Canteen recoveries as taxable supply and ITC denial under GST where subsidised food is tied to consideration and rate notification

Recovery of nominal amounts from employees and contract workers for subsidised canteen food was treated as a taxable supply under GST because the payments were direct consideration for food supplied and the activity formed part of business, being incidental to manufacturing and linked to the statutory canteen requirement. The absence of a separate employment clause did not alter the character of the arrangement, and the employer-perquisite circular was held inapplicable on the facts. Input tax credit on GST charged by the canteen service provider was also denied, as the credit-saving proviso to section 17(5)(b) was treated as limited to statutorily required facilities, while the applicable rate notification required supply at 5% without ITC.

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Issues: (i) Whether recovery of nominal amounts from employees and contract workers towards subsidised canteen food amounts to a taxable supply under GST; (ii) whether input tax credit of GST charged by the canteen service provider is available to the appellant.

Issue (i): Whether recovery of nominal amounts from employees and contract workers towards subsidised canteen food amounts to a taxable supply under GST.

Analysis: The supply of food was held to be for consideration, since the recoveries from employees and the manpower contractor were direct payments linked to the food supplied. The activity was treated as falling within the wide definition of business, as it was incidental and ancillary to the appellant's manufacturing activity and was undertaken to comply with the statutory canteen requirement under the factories law. The absence of a separate employment clause did not change the character of the arrangement, and the CBIC circular on employer-provided perquisites in contractual terms was held inapplicable on the facts.

Conclusion: The activity was held to be a supply and GST was held to be leviable. This issue was decided against the appellant and in favour of Revenue.

Issue (ii): Whether input tax credit of GST charged by the canteen service provider is available to the appellant.

Analysis: The credit restriction under section 17(5)(b) was considered, but the proviso was held to apply only where the employer is statutorily obliged to provide the facility. On that basis, credit was accepted in principle for canteen services provided to direct employees to the extent borne by the appellant. However, the arrangement was also examined in light of the applicable rate notification governing restaurant service, which required supply at 5% without ITC in the relevant setting. On that basis, the appellant was denied ITC on the tax charged by the canteen service provider.

Conclusion: Input tax credit on GST charged by the canteen service provider was held to be unavailable to the appellant. This issue was decided against the appellant and in favour of Revenue.

Final Conclusion: The appeal failed and the ruling of the advance ruling authority was not interfered with, leaving the canteen recoveries taxable and denying the claimed ITC.

Ratio Decidendi: A subsidised canteen arrangement involving recoveries from employees or connected third parties constitutes a taxable supply when it is linked to a consideration and forms part of business activity, while ITC is not available where the governing notification prescribes tax at a rate without credit.

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