2024 (2) TMI 847 - AAR - GST

Restaurant service providers under GST notification 11/2017-CT cannot claim ITC on general expenses unless providing other eligible supplies

The AAR Gujarat ruled that a restaurant service provider operating under GST notification 11/2017-CT (Rate) at 5% tax rate is generally not entitled to ... Eligibility for input tax credit where rate notification conditions prohibit credit - effect of Explanation (iv) to the rate notification on availment and reversal of ITC - application of section 17(2) for apportionment where supplies are partly taxable and partly exempt - operation of Rules 42 and 43 for reversal and determination of common input tax credit - strict interpretation of exemption/benefit notificationsEligibility for input tax credit where rate notification conditions prohibit credit - effect of Explanation (iv) to the rate notification on availment and reversal of ITC - Entitlement to claim input tax credit of general expenses of the company which are meant for the purpose of business - HELD THAT: - The applicant avails the concessional rate in the notification for restaurant services subject to the condition that credit of input tax charged on goods and services used in supplying the service has not been taken. Explanation (iv) makes clear that (a) credits on inputs/services used exclusively for supplying the restaurant service are not eligible, and (b) where inputs/services are used partly for supplying the restaurant service and partly for other supplies eligible for credit, reversal is required as if the restaurant service were an exempt supply and section 17(2) applies. The applicant has not identified other supplies eligible for ITC; on the material before the Authority, where only restaurant services are established, ITC in respect of general company expenses used for the restaurant business is not available. If the applicant supplies other taxable supplies eligible for ITC (not disclosed), Explanation (iv)(b) would apply and credits could be admissible subject to reversal under section 17(2) and rules made thereunder. [Paras 14]ITC on general expenses used for the restaurant business is not admissible under the notification; if other taxable supplies exist, Explanation (iv)(b) and section 17(2) govern admissibility subject to reversal.Application of section 17(2) for apportionment where supplies are partly taxable and partly exempt - operation of Rules 42 and 43 for reversal and determination of common input tax credit - Entitlement to claim input tax credit apportioned on the basis of square foot/area of usage of premises - HELD THAT: - Where inputs or input services are used partly for supplying the restaurant service (subject to the notification) and partly for other supplies eligible for ITC, Explanation (iv)(b) requires reversal treating the restaurant supply as if exempt, and section 17(2) restricts credit to that attributable to taxable supplies. The manner of determination and reversal of ITC for inputs and input services is governed by Rule 42, and for capital goods by Rule 43 of the CGST Rules. Consequently, apportionment cannot be determined solely by area/square footage if the statutory provisions and rules require prorata reversal on the basis of turnover or the methodology prescribed in Rules 42/43. [Paras 15, 16]Apportionment of ITC is subject to section 17(2) and must be determined under Rules 42 and 43 rather than solely by area; eligibility depends on whether other taxable supplies exist and the reversal provisions.Operation of Rules 42 and 43 for reversal and determination of common input tax credit - strict interpretation of exemption/benefit notifications - Applicability of Rules 42/43 (read with SGST rules) to the applicant's claim of input tax credit despite declared tariff remaining below the specified threshold - HELD THAT: - The notification condition disallowing credit where credit has been taken engages the reversal and apportionment provisions of the CGST Act and Rules. Given Explanation (iv) and the statutory scheme, Rules 42 and 43 apply to determine and, where necessary, reverse ITC. The applicant's contention that section 17 and Rules 42/43 do not apply because the declared tariff is below the threshold is untenable in view of Explanation (iv) and the requirement of strict interpretation of exemption notifications; accordingly Rules 42/43 (and corresponding SGST rules) are applicable to the claim of ITC. [Paras 16, 17]Rules 42 and 43 (with SGST counterparts) apply to the applicant's ITC claims; the declared tariff being below the threshold does not exclude operation of those rules.Final Conclusion: The applicant cannot claim ITC in respect of inputs/services used exclusively for restaurant services where the concessional notification prohibits credit; where inputs/services are used partly for other taxable supplies, Explanation (iv)(b), section 17(2) and Rules 42/43 govern admissibility and reversal, and apportionment cannot be determined solely by area. Rules 42/43 (and SGST equivalents) are applicable and the notification must be strictly construed. Issues Involved:1. Entitlement to claim input tax credit (ITC) for general expenses.2. Entitlement to ITC based on square foot and area of usage.3. Applicability of Rule 42/43 of the CGST Rules, read with SGST Rules, to the claim of ITC.Summary:Issue 1: Entitlement to Claim ITC for General ExpensesThe applicant sought to claim ITC for general expenses incurred for the business. The applicant provides restaurant services and discharges GST at 5% under Notification No. 11/2017-CT (Rate) as amended by Notification No. 20/2019-CT (Rate). The notification specifies that the benefit is available only if ITC on goods and services used in supplying the service has not been taken. Since the applicant provides restaurant services at premises other than specified premises, they are eligible for the notification's benefit, subject to not claiming ITC. Therefore, the applicant is not eligible to claim ITC for expenses incurred in respect of restaurant services. If the applicant provides other supplies eligible for ITC, the credit would be eligible subject to the conditions in explanation (iv) of the notification and section 17(2) of the CGST Act, 2017.Issue 2: Entitlement to ITC Based on Square Foot and Area of UsageThe applicant inquired whether they could enjoy the benefit of ITC based on the square foot and area of usage of the premises. The ruling states that if the applicant provides other supplies eligible for ITC, the credit would be eligible subject to the conditions in explanation (iv) (b) of the notification. The determination of ITC and its reversal would be governed by Rule 42 of the CGST Rules, 2017 for inputs and input services, and Rule 43 for capital goods.Issue 3: Applicability of Rule 42/43 of the CGST Rules, Read with SGST RulesThe applicant questioned the applicability of Rule 42/43 of the CGST Rules, read with SGST Rules, given that the declared tariff of the hotel rooms never exceeds Rs. 7,499/-. The ruling clarifies that Rule 42/43 of the CGST Rules, read with SGST Rules, are applicable to the claim of ITC by the applicant.Conclusion:The applicant is not entitled to claim ITC for general expenses related to restaurant services. ITC based on square foot and area of usage is subject to the conditions in the notification and section 17(2) of the CGST Act, 2017. Rule 42/43 of the CGST Rules, read with SGST Rules, are applicable to the claim of ITC. The ruling emphasizes strict interpretation of exemption notifications, aligning with the Supreme Court's judgment in the case of Dilip Kumar & Company.