2024 (1) TMI 703 - AAR - GST

Employer deductions for mandatory factory canteen services under Section 46 not taxable supply, input credit allowed on employer's contribution only

The AAR Gujarat ruled that subsidized deductions made by an employer from employees for mandatory factory canteen services under Section 46 of the ... Supply - perquisites provided by employer to employee - input tax credit - Section 17(5)(b) proviso - availability of ITC where employer is obliged by law - mandatory canteen facility under the Factories Act, 1948 (section 46) - Schedule III exclusion (services by employee to employer)Supply - Schedule III exclusion (services by employee to employer) - perquisites provided by employer to employee - Deduction of nominal amount from employees for subsidised canteen meals is a 'supply' under section 7 of the CGST Act, 2017 - HELD THAT: - The Authority examined Section 7's definition of 'supply' and the exceptions in Schedule III together with CBIC clarifications. The canteen facility is mandatorily provided by the applicant under section 46 of the Factories Act, 1948 and the applicant has shown the arrangement pertains to permanent employees governed by the HR manual. Relying on Circular No. 172/04/2022-GST and the press release position that perquisites provided by an employer to employees in terms of contractual obligations are not subject to GST, the Authority concluded that the deduction recovered from employees for the subsidised meals does not amount to a supply by the employer under section 7. The factual finding that the facility is provided as an obligatory statutory benefit and that the employer does not make a separate commercial supply or derive profit from the employees' portion underpinned this conclusion. [Paras 14]The deduction from employees for canteen meals is not a 'supply' under section 7 of the CGST Act, 2017.Input tax credit - Section 17(5)(b) proviso - availability of ITC where employer is obliged by law - mandatory canteen facility under the Factories Act, 1948 (section 46) - Entitlement of the applicant to claim input tax credit on GST charged by the canteen service provider - HELD THAT: - The Authority considered the amended clause (b) of section 17(5) and the CBIC clarification that the proviso to clause (b) applies to the entire clause, making ITC available where the supply is obligatory for an employer under any law. Given that provision of canteen facilities is mandatory under section 46 of the Factories Act, 1948 (and the Gujarat rules), the Authority held that input tax credit on GST charged by the canteen service provider is available to the applicant. The Authority further limited the credit to the extent of cost actually borne by the applicant, disallowing the proportionate credit attributable to that portion of costs recovered from employees, thereby restricting ITC to the employer's net outlay. [Paras 17, 18]ITC is available to the applicant in respect of GST charged by the canteen service provider for mandatory canteen services, restricted to the extent of cost borne by the applicant (excluding the portion recovered from employees).Final Conclusion: The Authority ruled that (i) the employees' subsidised contributions for mandatory factory canteen meals do not constitute a 'supply' under section 7 of the CGST Act, 2017, and (ii) the applicant may claim input tax credit on GST charged by the canteen service provider in respect of the mandatory canteen, limited to the proportion of cost borne by the applicant (excluding the portion recovered from employees). Issues Involved:1. Whether the subsidized deduction made by the applicant from the employees who are the ultimate recipients of the canteen facility would be considered as a 'supply' under the CGST Act, 2017 and GGST Act, 2017.2. If the answer to the above is affirmative, the value at which GST is payable.3. Whether the Company is eligible to take the Input Tax Credit (ITC) for the GST charged by the Canteen Service Provider (CSP) for canteen services.Summary of Judgment:Issue 1: Whether the subsidized deduction is considered as 'supply'The applicant, M/s Kohler India Corporation Private Limited, provides canteen facilities to its employees as mandated by Section 46 of the Factories Act, 1948. The deduction made by the applicant from the employees who avail food in the factory is not considered as a 'supply' under Section 7 of the CGST Act, 2017. This is based on Circular No. 172/04/2022-GST, which clarifies that perquisites provided by the employer to the employee in terms of a contractual agreement are not subjected to GST.Issue 2: Value at which GST is payableSince the deduction from employees is not considered a 'supply,' the question regarding the value at which GST is payable is rendered infructuous.Issue 3: Eligibility to take Input Tax Credit (ITC)The applicant is eligible to avail ITC on the GST charged by the CSP for canteen services provided to its employees. This eligibility is based on the proviso to Section 17(5)(b) of the CGST Act, 2017, which allows ITC for goods or services that an employer is obligated to provide to employees under any law. The ITC is restricted to the extent of the cost borne by the applicant, disallowing proportionate credit embedded in the cost recovered from employees.Ruling:1. The deduction from employees' salaries for canteen facilities is not considered a 'supply' under the CGST Act, 2017, and GGST Act, 2017.2. Since the above is not considered a 'supply,' the question of the value at which GST is payable is moot.3. ITC is available to the applicant on GST charged by the CSP for canteen services, restricted to the cost borne by the applicant, excluding the portion recovered from employees.