Company must pay GST on employee recoveries for subsidized canteen and transportation services under Section 7(1)

The Maharashtra AAR held that recoveries made from employees for subsidized canteen and transportation services constitute taxable supply under Section 7(1) of CGST Act, 2017. GST is payable on the recovered amounts from employees, while the subsidized portion provided as perquisite remains non-taxable per CBIC Circular 172/04/2022. Transportation services did not qualify for exemption under Notification 12/2017 as they constituted renting services under SAC 9966. ITC was denied on transportation services under Section 17(5)(g) as these were deemed for personal consumption of employees rather than business purposes.

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Issues Presented and Considered

The core legal questions considered by the Authority for Advance Ruling (AAR) are:

(a) Whether Goods and Services Tax (GST) is payable on recoveries made from employees by the applicant for providing canteen facilities at subsidized rates in the factory and office premises, and if yes, what should be the value on which tax is payableRs.

(b) Whether GST is payable on recoveries made from employees for providing bus transportation facilities, and if yes, whether the applicant is exempt under Notification No. 12/2017 Central Tax (Rate)Rs.

(c) Whether Input Tax Credit (ITC) is available on input services procured for providing bus transportation services to employees.

Issue-wise Detailed Analysis

1. Taxability of Recoveries from Employees for Canteen Facilities

Legal Framework and Precedents: Section 7(1)(a) of the CGST Act defines "supply" to include all forms of supply of goods or services made for consideration in the course or furtherance of business. Section 2(17) defines "business" broadly to include any trade, commerce, manufacture, profession, vocation, or any similar activity, whether or not for pecuniary benefit, and also includes activities incidental or ancillary to such activities. Schedule III excludes certain activities from being treated as supply, including services by an employee to the employer in the course or relation of employment.

Precedents cited by the applicant include rulings where employee recoveries were held not to constitute supply, such as in the cases of Jotun India Pvt Ltd and POSCO India Pune Processing Centre Pvt Ltd, where recoveries for parental health insurance were held not to amount to supply. The applicant also relied on the Madras High Court decision in Deputy Commissioner of Commercial Taxes vs. Thirumagal Mills Ltd., which held that a fair price shop run for employees was not a commercial activity, and Delhi High Court decision in Panacea Biotech Ltd. that sales of used cars were not incidental or ancillary to the main business.

Court's Interpretation and Reasoning: The applicant argued that the canteen facility is a statutory requirement under the Factories Act, 1948, and is provided as a part of employment terms, not as a business activity. The applicant contended that it is merely a facilitator between the third-party caterer and employees, and does not carry on the business of catering. Hence, recoveries from employees are not consideration for supply in the course or furtherance of business.

The department and AAR, however, held that the supply of food to employees for consideration, even at subsidized rates, constitutes supply under Section 7(1)(a). The activity is incidental or ancillary to the principal business of manufacturing automotive components, and thus falls within the definition of business under Section 2(17)(b). The applicant is a supplier of the canteen services to employees, receiving consideration (recovery) from them, and hence liable to GST. The AAR distinguished the Schedule III exclusion as it applies only to services by employees to employers, not vice versa.

The AAR noted that the exemption under pre-GST service tax laws for canteen services does not exist under GST. The applicant's reliance on perquisite exemption was examined in light of CBIC Circular No. 172/04/2022-GST, which clarifies that perquisites provided under employment contracts are not subject to GST only to the extent they are free or concessional. Recoveries made from employees are consideration and taxable.

Key Evidence and Findings: The applicant's canteen policy, salary slips showing recovery, and third-party invoices were examined. The statutory mandate under the Factories Act to provide canteen was acknowledged but held insufficient to exclude the activity from GST.

Application of Law to Facts: The AAR applied the broad definition of supply and business, and held that the canteen services supplied to employees for consideration, even at subsidized rates, constitute taxable supply. The recoveries are taxable, and the value on which GST is payable is the amount recovered from employees, not the total cost incurred by the applicant.

Treatment of Competing Arguments: The applicant's contention that the canteen facility is not a business activity was rejected. The AAR emphasized that incidental or ancillary activities to the main business are included in business. The applicant's reliance on Schedule III exclusion was distinguished as it applies only to services by employees to employers, not employer to employee. The perquisite exemption applies only to free or concessional supplies, not recoveries.

Conclusion: GST is payable on the recoveries made from employees for canteen facility at subsidized rates, and the taxable value is the amount recovered from employees.

2. Taxability of Recoveries from Employees for Bus Transportation Facilities

Legal Framework and Precedents: Similar provisions under Section 7(1)(a) and Section 2(17) apply. Notification No. 12/2017-Central Tax (Rate) exempts certain passenger transportation services, including non-air-conditioned contract carriages other than radio taxis, from GST. The Motor Vehicles Act, 1988 defines contract carriage and conditions for permits. The CBIC Circular No. 172/04/2022-GST was also considered.

Precedents include the Maharashtra AAR ruling in Tata Motors Ltd. where recoveries for employee bus transportation in non-AC buses were held not to constitute supply, and ITC was allowed on the cost borne by the applicant. Other rulings were cited where transportation services provided by third-party operators were considered renting services.

Court's Interpretation and Reasoning: The applicant argued that the bus transportation is provided as part of employment terms, is not a business activity, and recoveries from employees do not constitute supply. Alternatively, if supply exists, the service is exempt under Notification No. 12/2017 as non-AC contract carriage. The applicant also claimed ITC on GST paid to third-party providers.

The department and AAR held that the applicant is supplying transportation services to employees for consideration and hence taxable under GST. The exemption under Notification No. 12/2017 was denied because the applicant does not hold contract carriage permits, does not have privity of contract with employees, and the buses are used on various routes picking up multiple employees, thus not qualifying as contract carriage under the Motor Vehicles Act. The services provided by the third-party are renting services and GST is charged accordingly.

ITC on GST paid to third-party providers was denied by the AAR, relying on Section 17(5)(b) and (a) of the CGST Act, which restrict ITC on renting or hiring of motor vehicles used for transportation of persons with seating capacity not more than thirteen persons. Since the buses have approved seating capacity of more than thirteen persons, ITC is eligible only if the services are used for business. However, the AAR held that transportation services to employees are for personal convenience and thus ITC is not available.

Key Evidence and Findings: The applicant's contracts with third-party providers, bus permits, seating capacity, and usage patterns were examined. The absence of contract carriage permits held by the applicant was significant.

Application of Law to Facts: The AAR applied the definition of supply and business, and held the transportation services to employees for consideration constitute taxable supply. The exemption under Notification No. 12/2017 does not apply. ITC on GST paid to third-party providers is not available as the services are for personal consumption and not used in furtherance of business.

Treatment of Competing Arguments: The applicant's reliance on exemption notification and perquisite exemption was rejected. The department emphasized the nature of the contract and conditions under Motor Vehicles Act. The applicant's argument that the service is not supply was rejected based on the presence of consideration and business nexus.

Conclusion: GST is payable on recoveries made from employees for bus transportation facilities. The applicant is not exempt under Notification No. 12/2017. ITC on input services for bus transportation is not available.

3. Availability of Input Tax Credit (ITC) on Canteen and Bus Transportation Services

Legal Framework and Precedents: Section 16 of the CGST Act allows ITC on goods or services used in the course or furtherance of business. Section 17(5) lists blocked credits including food and beverages, outdoor catering, and renting or hiring of motor vehicles used for transportation of persons with seating capacity not more than thirteen persons, except under certain conditions.

The proviso to Section 17(5)(b) allows ITC on food and beverages if the employer is under obligation to provide the same under any law.

Court's Interpretation and Reasoning: The applicant argued ITC is available on GST paid to third-party caterers for canteen services as the canteen is mandated under the Factories Act, 1948. The AAR acknowledged this and allowed ITC to the extent of cost borne by the applicant.

For bus transportation, the applicant argued ITC is available as the buses have seating capacity of more than thirteen persons and the services are used in furtherance of business. The AAR, however, held that transportation of employees is for personal convenience and not in furtherance of business, thus ITC is not available.

Key Evidence and Findings: The statutory obligation under Factories Act for canteen was noted. Seating capacity of buses and usage was examined.

Application of Law to Facts: ITC is allowed on canteen services procured from third parties as mandated by law, to the extent cost is borne by the applicant. ITC on bus transportation services is denied as the service is for personal consumption and not used in furtherance of business.

Treatment of Competing Arguments: The applicant's reliance on exemption under Section 17(5) proviso for canteen services was accepted. For transportation, the applicant's arguments were rejected based on judicial precedents and the nature of service.

Conclusion: ITC is available on GST paid for canteen services to the extent cost is borne by the applicant. ITC is not available on GST paid for bus transportation services.

4. Valuation of Recoveries for GST Purposes

The applicant contended that if GST is payable, it should be payable only on the amount recovered from employees, not on the total cost incurred by the applicant. This is supported by the CBIC press release dated 10 July 2017, clarifying that perquisites provided as part of contractual agreement are not subject to GST, and GST is payable only on recoveries made.

The AAR agreed with this position, holding that the taxable value is the amount recovered from employees, with the balance treated as perquisite and not taxable.

Significant Holdings

"The supply of food by the applicant to its employees for consideration, even at subsidized rates, constitutes supply under Section 7(1)(a) of the CGST Act, and the applicant is liable to pay GST on the recoveries made from employees."

"The supply of bus transportation services to employees for consideration constitutes taxable supply under GST. The exemption under Notification No. 12/2017-Central Tax (Rate) does not apply as the applicant does not hold contract carriage permits and the buses are not used exclusively as contract carriages."

"Input Tax Credit is available on GST paid for canteen services procured from third-party service providers to the extent the cost is borne by the applicant, as the canteen is mandated under the Factories Act, 1948."

"Input Tax Credit is not available on GST paid for bus transportation services as such services are for personal convenience of employees and not used in furtherance of business."

"GST is payable only on the amount recovered from employees towards canteen and transportation services, with the balance treated as perquisite and not taxable."

Core Principles Established

1. Supply under GST includes services provided by an employer to employees for consideration, even if incidental or ancillary to the principal business.

2. Recoveries from employees for canteen and transportation facilities constitute consideration for supply and are taxable under GST.

3. Exemptions under GST notifications apply only if the supplier meets the conditions, such as holding contract carriage permits for transportation services.

4. Input Tax Credit is available on mandatory services procured for employees (e.g., canteen under Factories Act), but not on services for personal convenience (e.g., employee transportation).

5. Perquisites provided free or concessional to employees under contractual agreements are not subject to GST; GST applies only on recoveries made.

Final Determinations on Each Issue

(a) GST is payable on recoveries made from employees for canteen facilities at subsidized rates. The taxable value is the amount recovered from employees.

(b) GST is payable on recoveries made from employees for bus transportation facilities. The applicant is not exempt under Notification No. 12/2017 Central Tax (Rate).

(c) Input Tax Credit is available on GST paid for canteen services procured from third parties to the extent cost is borne by the applicant. ITC is not available on GST paid for bus transportation services.

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