2018 (7) TMI 1492 - AAR - GST

GST Classification: Food services by Merit Hospitality as outdoor catering, not canteen. SEZ supply verification pending.

In Re : Merit Hospitality Services Private Ltd.

The Authority determined that the services provided by Merit Hospitality, including the supply and distribution of food, do not qualify as canteen ... Classification of services - Outdoor catering services or not? - company is engaged in the business of supply, by way of and as a part of and in any other manner whatsoever of goods, being food and any other article for human consumption or drink. The company (Merit Hospitality) has entered into a contract for supply of food to the employees of the company say 'A' Ltd. - Merit Hospitality has to supply the food at 'A' Ltd.'s premises. The distribution of the food is directly done by the staff of 'A' Ltd. The menu and the material specifications are mentioned in the contract and also the rate for various items are pre-determined between Merit Hospitality and the company - the billing is done by Merit Hospitality directly to the company on monthly basis and payment is received from the company to Merit Hospitality directly - Whether the activity be called as canteen activity and the applicable rate of 5% be charged on our bills? - Held that:- Under this Notification after amendments uptill now GST @ 5% is chargeable in case of services by a restaurant, eating joint including mess and canteen - with the progress of time and civilization and further increasing demands and expectations from restaurants by customers and also the restaurants with intent to further grow their businesses have started providing 'take away' or even 'home delivery' services to customers as per their instant order out of the items that are there in the menu of the restaurants. However a special feature to be noted is that in such cases there is no pre-entered agreement or contract between the restaurant or customers except for the expectations which the customer has as per reputation about food and services of the restaurant - the services being provided by the applicant would not fall under restaurant service. The applicant himself has stated that they are registered as outdoor caterers under the GST Act and that the company is engaged in the business of supply, by way of and as a part of and in any other manner whatsoever of goods, being food and any other article for human consumption or drink - the service being provided by the company would clearly fall under Group 99633 - Food, edible preparations, alcoholic and non-alcoholic beverages serving services and further under service code 996337 - Other Contract Food Services which are in the nature of outdoor caterer services and would be taxable under Serial No. 7 Heading 9963 (v) @ 18% under GST as applicable. Natural bundling of services or not? - In addition to supply of food on the request of the client Merit Hospitality Services Pvt. Ltd. also undertake the services of distribution of food for which Merit Hospitality raises separate bill charging 18% GST/SGST - Can both the activities put together i.e. supply and distribution of food to the employees of 'A' ltd as canteen services and applicable rate of 5% be charged on our bills? - Held that:- The undertaking of additional responsibility of services of distribution of food by the applicant would in no way impact the classification or taxability of the services being provided by the applicant. The employees of 'A' Ltd. have formed 'Employees Co-op. Society ' which is registered under The Societies Registration Act. The Employees Co-op. Society is running a canteen for the employees of 'A' Ltd. The contract of supply of food of Merit Hospitality is now with 'Employees Co-op. Society ' and not with 'A ' Ltd. - can it still be claimed that Merit Hospitality is running a canteen and the applicable rate of 5% be charged on our bills? - Held that:- The Employees Cooperative Society running the canteen themselves would in no way impact the catering transaction with the applicant - the essence of transaction between the applicant and the Employees Cooperative Society is not changing - Now instead of the company A Ltd., the outdoor catering services are being provided to the Employees Cooperative Society which would be taxable @ 18% only. The Merit Hospitality has entered into a contract with a company called say 'B' Ltd. 'B' Ltd. is having its unit in SEZ area ( Special Export Zone). The supply of food is done by Merit Hospitality to the employees of 'B ' Ltd. and payment for the same is made by the employees of 'B ' Ltd. directly to Merit Hospitality - Can Merit Hospitality claim that since the food is supplied directly to SEZ area hence no GST is applicable? - Held that:- The benefit of zero rated supply would be allowed to a domestic unit only if supply of goods or services to a SEZ unit or developer is only in respect of authorized operations as mentioned in the Letter of Approval of the Development Commissioner as per Section 15(9) of the SEZ Act - In the case details provided by the applicant in Case IV, it is not forthcoming whether 'B Ltd' is an authorized unit in SEZ as per Section 15 (9) of the SEZ Act and as to what are the authorized operations of 'B Ltd' in SEZ and whether supply of food to B Ltd or its employees is covered under authorized operations as allowed/approved by the Development Commissioner. If it is not covered under authorized operations then this supply of food by the applicant to SEZ employees would not be eligible for the benefit of zero rated supply. Can Merit Hospitality claim that it is running a canteen in SEZ area hence no GST is applicable? - Held that:- It is clear that the applicant cannot claim that they are running a canteen in SEZ. Rather their service would be in the nature of outdoor catering service. Can Merit Hospitality claim that it is running a restaurant in SEZ area and hence applicable GST rate is 5% only? - Held that:- The applicant cannot claim that they are running a restaurant in SEZ. Rather their service would fall under outdoor catering service. Issues Involved:1. Whether the supply of food by Merit Hospitality can be classified as canteen services and taxed at 5%.2. Whether the combined supply and distribution of food can be classified as canteen services and taxed at 5%.3. Whether the supply of food to an Employees Co-op. Society running a canteen can be classified as canteen services and taxed at 5%.4. Whether the supply of food to employees in an SEZ area is exempt from GST or taxed at a different rate.Issue-wise Detailed Analysis:Case I: Classification of Supply of Food as Canteen ServicesThe applicant, Merit Hospitality, entered into a contract with 'A' Ltd. to supply food to its employees. The food is prepared at Merit Hospitality’s kitchen and delivered to 'A' Ltd.'s premises, where it is distributed by 'A' Ltd.'s staff. The menu, material specifications, and rates are pre-determined, and billing is done monthly.The Authority examined whether this activity qualifies as canteen services taxable at 5% under Notification No. 11/2017-Central Tax (Rate). It was determined that the service provided does not meet the criteria for canteen services as defined, which typically involve on-premises preparation and serving. Instead, it was classified as outdoor catering, taxable at 18%.Case II: Combined Supply and Distribution of FoodIn this scenario, Merit Hospitality also undertakes the distribution of food, in addition to its supply, and raises a separate bill for the distribution service at 18% GST.The Authority concluded that the additional distribution service does not change the nature of the primary service. Therefore, the combined activities still do not qualify as canteen services and remain classified as outdoor catering, taxable at 18%.Case III: Supply of Food to Employees Co-op. SocietyThe contract for food supply is now with an Employees Co-op. Society running a canteen for 'A' Ltd.'s employees. The applicant questioned whether this changes the classification to canteen services.The Authority noted that the change in contracting party does not alter the nature of the service provided. The supply of food to the Employees Co-op. Society is still considered outdoor catering, taxable at 18%.Case IV: Supply of Food in SEZ AreaMerit Hospitality supplies food to employees of 'B' Ltd., located in an SEZ area, with payments made directly by the employees.Question a: Exemption from GST for Supply to SEZ AreaThe Authority examined Section 16(1) of the IGST Act and the SEZ Act, 2005. It was noted that zero-rated supply benefits apply only if the supply is to an SEZ developer or unit for authorized operations. The applicant did not provide sufficient evidence that the supply to 'B' Ltd. qualifies under these conditions. Therefore, the question could not be definitively answered.Question b: Classification as Canteen Services in SEZThe Authority reiterated that the service provided does not qualify as canteen services, even in an SEZ area. It remains classified as outdoor catering, taxable at 18%.Question c: Classification as Restaurant Services in SEZSimilarly, the service does not qualify as restaurant services. It remains classified as outdoor catering, taxable at 18%.Order:The Authority concluded that the services provided by Merit Hospitality in all cases do not qualify as canteen services and are instead classified as outdoor catering, taxable at 18% GST. The specific question regarding zero-rated supply to SEZ could not be answered due to insufficient information.