2023 (11) TMI 949 - AAAR - GST

Subsidized employee food supply taxable under Section 7 CGST Act despite nominal cost, ITC restricted for contract workers

The AAAR held that subsidized food supply to employees and contract workers constitutes a taxable supply under Section 7 of CGST Act, 2017, even when ... Supply - Consideration - Furtherance of business / incidental or ancillary activity - Perquisites provided by employer to employee - Input tax credit - blocked credits under Section 17(5)(b) - Proviso to Section 17(5)(b) - ITC where supply is obligatory under any law - Concessional rate for restaurant services - Notification No. 11/2017 (as amended)Supply - Consideration - Furtherance of business / incidental or ancillary activity - Whether deduction/recovery from employees or manpower supplier for subsidised food constitutes a supply within the meaning of Section 7 of the CGST Act, 2017. - HELD THAT: - The Authority held that the collection of money per se is not a supply, but the facts showed that money was recovered from employees/contract workers in direct connection with supply of food. The definition of 'consideration' under Section 2(31) is wide and quantum is immaterial; even a nominal recovery constitutes consideration. Supply of food at the factory is an activity connected with and ancillary to the appellant's principal business (manufacture) within Section 2(17)(b)/(c) and therefore falls within the scope of 'supply' under Section 7. Pre-existing case-law under sales tax regimes holding canteen supplies as welfare measures does not negate GST liability because GST covers both goods and services. The CBIC circular on perquisites applies only where the perquisite is provided in terms of an employment contract; absence of an explicit contractual term here disentitles the appellant from that benefit. Accordingly, subsidised supply of food to employees and contract workers is a supply liable to GST. [Paras 8, 9, 10]Subsidised supply of food to employees and contract workers is a 'supply' under Section 7 and is leviable to GST.Perquisites provided by employer to employee - CBIC Circular No. 172/04/2022-GST - Whether the CBIC circular exempts the appellant's recoveries from employees from GST by treating them as perquisites falling outside supply. - HELD THAT: - The Authority examined the circular which excludes perquisites provided in terms of an employment contract from GST. It held that where a perquisite is not expressly provided for in the employment contract, it is largesse and not a contractual perquisite within the circular. The statutory mandate under the Factories Act to provide a canteen does not itself convert the arrangement into a contractual perquisite between employer and employee for the purpose of the circular. Therefore the circular's protection is inapplicable to the appellant's facts. [Paras 11]The CBIC circular cannot be invoked to exclude the appellant's recoveries from GST where the canteen facility is not provided pursuant to an explicit employment contract.Input tax credit - blocked credits under Section 17(5)(b) - Proviso to Section 17(5)(b) - ITC where supply is obligatory under any law - Concessional rate for restaurant services - Notification No. 11/2017 (as amended) - Whether the appellant is eligible to claim Input Tax Credit (ITC) on GST charged by the canteen service provider for the canteen services provided at the factory. - HELD THAT: - Section 17(5)(b) ordinarily blocks ITC on food and beverages/outdoor catering, but the proviso allows ITC where the inward supply is obligatory under any law. The Authority accepted that the Factories Act obliges the occupier to provide a canteen where applicable, so the proviso would permit ITC in principle only for supplies used for direct employees (not contract workers). However, the canteen contractor's activity is classifiable as 'restaurant service' and Notification No. 11/2017 (as amended by Notification No. 20/2019) prescribes a concessional 5% rate for such services without entitlement to ITC. The Authority observed that even if the proviso to Section 17(5)(b) permits ITC, the specific rate notification for restaurant services operates to deny ITC in these circumstances; similarly, had the appellant run the canteen itself the concessional notification would apply. Prior case law was noted for the principle that ITC is available only to the extent of cost borne by the recipient, but that limited entitlement is overridden here by the concessional no-ITC rate notification applicable to restaurant services. [Paras 12]ITC on GST charged by the canteen service provider is not available to the appellant because the restaurant service is subject to the concessional 5% rate under Notification No. 11/2017 as amended, which precludes availment of ITC; the proviso to Section 17(5)(b) does not override that effect in the present facts.Final Conclusion: The Appellate Authority affirmed the AAR's conclusions: (i) subsidised supply of food to employees and contract workers constitutes a supply under Section 7 and is taxable under GST; (ii) GST is leviable on nominal recoveries from employees and on recoveries from the manpower supplier; and (iii) Input Tax Credit on GST charged by the canteen service provider is not available to the appellant in view of the concessional notification applicable to restaurant services which bars ITC. Issues Involved:1. Whether the subsidized deduction made by the Appellant from the employees availing food in the factory is considered a 'supply' under the GST Act.2. Applicability of GST on the nominal amount deducted from the salaries of employees.3. Applicability of GST on the nominal amount deducted from the manpower supply contractor for contractual employees.4. Eligibility of Input Tax Credit (ITC) on GST charged by the Canteen Service Provider.Summary:Issue 1: Subsidized Deduction as 'Supply'The Appellant, involved in the manufacturing of automotive components, provides a canteen facility to its employees as mandated by the Factories Act, 1948. The question was whether the subsidized deduction from employees for canteen food qualifies as a 'supply' under Section 7 of the CGST Act. The court ruled that the supply of food at a subsidized rate constitutes a 'supply' under Section 7 of the CGST Act, 2017, as there is a clear element of consideration, even if nominal, and the activity is in furtherance of business.Issue 2: GST on Nominal Amount Deducted from SalariesThe Appellant argued that the nominal amount deducted from employees' salaries for canteen food should not attract GST. However, the court held that since there is a direct connection between the supply of food and the amount recovered, the transaction involves consideration. Thus, GST is applicable on the nominal amount deducted from employees' salaries.Issue 3: GST on Nominal Amount Deducted from Manpower Supply ContractorSimilarly, the court ruled that GST is applicable on the nominal amount deducted from the manpower supply contractor for contractual employees. The recovery of costs from the contractor is considered a transaction involving consideration, making it liable to GST.Issue 4: Eligibility for Input Tax Credit (ITC)The court examined whether the Appellant could claim ITC on the GST charged by the canteen service provider. Section 17(5)(b) of the CGST Act restricts ITC on food and beverages unless it is obligatory for the employer to provide the same under any law. Although the Factories Act mandates the provision of a canteen, the court noted that the canteen service provided by a third party is classified as 'Restaurant Service' under GST law, attracting a 5% GST rate without ITC. Consequently, the Appellant is not eligible to claim ITC on the GST paid to the canteen service provider.Conclusion:The court upheld the decision of the Authority for Advance Ruling, ruling that the subsidized food provided to employees and contractual workers is a supply under GST law and is subject to GST. Additionally, the Appellant is not eligible to claim ITC on the GST charged by the canteen service provider.