2022 (12) TMI 192 - AAR - GST

Subsidized employee canteen services by manufacturer constitute taxable supply under Section 7(1)(a) CGST Act 2017

AAR Karnataka ruled that subsidized canteen services provided by a manufacturer to employees constitute taxable supply under Section 7(1)(a) of CGST Act ... Supply under Section 7 (three limbs: form of supply, consideration, course or furtherance of business) - Supply of food as service under Schedule II (clause 6) - Valuation of taxable supply between related persons (Rule 28; Rule 30; Rule 31) - Employer-employee relationship as related persons for valuation - Input Tax Credit restriction for canteen services (supply classified under SAC 996333 attracting concessional rate without ITC) - Exclusion of employer-to-employee services under Schedule III not attracted where consideration is recoveredSupply under Section 7 (three limbs: form of supply, consideration, course or furtherance of business) - Supply of food as service under Schedule II (clause 6) - Exclusion of employer-to-employee services under Schedule III not attracted where consideration is recovered - Whether the subsidized deductions from employees for canteen meals amount to a 'supply' by the applicant under Section 7 of the CGST/KGST Act, 2017. - HELD THAT: - The Authority examined the three limbs of 'supply' under Section 7(1)(a): (i) form of supply, (ii) consideration, and (iii) in the course or furtherance of business. The applicant operates a canteen within factory premises (mandated by the Factories Act) and collects predetermined amounts by way of salary deductions (Rs.50 per month for payroll/union employees; Rs.10 per meal for contract employees), reflecting an agreed charging mechanism and reciprocal obligations. The contention that there is no legal intention to contract with employees was rejected on facts: the applicant runs the canteen, charges are pre decided and deducted, and therefore a contractual relationship is established. The definition of 'consideration' was held to include the payments recovered from employees; adequacy of consideration is irrelevant. The provision of canteen services was held to be incidental to and in furtherance of the applicant's manufacturing business-facilitating production by preventing loss of time-thus satisfying the 'business' limb. The Authority further relied on Schedule II, clause 6, which treats supply of food or drink for consideration as a supply of service. The applicant's reliance on Schedule III (services by employee to employer) and on press release guidance was held inapplicable because the supplies in question are from employer to employee for consideration and not free of charge. Consequently, the provision of subsidized meals with salary deductions constitutes a taxable supply of canteen services under Section 7(1)(a) and Schedule II, clause 6. [Paras 11, 13, 14, 15]The subsidized deductions made from employees for canteen meals amount to a 'supply' of canteen service by the applicant under Section 7 of the CGST/KGST Act, 2017.Valuation of taxable supply between related persons (Rule 28; Rule 30; Rule 31) - Employer-employee relationship as related persons for valuation - On what value GST is to be discharged for the canteen supplies made to employees by the applicant. - HELD THAT: - Employees are 'related persons' to the employer under the Explanation to Section 15(1)(a)(iii). Section 15(1) (transaction value for unrelated parties) is therefore not applicable. As open market value or value of like kind and quality is not available from the facts, the valuation must follow Rule 28 read with Rule 30 or, if applicable, Rule 31 of the CGST Rules. Rule 30 provides a cost based valuation (110% of cost of provision of services) where preceding rules are inapplicable; Rule 31 permits a residual/reasonable method for services and may be opted by the supplier. The Authority held that the applicant must determine the taxable value under Rule 30 or Rule 31 at its option. [Paras 17, 18]GST is payable on the value of the canteen supply to be determined under Rule 30 or Rule 31 of the CGST Rules, 2017 (at the applicant's option).Input Tax Credit restriction for canteen services (supply classified under SAC 996333 attracting concessional rate without ITC) - Eligibility of ITC for input services used in supplying exempted/zero ITC supplies - Whether the applicant is eligible to avail Input Tax Credit of GST paid on the manpower supply services used to operate the canteen. - HELD THAT: - The Authority classified the applicant's activity as canteen services falling under SAC 996333. Notification granting concessional rate for such canteen services prescribes the rate at 5% without entitlement to Input Tax Credit. Given that the outward supply is a service attracting the concessional rate without ITC, the GST paid on manpower supply services used for providing the canteen facility is not eligible for credit. The applicant's contention that ITC should be available because the canteen is provided pursuant to statutory mandate and the outward supply is not a 'supply' was negatived by the Authority's finding that the activity is a supply and is covered by the no ITC notification. [Paras 19, 20, 21]The applicant is not eligible to avail Input Tax Credit of GST paid on manpower supply services used for providing the canteen facility.Final Conclusion: The Authority ruled that the subsidized deductions from employees for factory canteen meals constitute a taxable supply of canteen services by the employer under Section 7 and Schedule II (clause 6); GST must be discharged on the value determined under Rule 30 or Rule 31; and Input Tax Credit of GST paid on manpower services used for the canteen is not admissible because such services are classified under SAC 996333 attracting concessional rate without ITC. Issues Involved:1. Applicability of GST on subsidized deductions made from employees' salaries for canteen services.2. Eligibility of Input Tax Credit (ITC) on GST paid for manpower supply services used in the canteen.Detailed Analysis:Issue 1: Applicability of GST on Subsidized DeductionsProvision of Canteen Facility as Supply:The applicant provides canteen facilities to around 3200 employees, including contractual employees, and deducts a nominal amount from their salaries to cover part of the meal costs. The applicant contends that this deduction does not constitute a 'supply' under Section 7 of the CGST Act, 2017, as it is a statutory obligation under the Factories Act, 1948, and lacks the legal intention of a contractual relationship.However, the ruling clarifies that:- Section 7(1)(a) of the CGST Act: For an activity to qualify as a supply, it must involve a form of supply of goods or services for consideration in the course or furtherance of business. The applicant's provision of canteen services meets these criteria.- Contractual Relationship: The applicant's deduction of a pre-decided amount from employees' salaries establishes a contractual relationship, fulfilling the first limb of supply.- Consideration: The nominal amount deducted from salaries qualifies as consideration under Section 2(31) of the CGST Act, which includes any payment made for the supply of goods or services. The adequacy of consideration is irrelevant.- In the Course or Furtherance of Business: The canteen facility supports the applicant's manufacturing business by ensuring employees remain on-site for meals, thus aiding productivity. This satisfies the third limb of supply.The ruling concludes that the provision of canteen services by the applicant constitutes a supply under Section 7(1)(a) of the CGST Act, 2017, and is liable to GST.Valuation of Supply:- Related Persons: The employer and employees are related persons under Section 15 of the CGST Act.- Valuation Rules: Since the supplier and recipient are related, the value of supply must be determined under Rule 30 or Rule 31 of the CGST Rules, 2017. The applicant must discharge GST liability based on the value determined using these rules.Issue 2: Eligibility of Input Tax Credit (ITC)ITC on Manpower Supply Services:The applicant argues that ITC should be available for GST paid on manpower supply services used in the canteen, as it is a statutory requirement under the Factories Act, 1948.However, the ruling states:- Classification of Services: The services provided in the canteen fall under SAC 996333 and attract GST at 5% without ITC, as per Notification 11/2017-Central Tax (Rate) dated 28.06.2017.- Ineligibility for ITC: Therefore, the applicant is not entitled to ITC for the GST paid on manpower supply services used for the canteen.Ruling:a) The subsidized deduction from employees' salaries for canteen services is considered a supply under Section 7 of the CGST/KGST Act, 2017. GST must be paid on the value determined under Rule 30 or 31 of the CGST Rules, 2017.b) The applicant is not eligible for ITC on GST paid for manpower supply services used in providing the canteen facility.