2023 (12) TMI 723 - AAR - GST

AAR rules subsidized employee canteen charges constitute taxable supply under GST Act despite concessional rates

AAR Tamil Nadu ruled that recovery of subsidized canteen charges from employees constitutes taxable supply under GST Act. The applicant, mandated under ... Supply or not - recovery of subsidised value from employees for providing canteen facility - Canteen operated by the Applicant within the factory premises - Canteen run by Applicant's subsidiary company operating within common premises for which the subsidiary company recovers charges from the Applicant. HELD THAT:- Applicant provides canteen facility either by himself or through a third party and is providing meals/food at concessional rates, i.e., no meal is extended free and specified amount in respect of the food consumed by the employee are collected by the Applicant against such consumption of food. Further, as seen from the documents furnished i.e. appointment order, availing the canteen facility made available by the Applicant in their premises is not mandatory. Whether recovery of subsidised value from employees for providing canteen facility would amount to 'supply'? - HELD THAT:- The Act mandates establishing a canteen when more than two hundred and fifty workers are 'ordinarily' employed in a factory and as per sub-clause (2)(dd) above, certain expenditure are to be borne by the employer. Abiding by the above provisions, since the number of workers and contract labourers, ordinarily employed exceeds 250 in number, the Applicant has established a canteen - In the case at hand establishing a canteen facility in the unit is an activity incident to the running of their business. Factory Act, above mandates establishing canteen, bearing certain mandatory costs in running of the canteen by the employer in as much as the number of workers 'ordinarily employed' (workers & contract labourers) are above 250 per unit, which is the case in hand as per their submissions. Accordingly, the applicant has established the canteen in their premises and bears certain running cost while collecting the nominal rate as fixed by the Managing Committee, which is an activity in furtherance of their business. In the case at hand, the Applicant supplies food to their employees at a nominal cost, and the same is the consideration for such supply made by the Applicant on which GST is liable to be paid - The supply of the food/beverages, although at subsidized rates, by the Applicant to their employees is certainly an activity amounting to supply of service and attracts levy of GST on that part of the consideration being charged for such supply. The supply of food by the employer, i.e, the applicant to their employees is composite supply of food held as 'Supply of service' as per Schedule-II of the GST Act and the amount collected by the Applicant is a 'Consideration' on which GST is liable to be paid. Subsidized food is a perquisite to employees forming a part of the wage agreement and HR policy of the Applicant or not - HELD THAT:- A combined reading of the Circular no. 172/04/2022-GST dated 06.07.2022 of CBIC and the term 'perquisite', it is found that the intention of the Circular is to clarify that tax is not applicable on perquisite which is part of the employee agreement and which may be free of cost for the employees. Accordingly, in case where a recovery is made against a supply, even if it is subsidised, the same will be subjected to tax - it is found that the benefit of the non-levy of GST could be extended only to the extent of the consideration being borne by the Applicant out of the total cost for supply of the food/beverages, but not to the extent of the consideration being collected at the subsidized rates, by the Applicant from their employees. Thus, GST is to be levied on the amount recovered by the Applicant from the employees towards canteen provision. Canteen facility is provided through a third party i.e. SACL - pure agent services or not - HELD THAT:- It was the contention of the Applicant that in respect of Model II, where canteen facility is provided through a third party i.e. SACL, the Applicant's role is limited to collecting the amount from the workers for onward payment to SACL and thereby they act as a pure agent. We find that this contention of the Applicant is not acceptable as the third party i.e. SACL is providing the canteen service to the Applicant and not to the employees. The Applicant in turn is providing the canteen facility to the employees. This fact is stated by the Applicant themselves in their application. Moreover, the first condition to act as a pure agent is that the service recipient should enter into a contractual agreement to authorize a person to act a pure agent for them. Whereas, in the present case, the employees have not authorised the Applicant to act as their agent. Hence this contention of the Applicant is totally not tenable. The recovery of subsidised value from employees for providing canteen facility will amount to 'supply' under the CGST Act and GST is to be levied on the amount recovered by the Applicant from the employees towards provision of canteen facility. Issues Involved:1. Whether recovery of subsidized value from employees for providing canteen facility amounts to 'supply' under the CGST Act.2. Whether the recovery would attract GST under two models: - Model I: Canteen operated by the Applicant within the factory premises. - Model II: Canteen run by Applicant's subsidiary company operating within common premises.Summary of Judgment:Issue 1: Whether recovery of subsidized value from employees for providing canteen facility amounts to 'supply' under the CGST Act:The Applicant argued that the subsidized amount collected from employees for canteen facilities should not attract GST as it is a statutory obligation under the Factories Act. They contended that there is no legal intention or agreement between them and the workers to provide canteen services for consideration, and the amount collected is merely a reimbursement without reciprocal obligations. The Applicant also claimed that the provision of canteen facilities is not in furtherance of their business.The Authority found that establishing a canteen facility is an activity incident to the running of the business, as mandated by the Factories Act, 1948. The term 'business' under Section 2(17) includes activities incidental or ancillary to the main business. The provision of food in the canteen for a nominal cost is a 'Supply' for the purposes of GST. The term 'Outward Supply' under Section 2(83) includes any supply made in the course or furtherance of business. Therefore, the provision of food in the canteen amounts to a 'Supply' under the CGST Act.Issue 2: Whether the recovery would attract GST under two models:Model I: Canteen operated by the Applicant within the factory premises:The Applicant runs the canteen, hires a cook, and procures food supplies. They recover a subsidized amount from employees, which is considered a 'Supply' under the CGST Act. The amount collected from employees is 'Consideration' for the supply made by the Applicant, and GST is liable to be paid on this amount.Model II: Canteen run by Applicant's subsidiary company operating within common premises:The subsidiary company (SACL) operates the canteen, and the Applicant mediates between SACL and employees. The Applicant argued that they act as a pure agent and merely recover and reimburse the amount without retaining any profit margin. However, the Authority found that the third party (SACL) provides the canteen service to the Applicant, not directly to the employees. The Applicant, in turn, provides the canteen facility to the employees, and there is no contractual agreement authorizing the Applicant to act as a pure agent. Therefore, GST is to be levied on the amount recovered by the Applicant from the employees.Ruling:For both models, the recovery of subsidized value from employees for providing canteen facility amounts to 'supply' under the CGST Act, and GST is to be levied on the amount recovered by the Applicant from the employees towards the provision of canteen facility.