2024 (2) TMI 848 - AAR - GST

Employee canteen deductions under Factories Act not taxable supply but charges to contract workers are taxable under section 7

Gujarat AAR ruled that deductions from employees for mandatory canteen facilities under Factories Act, 1948 do not constitute taxable supply under CGST ... Supply under section 7 of the CGST Act - Consideration as element of supply - Perquisite / employer-employee contractual benefit outside scope of supply - Input tax credit under the proviso to section 17(5)(b) (obligatory provision to employees) - Composite supply of food as service (Schedule II) - Outward supply and business (section 2(83) and section 2(17)) - Blocked credit for food and beverages under section 17(5)(b)(i)Supply under section 7 of the CGST Act - Perquisite / employer-employee contractual benefit outside scope of supply - Consideration as element of supply - Deduction recovered from permanent employees for subsidised canteen meals is not a supply; recoveries from employees not on the applicant's payroll are supplies liable to GST. - HELD THAT: - Applying section 7 and the CBIC clarifications, the Authority found that canteen meals provided mandatorily under the Factories Act to the applicant's permanent employees are perquisites provided in terms of the employer-employee contractual relationship and therefore do not constitute supply. The Meal Policy and statutory obligation establish that the amounts recovered from permanent employees are not consideration for an independent supply by the applicant. By contrast, persons who are not on the applicant's payroll (employees on deputation, persons on business travel and temporary/contract workers) do not satisfy the employer-employee relationship test; supply of food to them falls within the definition of outward supply and composite supply of food as a service (Schedule II), and the nominal recoveries constitute consideration, attracting GST. [Paras 31, 33, 34, 35, 36]No GST on recoveries from permanent employees; GST liable on recoveries from employees on deputation, employees on business travel and temporary/contract workers.Input tax credit under the proviso to section 17(5)(b) (obligatory provision to employees) - Blocked credit for food and beverages under section 17(5)(b)(i) - ITC is available to the applicant for GST charged by the canteen service provider to the extent of the cost borne by the applicant for permanent employees; ITC is not available for the portion relating to employees on deputation/business travel/temporary workers. - HELD THAT: - Having held that canteen provision to permanent employees is obligatory under section 46 of the Factories Act and in light of the proviso to section 17(5)(b) (as clarified by CBIC Circular No.172/04/2022), the Authority ruled that ITC on GST charged by the CSP is admissible but only to the extent of the cost actually borne by the applicant (disallowing credit proportionate to amounts recovered from employees). Conversely, supplies to non employees (deputation, business travel, temporary/contract workers) are taxable outward supplies and fall within the blocked category under section 17(5)(b)(i), so ITC for those supplies is not available. [Paras 37, 38, 39, 40]ITC admissible for canteen services used for permanent employees limited to applicant's borne cost; ITC not admissible for canteen services provided to deputation/business travel/temporary/contract workers.Outward supply and business (section 2(83) and section 2(17)) - Composite supply of food as service (Schedule II) - Supply of subsidised food to persons who are not the applicant's employees is an outward supply in the course or furtherance of business and taxable as supply of service. - HELD THAT: - The Authority applied the statutory definitions of 'business' and 'outward supply' and Schedule II to conclude that providing food to deputed personnel, business travel personnel and contractual/temporary workers is incidental or ancillary to the applicant's business and constitutes supply of service; recoveries made are consideration as defined in section 2(31). Consequently such recoveries attract GST. [Paras 32, 33, 34, 35, 36]Recoveries from non payroll persons are taxable outward supplies of service.Blocked credit for food and beverages under section 17(5)(b)(i) - Input tax credit on capital/inputs used for canteen operations - ITC is not admissible on kitchen utensils and equipment used for providing canteen facilities. - HELD THAT: - Although the applicant retains ownership of utensils and equipment, section 17(5)(b)(i) blocks credit for food and beverages and related supplies; further, notification and rate provisions treating canteen supplies as without ITC confirm that ITC on such kitchen utensils and equipment utilized in canteen operations is not allowable. The Authority therefore disallowed ITC on these inputs. [Paras 41, 42, 43, 44]No ITC on kitchen utensils and equipment used in the canteen.Final Conclusion: The Authority ruled (1) recoveries from permanent employees for statutory canteen meals are not supplies and not taxable, while recoveries from deputation/business travel/temporary/contract workers are taxable supplies; (2) ITC on CSP charges is available only to the extent of cost borne by the applicant for permanent employees and is not available for supplies to non employees; and (3) ITC is disallowed on kitchen utensils and equipment used for canteen services. Issues Involved:1. GST liability on the amount recovered from employees for canteen facilities.2. Eligibility for Input Tax Credit (ITC) on GST charged by the canteen service provider for permanent employees.3. Eligibility for ITC on GST charged by the canteen service provider for employees on deputation, business travel, and temporary workers.4. Eligibility for ITC on inputs like equipment and kitchen utensils used for providing canteen facilities.Summary:Issue 1: GST Liability on Amount Recovered from Employees for Canteen FacilitiesThe applicant provides canteen facilities to its employees as mandated by Section 46 of the Factories Act, 1948. The deduction made by the applicant from the permanent employees for availing food in the factory canteen is not considered a 'supply' under section 7 of the CGST Act, 2017. However, this finding is only applicable to permanent employees and not to employees of SMC on deputation, MSIL on business travel, and temporary workers. For these categories, the recovery of the amount falls under the definition of 'outward supply' as per section 2(83) of the CGST Act, 2017, and is liable to tax under GST.Issue 2: Eligibility for ITC on GST Charged by Canteen Service Provider for Permanent EmployeesThe applicant is eligible to avail ITC in respect of the GST charged by the canteen service provider for canteen facilities provided to its permanent employees. This is based on Section 17(5)(b) as amended effective from 1.2.2019 and clarified by CBIC circular No. 172/04/2022-GST dated 6.7.2022. The ITC is restricted to the extent of the cost borne by the applicant, disallowing proportionate credit embedded in the cost recovered from employees.Issue 3: Eligibility for ITC on GST Charged by Canteen Service Provider for Employees on Deputation, Business Travel, and Temporary WorkersThe applicant is not eligible to avail ITC for the GST charged by the canteen service provider for canteen facilities provided to employees of SMC on deputation, MSIL on business travel, and temporary workers. This is in accordance with section 17(5)(b)(i) of the CGST Act, 2017, which restricts ITC on supply of food and beverages.Issue 4: Eligibility for ITC on Inputs Used for Providing Canteen FacilitiesThe applicant is not eligible to avail ITC on kitchen utensils and equipment like water coolers, dishwashers, plates, worktables, etc., used for providing canteen facilities. This ruling is based on section 17(5)(b)(i) of the CGST Act, 2017, and notification No. 13/2018-CT (Rate) dated 26.7.2018, which restricts ITC on such items.Ruling:1. GST is not liable on the amount recovered from permanent employees for canteen facilities. However, it is liable on the amount recovered from employees of SMC on deputation, MSIL on business travel, and temporary workers.2. The applicant is eligible for ITC on GST charged by the canteen service provider for permanent employees, restricted to the cost borne by the applicant.3. The applicant is not eligible for ITC on GST charged by the canteen service provider for employees on deputation, business travel, and temporary workers.4. The applicant is not eligible for ITC on inputs like equipment and kitchen utensils used for providing canteen facilities.