GST not applicable on employee canteen charges under Factories Act Section 46 but applies to contractual workers

The AAAR Gujarat ruled on GST applicability for canteen service charges recovered from employees and contractual workers by a pharmaceutical company. The Authority held that GST is not applicable on amounts recovered from employees for canteen services as it constitutes a mandatory facility under Section 46 of the Factories Act, 1948, and input tax credit is available for such services. However, GST is applicable on charges recovered from contractual workers since the statutory obligation to provide canteen facilities to contractual workers lies with the contractor, not the principal employer. The company's assumption of primary responsibility was unsupported by factual evidence as contractors were paid gross amounts including canteen allowances. The appeal was dismissed.

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ISSUES PRESENTED and CONSIDERED

The primary legal questions considered in this judgment are:

• Whether GST is applicable on the amount recovered by the appellant from employees or contractual workers for canteen services, which are obligatory under Section 46 of the Factories Act, 1948.
• Whether the input tax credit (ITC) of GST paid on the food bill of the Canteen Service Provider is available to the appellant, given the mandatory nature of providing canteen facilities under the Factories Act, 1948.

ISSUE-WISE DETAILED ANALYSIS

1. Applicability of GST on Canteen Charges Recovered from Employees and Contractual Workers

• Legal Framework and Precedents: The judgment references the Central Goods and Services Tax Act, 2017 (CGST Act), specifically Section 7(1)(a) and Section 2(31), which define supply and consideration, respectively. It also considers the provisions of the Factories Act, 1948, and the Contract Labour (Regulation & Abolition) Act, 1970 (CLRA).
• Court's Interpretation and Reasoning: The court upheld the ruling that GST is not leviable on canteen charges collected from employees, as these are not considered a supply under the CGST Act. However, for contractual workers, the charges are considered a supply, and thus GST is applicable.
• Key Evidence and Findings: The court noted that the appellant recovers 50% of canteen charges from employees and contractual workers. For employees, this recovery is not considered a supply, but for contractual workers, it is, due to the absence of an employer-employee relationship.
• Application of Law to Facts: The court applied Section 7(1)(a) and Section 2(31) of the CGST Act to determine that the recovery from contractual workers constitutes consideration for supply, thereby attracting GST.
• Treatment of Competing Arguments: The appellant argued that the obligation to provide canteen facilities under the Factories Act should exempt these charges from GST. However, the court found that this obligation does not extend to contractual workers under the CLRA.
• Conclusions: GST is not applicable on charges recovered from employees but is applicable on charges recovered from contractual workers.

2. Availability of Input Tax Credit on Canteen Services

• Legal Framework and Precedents: The court examined Section 17(5)(b) of the CGST Act, which deals with blocked credits, and the circular No. 172/4/2022-GST, which clarifies the applicability of ITC provisions.
• Court's Interpretation and Reasoning: The court held that ITC is available for canteen services provided to employees, as it is obligatory under the Factories Act. However, for contractual workers, ITC is not available, as the obligation to provide canteen facilities does not extend to them under the CLRA.
• Key Evidence and Findings: The court noted that the appellant's contracts with service providers do not establish an employer-employee relationship with contractual workers, thus affecting ITC eligibility.
• Application of Law to Facts: The court applied the provisions of the CGST Act and relevant circulars to conclude that ITC is admissible only for canteen services provided to employees.
• Treatment of Competing Arguments: The appellant contended that as a principal employer, it should be eligible for ITC for services provided to all workers. The court rejected this argument, citing the lack of statutory obligation for contractual workers.
• Conclusions: ITC is available for canteen services provided to employees but not for those provided to contractual workers.

SIGNIFICANT HOLDINGS

• Core Principles Established: The judgment reinforces the principle that GST applicability and ITC eligibility depend on the existence of a statutory obligation and the nature of the relationship between the parties involved.
• Final Determinations on Each Issue: The court upheld the ruling that GST is not applicable on canteen charges for employees but is applicable for contractual workers. ITC is available for canteen services provided to employees but not for those provided to contractual workers.

In conclusion, the appeal by M/s. Troikaa Pharmaceuticals Ltd. was rejected, affirming the original ruling by the Gujarat Authority for Advance Ruling. The court's decision was based on a detailed analysis of the statutory obligations under the Factories Act and the CLRA, as well as the provisions of the CGST Act regarding supply and ITC.

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