GST is not applicable on consideration collection from employee for canteen services

Held by Hon’ble Appellate Authority of Advance Ruling, Gujarat in the matter of 

M/S Amneal Pharmaceuticals Pvt. Ltd. (appeal No. GUJ/GAAAR/APPEAL/2021/07)

The Amneal Pharmaceuticals Private Limited (The Appellant), is providing food facilities to its 500 employees. Canteen is run by a third party, i.e., Canteen Service Provider, to provide food to the employees. The Appellant collects a portion of the price of the canteen service provider from the employees by way of deduction from their salaries. To determine whether GST is payable on the amount collected from the employee, the appellant filed an appeal before GAAR wherein Hon’ble GAAR held affirmative and decided that appellant is liable to pay GST on such amount.

Aggrieved by order of GAAR, the appellant file appeal before GAAAR. Hon’ble GAAR held that The appellant is only acting a mediator between the canteen service provider and the employee by way of the collection of amount from the employee and paying it to the canteen service provider along with his portion of cost without making any profit. There is no supply involve from the appellant to the employee. Therefore, no GST is payable on consideration collection from the employee for canteen service.

In this article, we will discuss the details of the matter of this case and the final judgment of the Advance Authority of Advance Ruling.

1. Brief facts of the case

1. M/s Amneal Pharmaceuticals Pvt. Ltd (The appellant) is a pharmaceutical company, with more than 500 employees working in the factory of the appellant.
2. In the factory, a canteen is run by a third party, i.e., Canteen Service Provider, to provide food to the employees of the appellant.
3. The appellant pays the canteen service provider for which it collects some portion from the employees by way of deduction from employees’ salary.
4. The Appellant contended that he was only facilitating supply of food to the employee as the same is a statutory requirement under Factories Act, 1948. For this purpose, the appellant is only recovering the employee’s portion for actual expenditure incurred for such food and he is not making any kind of profit.
5. Seeking the clarification on the above transaction, where the part of amount collected from employees toward food supply, the appellant filed an application before Gujarat Authority for Advance Ruling (GAAR) asking the following Question:
   • “Whether GST is applicable on the amount recovered from employee on account of third party canteen services which is obligatory under Section 46 of the Factories Act, provided by company ?”

6. The Hon’ble Advance Ruling Authority, vide Advance Ruling No. GUJ/GAAR/R/50/2020 dated 30.07.2020, answered the question of the applicant in affirmative. Hon’ble GAAR held that the GST is applicable on the amount recovered from employed on account of third party canteen services.
7. Aggrieved by the ruling of Hon’ble GAAR, the appellant filed an appeal before Appellate Authority of Advance Ruling, Gujarat.

2. Ruling provided by GAAR

In the appeal file before Hon’ble GAAR, the following decision was provided:

1. The Applicant contended that the activity of supply of food to employees is not carried out as a business activity and no profit is involved in the same.
2. Hon’ble GAAR held that:
   • Even though no profit is earned by the applicant on the supply of food to its employees, there is a “supply”, as provided in Section 7(1)(a) of the CGST Act, 2017. 
   • Therefore, The applicant would definitely come under the definition of “Supplier”, as provided under Section 2(105) of CGST Act, 2017.
   • Also, as the applicant recovers the cost of food from its employees, there is ‘consideration’ involved as per Section Section 2(31) of the CGST Act, 2017. 
   • Accordingly, recovery of the amount from employees on account of third party canteen services provided by the Company would come under the definition of ‘outward supply’. Therefore, such service is liable to GST.

3. Contention made by Appellant 

Aggrieved by the order of the GAAR, the Appellant contended following points before Appellate Authority of Advance Ruling, Gujarat:

1. The appellant has collected the amount and paid it to the canteen service provider i.e third party.
2. The activity of supply of food is not the main object of business of the Appellant and the same is provided out of statutory obligation as given under section 46 of Factories Act, 1948.
3. The Appellant is only acting as a mediator between the canteen service provider and the employees with no profit making motive. Therefore, no GST is payable by the employees to the company on subsidized value of goods.
4. The appellant also submitted that the activity performed in this case is not covered under the scope of ‘supply’ as it is not in the course or furtherance of a business of the appellant.
5. GST is charged by Canteen Service Provider and the appellant is not availing any Input Tax Credit (“ITC”) of the same. Therefore, the activity of providing food to the employee at subsidized rate should not be construed as “Service” and no GST should be levied on the same.
6. The Appellant also referred to Sr. No. 19 of Notification No. 25/2012-Service Tax dated 20.06.2012.

4. Findings of Hon’ble Appellate Authority for Advance Ruling, Gujarat (GAAAR)

Going through the contention of the applicant and the theme of the transaction the Hon’ble GAAAR has found out the following points:

1. The applicant has arranged the canteen service for the employees of his factory and for which he collects part of the amounts from employees and  part of it paid by the appellant to the third party which is canteen service provider.
2. Canteen Service provider pays applicable GST on consideration charged by him from the appellant.
3. The employees’ portion of consideration and the appellant’s portion of the cost is paid to the Canteen Service Provider by the appellant. 
4. The issue here is whether GST is payable on the amount of consideration collected from the employee.
5. In the purview of the transaction made by the applicant it is clear that the appellant is not supplying any goods or services to the employees. THe appellant merely collects the portion of the amount from the employee and pays it to the canteen service provider after adding his portion of the amount.
6. The appellant does not include margin on the amount collected from employees and also is not providing any additional supplies to the employees.
7. In view of Hon’ble GAAAR, as the appellant is not carrying out the said activity of collecting employees’ portion and paying to third party for any consideration,
8. Hence, In the above transaction there is no supply involved from the appellant to the employees and therefore there will not be GST applicable.
9. On the other hand, the ruling made by Gujarat Authority for Advance Ruling (GAAR) were mainly based on the ground that ‘the appellant is supplying food to its employees’ is covered under definition of “Business”.
10. However, the appellant is only working as a mediator between employees and the contractor. Therefore, GST is not applicable on the activity of collection of employees’ portion of amount without making any supply of goods or service by the appellant to its employees.

5. Ruling of Hon’ble GAAAR

Hon’ble Appellate Advance Authority of Advance Ruling, Gujrat held that the GST is not applicable on a collection of employees’ portion of amount to be payable to canteen service provider.