2020 (2) TMI 1416 - AAR - GST

Company denied Input Tax Credit on GST for canteen services & business promotion expenses. Coupons distributed to employees attract tax liability.

In Re: M/s. Musashi Auto Parts Pvt. Ltd.,

The company was deemed ineligible to claim Input Tax Credit (ITC) on GST for canteen services provided to employees. Distribution of coupons among ... Input Tax Credit (ITC) of GST charged - GST charged by vendor for Canteen Service availed by it for its employees - service mandatorily to be provided under Factories Act, 1948 by the applicant company - Liability of GST on distribution of Coupons among employees - HSN Code - determination of Fair market value of coupons based on the rate charged to employees - Composite supply or mixed supply. HELD THAT:- The conjoint reading of section 16 and 17 (5) (b) of CGST Act suggest that the input tax credit with respect to food and beverages and outdoor catering shall be available only 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 - In the instant case, the applicant is a registered taxable person who is paying tax (GST) on the inward supply of goods or services or both, food and catering service in this case. But the applicant is engaged in the business of manufacturing of automobiles and not in the business of provision of food or catering. The mandate of the Factories Act to provide meals to the employees does not mean that such provision is in the course of furtherance of business. Even if the provision of food and catering had been in the course of furtherance of business, the applicant would not have been entitled to the input tax credit in light of the express bar provided under section 17 (5) (b)(i) of the CGST Act, 2017. A careful reading of section 17(5) would suggest that this proviso is with regard to the provision contained in section 17 (5) (b)(iii) and not section 17 (5) (b)(i) - In light of the said provisions, the applicant is not eligible for claim of input tax credit with respect to the goods and services tax paid by it against the receipt of food and catering services supplied by the vendor. Liability to pay tax on the distribution of coupons - HELD THAT:- The applicant company is incurring expenditure with regard to these facilities provided to the caterer. The caterer provides food and beverage services to the employees of the applicant and payment to that effect is made to the caterer by the applicant company. The company claims that in order to maintain discipline and prevent food wastage, the company recovers a part (25%) of the amount paid to the caterer from the employees. Had the applicant company not provided the above mentioned supplies free of cost to the caterer, the caterer would have had to make arrangements and incur expenditure for the same and it would have led to an increase in the cost of supply. But in this case, these facilities are provided by the company free of cost and in turn, the caterer provides food to the employees of the company at a subsidized rate. The company is charging around 25% of the charges paid to the caterer from the employees. The company claims to be recovering these charges in order to maintain discipline and to check wastage of food, but in essence, these are charges recovered by the company in lieu of facilities provided to the caterer - the applicant has been incurring the cost of LPG etc. and the caterer is subsidizing the food in lieu of that, therefore, in light of the provisions of section 15 (2) (b) and 15 (2) (e) of the Act, the values of coupon is a part of the value of services provided by the caterer and as such the coupon value is taxable. Company purchases edible items like Sweets, Dry fruits and gifts like electronics, gold & silver coins/articles etc. for the purpose of Business Promotion - Whether Company is eligible to take Input Tax Credit on such business promotion expenses or not? - HELD THAT:- The purchase and distribution of sweets, dry fruits, coins or silver items for the purpose of business promotion cannot be termed as an activity carried out in the course or furtherance of business by any stretch of imagination - The applicant itself has submitted that it is distributing these items to its customers and employees by way of presents. Therefore, the applicant is not eligible for credit of input tax against the inward supply of these items. Issues Involved:1. Eligibility to claim Input Tax Credit (ITC) on GST charged by the vendor for canteen services.2. GST liability on the distribution of coupons among employees.3. Determination of the fair market value of coupons.4. Eligibility to claim ITC on business promotion expenses.Issue-wise Detailed Analysis:1. Eligibility to Claim Input Tax Credit on GST Charged by Vendor for Canteen Services:The applicant, a manufacturing company, provides canteen services to its employees as mandated by Section 46 of the Factories Act, 1948. The applicant argued that it should be eligible for ITC on GST paid to the canteen contractor under Section 16 of the CGST Act, 2017, as these services are essential for business operations. However, Section 17(5)(b)(i) of the CGST Act specifically excludes ITC on food and beverages unless these services are used to make an outward taxable supply of the same category. The applicant's business is manufacturing, not providing food services, thus disqualifying it from claiming ITC on canteen services. The proviso allowing ITC when services are obligatory under any law applies to Section 17(5)(b)(iii) and not to 17(5)(b)(i). Therefore, the applicant is not eligible to claim ITC on canteen services.2. GST Liability on the Distribution of Coupons Among Employees:The applicant recovers a nominal amount from employees for canteen services via coupons to maintain discipline and prevent food wastage. The applicant contended that this recovery is under an employer-employee relationship, which is exempt from GST under Schedule III of the CGST Act. However, the relationship exempts services provided by employees to employers, not vice versa. The applicant also provides various facilities to the caterer, which subsidizes the food cost. Under Section 15(2)(b) and 15(2)(e) of the CGST Act, the value of these coupons is part of the taxable supply provided by the caterer. Thus, the distribution of coupons attracts GST liability.3. Determination of Fair Market Value of Coupons:The applicant argued that if tax is charged on the subsidized price, the open market value should be considered. Section 15 of the CGST Act defines the value of taxable supply as the transaction value, which includes any amount the supplier is liable to pay but is incurred by the recipient. Since the applicant incurs costs for facilities provided to the caterer, the coupon value forms part of the total taxable value of the caterer’s services.4. Eligibility to Claim ITC on Business Promotion Expenses:The applicant purchases sweets, dry fruits, and gifts for business promotion and argued that denying ITC on these expenses would lead to a cascading tax effect. However, Section 17(5)(h) of the CGST Act expressly bars ITC on goods disposed of by way of gifts. The applicant admitted that these items are distributed as presents, which qualifies as gifts. Therefore, the applicant is not eligible for ITC on business promotion expenses.Ruling:1. The company is not eligible to take ITC on GST charged by the vendor for canteen services availed for its employees.2. The distribution of coupons among employees will attract tax liability.3. The coupon value shall form part of the total taxable value of the caterer.4. The company is not eligible to take ITC on business promotion expenses.Ordered accordingly.