Deduction made by the applicant from employees for canteen services is not supply and ITC will be available for obligatory canteen services

Held by Hon’ble Authority of Advance Ruling, Gujarat

In the matter of

Kohler India Corporation Pvt Ltd. (GST AAR Gujarat) (GUI/GAAR/R/2024/03 dated 5th Jan, 2024)

The Kohler India Corporation Private Limited (“The Applicant ”) was mandatorily required to provide a canteen facility to the workers. The Applicant entered into a contract with Canteen service provider wherein invoice is raised by the CSP in the name of the applicant. Cost of CSP is borne by the applicant partially and the balance amount is recovered from the employees by way of deduction from salary. The amount is collected by the applicant from the employees without any commercial objective, i.e., without any profit markups. The question before Hon’ble AAR is Whether the subsidized deduction made by the applicant from the employees would be considered as ‘supply’ under CGST Act. Further, whether the applicant is entitled to claim ITC on invoice raised by the CSP.

Hon’ble AAR held as per Circular No. 172/04/2022-GST, it is clarified that perquisites provided by the ’employer’ to the ’employee’ in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST when the same are provided in terms of the contract between the employer and employee. Therefore, deduction made by the applicant from the employees would not be considered as a ‘supply” under the CGST Act. Further, canteen facilities are obligatorily to be provided under the Factories Act, 1948. Therefore, ITC on GST charged by the CSP will be restricted to the extent of cost borne by the appellant only. 

1. Brief facts of the Case

• M/s Kohler India Corporation Private Limited (“The Applicant”) is engaged in the manufacturing of plumbing products for kitchen & bathrooms. 
• As per the Factories Act, 1948, the applicant is mandatorily required to provide canteen facilities to its workers.
• To comply with this requirement, the applicant entered into a contract with a canteen service provider (‘CSP’) to provide canteen facilities to their workers at their factory premises.
• The CSP raises the invoice on the applicant for canteen charges alongwith GST. The invoice is raised based on the number of employees who avail the canteen facility.
• Canteen charges are partially paid by the applicant and remaining part is recovered from the employees by way of deduction from salaries.
• The amount is collected by the applicant without any commercial objective, i.e., without any profit markups. 
• The applicant records the canteen invoice as an expense in a profit and loss account. The amount collected by the applicant from its employees is reduced from the canteen expense.
• The applicant states that GST should not be applicable on the amount representing the employee’s portion of canteen.

2. Question before Hon’ble Authority of Advance Ruling

The applicant has sought advance ruling on following questions viz

1. Whether the subsidized deduction made by the applicant from the employees who are the ultimate recipient of the canteen facility provided in factory/corporate office would be considered as ‘supply’ under the provisions of section 7 of the CGST Act, 2017 and the GGST Act, 2017?

2. If the answer to the above is affirmative, the value at which the GST is payable ?

3. Whether the Company is eligible to take the ITC for the GST charged by the CSP for canteen services, where the canteen facility is mandatory in terms of section 46 of the Factories Act, 1948.

3. Legal extract

Relevant extract of CGST Act is reiterated below for ready reference:

a. Section 7. Scope of supply.-

“(1) For the purposes of this Act. the expression –

“supply” includes-

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.

Explanation -For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to lake place from one such person to another;]

(b) import of services for a consideration whether or not in the course or furtherance of business; and

(c) the activities specified in Schedule I. made or agreed to he made without a consideration;

(d) ****.

b. Section 17. Apportionment of credit and blocked credits.- [relevant extracts]

“5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

…

(b) the following supply of goods or services or both-

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

…

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force]

c.  CBIC’s press release dated 10.7.2017

Another issue is the taxation of perquisites. It is pertinent to point out here that the services by an employee to the employer in the course of or in relation to his employment is outside the scope of GST (neither supply of goods or supply of services). It follows therefrom that supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST. Further, the input tax credit (ITC) scheme under GST does not allow ITC of membership of a club, health and fitness centre section 17 (5) (b) (ii) It follows, therefore, that if such services are provided free of charge to all the employees by the employer then the same will not he subjected to GST provided appropriate GST was paid when procured by the employer. The same would hold true for free housing to the employees, when the same is provided in terms of the contract between the employer and employee and is part and parcel of the cost-to-company (C2C).

d. Circular No. 172/04/2022-GST

Issue: 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?

Clarification: 1. Schedule Ill 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 the services provided by employee to the employer in relation to his employment. It follows there from that perquisites provided by the employer to the employee in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST when the same are provided in terms of the contract between the employer and employee.

4. Contention of the Applicant

The Applicant made following submission:

1. The applicant states that GST should not be applicable on the employee’s portion of canteen on the grounds that in order to constitute a ‘supply’, the following elements are required to be satisfied:
   1. supply of goods or services;
   2. supply is made for a ‘consideration’
   3. supply is made ‘in the course or furtherance of business’
   4. the activity should not fall under Schedule III to the CGST Act. 2017;

2. Further, as per press release dated 10.7.2017, supply by employer to the employee, in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST;
3. Further, as per circular no. 172/04/2022-GST dated 6.7.2022, perquisites provided by the employer to the employee in terms of the contractual agreement are in lieu of the services provided by employee to employer in relation to his employment & hence will not be subjected to GST when the same are provided in terms of the contract between the employer and employee;
4. In the present case, there is only one supply, i.e., the supply from the CSP to the employees &. not from the CSP to the applicant as the foods get consumed only by employees;
5. the supplier is the CSP & invoice is raised on the applicant but the ultimate recipients of such canteen facility are the employees;
6. the applicant allows the CSP to use its demarcated area for serving food to the employees & make payment to the CSP on behalf of the employees for administrative convenience;
7. the applicant does not keep any margin and the applicant does not make any separate supply to the employees.
8. The applicant is not in the business of providing canteen facilities. The Applicant recovers the employees share without keeping any profit margin.
9. No independent contract exists between the applicant & the employees for setting up of canteen facility;

5. Discussion and findings by the Hon’ble Authority of Advance Ruling

The Hon’ble Authority of Advance made following discussions and findings:

Issue-1: Whether subsidized deduction made by the applicant from the employees would be considered as ‘supply’?

1. As per Section 7 of the CGST Act, 2017, supply means all forms of ‘supply’ of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. 
2. The exception to Section 7 is:
   1. Schedule I, which includes the activities made or agreed to be made without a consideration; and 
   2. Schedule III, which includes activities which shall be treated neither as a supply of goods or services. 

3. Primary role of the applicants is to set up a canteen facility, having a demarcated area in the factory premises.
4. Now in terms of Circular No. 172/04/2022-GST, it is clarified that perquisites provided by the ’employer’ to the ’employee’ in terms of contractual agreement entered into between the employer and the employee, will not be subjected to GST when the same are provided in terms of the contract between the employer and employee. 
5. We find that factually there is no dispute on the fact that the canteen facility is provided by the applicant as mandated in Section 46 of the Factories Act, 1948 is concerned; and 
6. In view of the foregoing, the deduction made by the applicant from the employees who are availing food in the factory would not be considered as a ‘supply” under the provisions of section 7 of the CGST Act, 2017.

Issue:2 If the answer to the above is affirmative, the value at which the GST is payable ?

Since the answer to the above is not in the affirmative, the ruling sought in respect of the second question is rendered infructuous.

Issue 3: Input Tax Credit on canteen services?

In this context, Hon’ble AAR held that Input Tax Credit will be available to the appellant in respect of food and beverages as canteen facility is obligatorily to be provided under the Factories Act, 1948, read with Gujarat Factories Rules, 1963 as far as provision of canteen service for employees is concerned. 

Further, ITC on GST charged by the CSP will be restricted to the extent of cost borne by the appellant only. 

6. Ruling

Issue:1 The deduction of amount by the applicant from the salary of the employees who are availing facility of food would not be considered as a ‘supply’ under CGST Act.

Issue:2  Since the answer to the above is not in the affirmative, the ruling sought in respect of the question listed at 1(a) is rendered infructuous.

Issue: 3 Input Tax Credit (ITC) will be available to the applicant on GST charged by the CSP to its employees other than contract employees working in their factory. However, ITC shall be restricted to the extent cost borne by the applicant for providing such canteen services and ITC corresponding to cost recovered from the employees shall be disallowed.