.
• Despite the appellant supplied all information and documents as directed by the Authority in the course of the proceeding the Authority erred in not deciding the rate of GST for the supply made by the appellants.
• The order of the Authority did not indicate which documents and furnished were not furnished by the appellants as directed by the Authority.
• The Authority erred in quoting, relying and concluding his opinion based to his observations on the transactions in the domestic market with zero rated supply.
• Section 16(3) of the Integrated Goods and Services Tax Act, 2017 allows a registered person to make ‘zero rated supplies’ without payment of tax subject to conditions, safeguards and procedures as laid out under Rule 96A of the CGST Rule.

Ruling of the Appellate Authority

The appellant only requested the ruling from the Appellate Authority for the supplies made to the unit in a SEZ and not for others.  Personal hearing was afforded to the appellant by the Appellate Authority for Advance Rulings. 

The Appellate Authority for Advance Rulings analyzed the provisions of section16 (1) of the Integrated Goods and Services Tax Act, 2017.

The Appellate Authority observed that the appellant is not supplying the food to the SEZ developer or to a SEZ Unit.  The employees of the Unit are not considered as SEZ Developer or SEZ Unit.   The Appellate Authority ruled that the supply attracts tax as per the classification of services as provided in the Annexure A to the Notification No.11/2017-CT, dated 28.06.2017 as amended from time to time.

In respect of the question as to the supply of the appellants amounts to ‘restaurant service’ the Authority held that the appellants registered as ‘Outdoor caterers’ under GST regime.  Further they cook the food in their own premises and distribute the same to the employees in the Unit of SEZ.  Restaurant is a place where food is prepared and supplied to the customer.  As such the appellant’s services do not amount ‘restaurant service’.

The Appellate Authority for Advance Rulings held that the services of supplying the food by the appellant to the employees of the unit located in a Special Economic Zone is not covered under the ‘Zero rated supplies’ in terms of section 16(1)(b) of Integrated Goods and Services Tax Act, 2017.