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TaxTMI 
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TaxTMI 
2026 (4) TMI 134
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....unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the MGST Act. Further to the earlier, henceforth for the purposes of this Advance Ruling, the expression 'GST Act' would mean CGST Act and MGST Act. 1. FACTS AND CONTENTION - AS PER THE APPLICANT FACTS: 1.1 Canteen Facility: 1.1.1 M/s Piaggio Vehicles Pvt Ltd, the applicant is in the business activity of manufacturing of three wheeled, two wheeled, four wheeled vehicles, its parts components, having its registered office at Plot no E-2, Baramati Industrial Estate Baramati 413133, provides canteen facility to its employees as a part and parcel of its employment arrangement vide its employment agreement executed with the employees, as per the terms and conditions of its HR Policy. 1.1.2 The applicant makes the recoveries at subsidized rates for availing the canteen facility to its employees from the employee's salary. The applicant has entered into a contract with third party service provider to provide the said facility as per the terms of the employment. The service provider raises the invoice in the na....
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....f the CGST Act. Entry (1) of Schedule-Ill covers services provided by employee to its employer in the course of employment or in relation to employment. Any activity or transaction, in this case, canteen services, which is undertaken in the course of employment or in connection with employment has been specifically excluded from the ambit of supply. By virtue of Section 7(2) read with Entry (1) of Schedule III, the canteen facility does not amount to supply. Also, as per the Press release issued by the Ministry of Finance dated 10 July 2017 any services provided by the employer to the employees in terms of the contractual agreement entered into between the employer and employee will not be subjected to the GST. 2.1.6 Without prejudice to the above, it is settled position under GST regime that employee recoveries do not amount to 'supply'. 2.1.7 The applicant has relied on following judgments and advance rulings, which are discussed in discussion part of this order. 1. State of Gujarat vs. Raipur Manufacturing Co. Ltd. (Civil Appeal No. 603 of 1966) 2. Deputy Commissioner of Commercial Taxes vs. Thirumagal Mills Ltd. [1967 (20) STC 287 Mad]. ....
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....of Uniparts India Ltd V/s. Commissioner (Appeals), C.Ex. Meerut, [2020 (33) G.S.T.L. 233 (Tri - All.) 2.2.9 The applicant also relies on the decision of the Hon'ble Supreme Court in Sundaram Finance Limited v State of Kerala [AIR 1966 SC 1178], as well in the case of Ishikawajima-Harima Heavy Industries v CIT in 2007, 288 ITR 408, 440 (SC), wherein the Hon'ble Supreme Court laid the principle for interpreting the contract. 2.2.10 Further, Applicant submits that, by collecting notice pay for defaults of the employees under the Employment Agreement, it cannot be said to have provided the service of 'agreeing to the obligation to tolerate an act'. The Madras High Court in the case of GE T&D (supra) has also held that the notice pay recovery cannot be equated with tolerating an act. 2.2.11 Similarly, reliance can also be placed on Order-in-Original No. 47/ADC/ST/GZB/2015-16 dated 30.03.2016, passed by the Ld. Additional Commissioner, Central Excise & Service Tax, Ghaziabad in the case of Glaxo Smithkline Consumer Healthcare Ltd. 2.2.12 Therefore, based on the above cited cases, the notice pay recovery collected by the Applicant are in the nature of p....
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.... 2.3.2 Notice pay recovered by the Applicant can at best be treated as compensation towards the loss of the Applicant for the breach of the contract by the employee. In the present case, the penalty imposed by the employer on its employee is a part of the contract which is a legal document and is binding on both the parties. The nature of notice pay recovery is the compensation for the loss incurred by the employer due to breach of the terms of the agreement, which cannot be equated with consideration under the GST Regulations. Hence, there cannot be a supply to attract GST. 2.4 Without prejudice to the above, the notice pay recovery does not amount to "supply" under Section 7(1)(c) read with Schedule I to the CGST Act. 2.4.1 The Applicant submits that the transaction of notice period recovery does not amount to 'supply' and hence, GST is not applicable. 2.4.2 In view of the provisions of Section 7(1)(c) and Schedule I of the CGST Act, a supply between related person even without consideration would tantamount to supply and GST would be applicable. However, such supply should be in course or furtherance of business. It is submitted that the notice pay reco....
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....of motor vehicles and providing canteen facilities is not incidental or ancillary to the activities covered under section 2(17) of the CGST Act, 2017. Hence our opinion this is not a "supply" under 7(1) of the CGST Act, 2017. 3.2 When the employee resigns or leaves the employment without serving the mandated notice period as per the terms and conditions of employment contract or agreement either in full or in part. In such circumstances the applicant is entitled for the monetary consideration as per the terms, the said amount is recovered by the applicant at the time of full settlement for the non-compliance of the agreement or the breach of the contract. Remark: Refer Circular No. 178/10/2022 (GST) dated 03/08/2022 para 7.5 is reproduced here. 7.5 An employer carries out an elaborate selection process and incurs expenditure in recruiting an employee, invests in his training and makes him a part of the organization, privy to its processes and business secrets in the expectation that the recruited employee would work for the organization for a certain minimum period. Premature leaving of the employment results in disruption of work and an undesirable situation. The pr....
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....pplicant pays the consideration to the third-party service providers for the said canteen service facilities. Thereafter, the Applicant recovers certain portion (i.e., subsidized amount is deducted from salary of the employees on monthly basis) of the cost of the canteen expenses incurred by the Applicant from its employees. (4) Applicant has contended that the recovery of amounts from employees for canteen services to employees do not fall under 'supply' as per section 7 of CGST Act, as supply of these services are not in the course or furtherance of 'business'. Various grounds raised by the Applicant to contend that the recovery of amounts from the employees for providing canteen services are discussed as below. 5.1.2 Whether supply of canteen services provided to employees is in the course or furtherance of business. (1) We observe that the Applicant has argued that he is carrying out the activity of manufacturing of two wheeled, three wheeled and four wheeled motor vehicles and spares thereof. The Applicant has taken view that activities which are having direct nexus with the main business can be said to be ancillary or incidental. According to him canteen fac....
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....g or likely to happen in an unplanned or subordinate conjunction with something else. Similarly word 'ancillary' has been defined as under: Oxford Dictionary - provide necessary support to the main work or activities of an organisation. - In addition to something else but not as important. Cambridge Dictionary: providing support or help. Dictionary.com - supporting, secondary, subsidiary The reading of all above definitions clarify that any activity, which supports the main activity or necessary to carry out the principal activity, is an activity or transaction in connection with or incidental to or ancillary to the principal activity. The activity of providing food in canteen services to its workers who are pivotal to his principal activity can definitely be said to be in connection with or incidental or ancillary to his main activity of manufacture of motor vehicles. (3) Further, in terms of Section 2(17)(c), as mentioned in para (1) above, the volume of transaction is immaterial for the purpose of coverage under "Business", therefore, even if supply of food is quite insignificant activity in terms of volume of transaction, still....
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....n of supply of canteen services by Applicant to the employees. Thus, there is supply of canteen services from the Applicant to the employees, u/s. 7(1) of CGST Act, 2017. 5.1.4 Taxability of Supply of Canteen services to the employees (1) Whether the perquisites forming part of employment contract excluded from GST. As per the Circular no. 172/04/2022-GST dated 06.07.2022 of CBIC, the relevant extract of the said circular is reproduced hereunder for ease of reference: S.No. Issue Clarification 5. Whether various perquisites provided by the employer to its employees in terms of contractual agreement entered into between the employer and the employee are liable for GST? 1. Schedule III to the CGST Act provides that "services by employee to the employer in the course of or in relation to his employment" will not be considered as supply of goods or services and hence GST is not applicable on services rendered by employee to employer provided they are in the course of or in relation to employment. 2. Any perquisites provided by the employer to its employees in terms of contractual agreement entered into between the employer and the employee are in lieu of t....
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.... to the instant case, in respect of the canteen services provided by the applicant to its employees, it becomes clear that the exemption provided in Entry 1 of Schedule III to the CGST Act, 2017 applies only to the concession part extended to the employees and not to the value charged to the employees. Thus, the recoveries made from the employees for canteen services are liable to levy of tax. (4) If incidental of ancillary supply of goods or services such as canteen services by the employer to employee were to not fall under 'business', it would not be necessary to provide respite to 'supplies by employer to employees given as perquisite' from falling under 'supply' by taking recourse to schedule III. That is, if a transaction or activity is not a supply u/s 7(1) of CGST Act, then there would not be necessity to place such a transaction u/s 7(2)(a) for deeming it to be neither supply of goods nor supply of services. Hence, as discussed in Para 5.1.2 and 5.1.3, Applicant's activity of supply of canteen services falls u/s 7(1) of CGST Act, 2017. As discussed in Para 5.1.4, only the perquisites i.e., free supplies, in terms of a contractual agreement between the employer and emplo....
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....anation. - For the purposes of this Act, -- (a) persons shall be deemed to be -related persons if -- (i) such persons are officers or directors of one another 's businesses; (ii) such persons are legally recognized partners in business; (iii) such persons are employer and employee; ..... As per Section 15(a)(iii), employer and employee are deemed to be related persons for the purposes of this Act. This means any transaction between employer and employee will not come out of 'supply' for the reason of not having consideration. However, respite to such transactions has come through Schedule 3. Section 7(2)(a) states that, notwithstanding anything in sub-section (1), activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor a supply of services. Serial Number 1 of Schedule III is as below. "1. Services by an employee to the employer in the course of or in relation to his employment." This entry includes only the services by an employee to the employer. However, it has been clarified by the above referred Circular that as corollary to this provision, the perquisite given to the empl....
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....o. Ltd. (Civil Appeal No. 603 of 1966). (2) Deputy Commissioner of Commercial Taxes vs. Thirumagal Mills Ltd [1967 (20) STC 287 Mad]. (3) Panacea Bitotech Limited vs Commissioner Trade and taxes [(2013) 59 VST 524(Del). The facts and the provisions of the law for which the above decisions were pronounced are completely different than the current case. 5.3 Whether the GST would be payable on the notice pay recoveries made from the employees on account of not serving the full notice period? 5.3.1 It is now clarified by the CBIC circular No. 178/10/2022-GST dated 3^rd August 2022 that the notice pay recoveries are not taxable. The relevant para of the said Circular is produced as below. "An employer carries out an elaborate selection process and incurs expenditure in recruiting an employee, invests in his training and makes him a part of the organization, privy to its processes and business secrets in the expectation that the recruited employee would work for the organization for a certain minimum period. Premature leaving of the employment results in disruption of work and an undesirable situation. The provisions for forfeiture of salary or recover....