Opinion Canteen-Aug19

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Query

In the light of changes in the law w.e.f. 01.02.2019 regarding:

  • The applicability of GST on the canteen services supplied by Company to their employees;

  • In case the GST is applicable on the a) above, then on what value and the rate of GST would be applicable; and

  • Whether Company can avail the input tax credit of GST paid to the canteen contractor.

Brief facts relevant to the queries:

Company is hiring services of a canteen contractor who prepares the food in the canteen, the space has been provided by Company to contractor within the factory premises and the food is served to the employees working in the factory of Company. Company is under an obligation to provide the food to their employees under law. The Company is providing the same and is charging subsidized amount against the food so provided.

Relevant legal provisions to the query as on 1.2.2019

  • Notification no. 11/2017- CT(Rate) dated 28.6.2017 as amended is as follows:

    “(i) Supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied, other than those located in the premises of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes having declared tariff of any unit of accommodation of seven thousand five hundred rupees and above per unit per day or equivalent.

    Explanation 1.- This item includes such supply at a canteen, mess, cafeteria or dining space of an institution such as a school, college, hospital, industrial unit, office, by such institution or by any other person based on a contractual arrangement with such institution for such supply, provided that such supply is not event based or occasional.

    Explanation 2.- This item excludes the supplies covered under item 7 (v).

    Explanation 3.- “declared tariff” includes charges for all amenities provided in the unit of accommodation (given on rent for stay) like furniture, air conditioner, refrigerators or any other amenities, but without excluding any discount offered on the published charges for such unit.”

  • Section 17(5)(b)(i) of CGST Act, 2017 provides the following:

    “(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of 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 an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

    (ii) Membership of a club, health and fitness centre; and

    (iii) Travel benefits extended to employees on vacation such as leave or home travel concession:

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

  • The scope of “Supply” is defined under section-7 of the CGST Act, 2017 and is as follows:

    “(a) 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;

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

    (c) the activities specified in Schedule I, made or agreed to be made without a consideration;”

As per Schedule-I the “Supply of goods or services” or both between related persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business.

As per Schedule-II the supply, by way of as part of any service or any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration is a composite supply of services.

Legal analysis of the relevant provisions of GST Law vis-à-vis the queries raised.

  • Analysis of Canteen Services provided by Company to employees are in relation to furtherance of Business of Company and not relation to their employment. The said services when charged to the employees will be treated as “Outward Supply” and will not be covered as part of the package of the employees i.e. cost to the Company (C2C).

    As Company is supplying the canteen services to their employees for a consideration in the course or furtherance of business.

    The “business” has been defined under section 2(17) of the CGST Act, 2017 which is as follows:

    “business” includes-

    (a)  any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

    (b)  any activity or transaction in connection with or incidental or ancillary to sub-clause (a);

    Therefore, the supply of canteen services by Company to their employees would get covered under clause (b) of section 2(17) as above as transaction incidental or ancillary to sub clause (a). The above services to the employees are given for a “consideration”, the same will be treated as “Outward Supply”. The said canteen services to the employees, when provided for a consideration, cannot be said as part of their pay package i.e. cost to the Company.

    The position above was considered in the Advance Ruling given by Authority for Advance Ruling in the case of M/s Caltech Polymers Private Limited (copy enclosed) which was further confirmed by Appellate Authority for Advance Ruling (copy enclosed). The relevant extract of the judgment by Appellate Authority for Advance Ruling is reproduced below:

    6.  The Authority for Advance Ruling had deliberated on the issue raised and after hearing the authorized representative of the applicant elaborated as follows [2018 (12) G.S.T.L. 350 (A.A.R. - GST)] :

    “10. Schedule II to the GST Act describes the activities to be treated as supply of goods or supply of services. As per clause 6 of the Schedule, the following composite supply is declared as supply of service.

    “supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.”

    Even though there is no profit as claimed by the applicant on the supply of food to its employees, there is ‘supply’ as provided in Section 7(1)(a) of the GST Act, 2017. The appellant would definitely come under the definition of ‘supplier’ as provided in sub-section (105) of Section 2 of the GST Act, 2017.

    11. The term ‘consideration’ is defined in Section 2(31) of the GST Act, 2017 which is extracted below :

    ‘consideration’ in relation to the supply of goods or services or both includes,-

    (a)  any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;

    (b)  the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government :

    Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

    Since the applicant recovers the cost of food from its employees, there is consideration as defined in Section 2(31) of the GST Act, 2017.”

    7. The Advance Ruling Authority also clarified that “It is true that in the pre-GST period, vide Sl. No. 19 and 19A of Notification No. 25/2012-S.T., dated 20-6-2012 as amended by the Notification No. 14/2013-Service Tax, dated 22-10-2013 the ‘services provided in relation to serving of food or beverages by a canteen maintained in a factory covered under the Factories Act, 1948 (63 of 1948), having the facility of air-conditioning or central air-heating at any time during the year’ was exempted from taxable services. But there is no such provision in the GST Act, 2017.”

    8. Based on the deliberations delineated supra, the Advance Ruling Authority ruled vide paper read 1st above that the recovery of food expenses from employees for the canteen services provided by Company would come under the definition of ‘outward supply’ as defined in Section 2(83) of the SGST Act, 2017 and would be taxable as a supply of service under GST.

    9. Aggrieved by the said Advance Ruling, the appellant preferred appeal vide paper read 2nd above, before the Appellate Authority for Advance Ruling. The Authority heard the authorized representative of the appellant on the matter on 13th September, 2018 in the Chamber of the Principal Secretary & Commissioner, State Goods & Service Tax Department, Kerala.

    10. The appellant contended that as per Schedule-III, Clause 1 of GST Act, 2017, services by an employee to the employer in the course of or in relation to his employment is neither a supply of goods, nor a supply of services and that any consideration received by the employee from his employer for the services rendered in relation to the employment is outside the purview of GST. A press release dated 10-7-2017 issued by the Central Board of Indirect Taxes and Customs (CBIC) was also submitted.

    11. The party also produced a copy of the press release issued by the CBEC to clarify the applicability of Reverse Charge under Section 9(4) of the GST Act, 2017 on the purchase of ornaments by a jeweller from a consumer. It reads as follows :

    “Even though the sale of gold by an individual is for a consideration, it cannot be said to be in the course of or in furtherance of his business (as selling old gold jewellery is not the business of the said individual), and hence does not qualify to be a supply per se. Accordingly, the sale of old jewellery by an individual to a jeweller will not attract the provisions of Section 9(4) and the jeweller will not be liable to pay tax under reverse charge mechanism on such purchases’’.

    12. Relying on the above press release, the appellant contended that if an activity is not in the course or in furtherance of one’s business, it does not constitute supply unless it is an import of service as mentioned under Section 7(1) of the GST Act, 2017. It was also contended that supply of subsidized food is not the business of the appellant, in the same manner as supply of gold jewellery was held not to be the business of the consumer, in the above clarification. The appellant submitted that supply of subsidized food by the appellant does not constitute a ’supply’ within the meaning of Section 7 of the GST Act, 2017 and hence does not attract GST.

    13. During the Personal Hearing the authorized representative of the Appellant, in addition to the reiteration of the submissions made in the original application for Advance Ruling, submitted that M/s. Caltech Polymers Pvt. Ltd. “is a private limited Company manufacturing foot wears. As per the requirement of Factories Act, for an industry having more than 250 employees, canteen facility shall be provided. To comply with the statutory requirements, the Company provides food to the employees and cash is recovered from their salary. The authority below classified it as supply in furtherance of business. The Telengana High Court had delivered a judgment in favour of M/s. Bhima case stating that subsidized food to employees and realization of cost of wages is an industrial obligation it does not amount to service. Government of India issued a press release on 10-7-2017, stating that supply by employer to employee is in the course of furtherance of employment and not in the course of furtherance of business and comes under Schedule III, which is not liable to tax.”

    14. The contentions raised by the appellant have been examined in detail. The crucial aspects to be considered in this case are the elements of “supply” and “consideration”. The appellant Company has admitted that they are serving food to the employees for cash, though there is no profit involved in the transaction. In spite of the absence of any profit, the activity of supplying food and charging price for the same from the employees would surely come within the definition of “supply” as provided in Section 7(1)(a) of the GST Act, 2017. Consequently, the appellant would definitely come under the definition of “supplier” as provided in sub-section (105) of Section 2 of the GST Act, 2017. Moreover, since the appellant recovers the cost of food items from their employees, there is “consideration” as defined in Section 2(31) of the GST Act, 2017.

    15. The decision of the Hon’ble High Court of Telengana with respect to Bhimas Hotels [2017 (3) G.S.T.L. 30 (A.P.)] case pertains to the erstwhile Service Tax Law, when Service Tax and Value Added Tax stood on separate and independent footing. The Hon’ble Court in Para 12 of the said Order held that “the petitioner has paid the value added tax on the value of the food supplied to its workers. In respect of some assessment years, they have even been imposed with a penalty under the Andhra Pradesh Value Added Tax Act, 2005. Therefore, once the State Authorities have treated the supply of food to the workers of the petitioner as sale, it is not open to the respondents to treat the same as service and impose a liability.”

    16.It is apparent from the extract supra that, in the above referred case, the food provided to the employees was already taxed under the erstwhile Value Added Tax and thereby the Hon’ble High Court held that the same could not be subjected to Service Tax. Hence the Hon’ble Court had decided upon a matter where the issue of double taxation was a relevant fact. As there is no possibility of such double taxation in the GST regime, it is evident that the facts of the Bhimas Hotels case cannot be considered to be in pari materia with the facts of this case.

    17. In light of the detailed discussion supra, this Appellate Authority for Advance Ruling does not find any reason to deviate from the findings and the decision of the Authority for Advance Ruling, issued vide paper read 1st above. Accordingly, the following orders are issued.

    Order No. CT/7726/2018-C3, dated 25-9-2018

    18. The supply of food items to the employees for consideration in the canteen run by the appellant Company would come under the definition of ‘supply’ and would be taxable under GST. Therefore the appeal fails and stands dismissed.

  • No Input Tax Credit is available on the Canteen Services supplied by Company to their employees.

    The GST at the rate of 12% was applicable with full input tax credit vide notification no. 11/2017- CT (Rate) dated 28.6.2017 till its amendments. The said notification was later amended by notification no. 13/2018- CT (Rate) dated 26.7.2018 (w.e.f 27.7.2018) and the applicable rate was fixed at 5% [sl. no. 7(i) read with explanation at sl. no. 7(ix)]. The conjoint reading of the conditions mentioned at column 5 and the Explanation of the said notification makes it clear that GST at the rate of 5% is applicable without any ITC. Thus, there is no option given for availment of the ITC to the assessees.

    Recently, Section 17(5) of CGST Act was amended by Section 9 of the CGST {Amendment Act, 2018(31 of 2018)} w.e.f. 1.2.2019 whereby the input tax credit in respect of canteen service was made available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force. Therefore, vide the said amendment; the input tax credit was made available to the employer who was also providing the canteen service. But notification no. 11/2017-CT (Rate) dated 28.06.2017 as amended, however, cast restrictions that input tax credit charged on both goods and services used in supplying the said services has not been availed. Thus, though Section 17(5) allows the input tax credit when it is obligatory for the employer, yet the condition to the notification no. 11/2017-CT (Rate) would override and no ITC would be available to Company in the said matter.

    It is pertinent to mention that the payment of tax @ 18% under the canteen services is applicable only in such cases where the said service is provided on “occasional basis” (refer sub clause (v) serial no. 7 of the said notification).

  • What would be the taxable value of the Canteen Services provided by Company to their employees whether at subsidized rates or at full rate.

    As Company and their employees are “related persons” in terms of Section 15, the valuation of any taxable supply between the two would be governed by the CGST Rules, 2017 under Chapter IV - Determination of Value of Supply.

    Section 15 of the CGST Act and Rule 27 to Rule 35 of CGST Rules, 2017 (Chapter IV - Determination of Value of Supply) are relevant to the query.

    Under GST law, taxable value is the transaction value i.e. price actually paid or payable, provided the supplier & the recipient are not related and price is the sole consideration. However, Company and their employees are “related persons” as per section 15 (5)(a)(iii). Valuation in respect of related persons has been laid down in valuation rules. As per the said Valuation Rules, value shall be determined sequentially as follows:

    (i) &nbs; Open Market Value

    (ii) &nbs; Value of supply of like kind and quality.

    (iii) &nbs; Value of supply based on cost i.e. cost of supply plus 10% mark-up.

    (iv) &nbs; Value of supply determined by using reasonable means consistent with principles & general provisions of GST law. (Best Judgment method).

    Thus as per the provisions of said Rules, in case the open market value is available then such value should be taken as transaction value and tax has to be paid accordingly. In case the open market is not available then the deeming provisions will come into play as mentioned at ii or iii or iv.

    However, in the case of Company, open market value is available i.e. the value on which the canteen contractor supplies the food i.e. to say Rs. 100/-.

  • Discussion and legal status of Press Release dated 10.07.2017 issued by CBIC.

    Company is collecting a subsidized amount from the employees towards the Canteen Services while Company is procuring the said Canteen Services from a Canteen Contractor. The issue at hand can best be understood by breaking it into two transactions. The first transaction is the supply of canteen services by the contractor on payment of GST @5% and the invoice for the same is raised in the name of the Company. The second transaction is the supply of canteen services by the Company to the employees particularly in a situation when a subsidized amount (say Rs. 40/-) is being collected against Rs. 100/- paid to the canteen contractor. In view of the legal provisions mentioned above, as the notification has left no option to avail the ITC for Company when providing services of canteen to their employees. It becomes mandatory to pay GST @5% on the canteen service. In other words, it means that Company is not in a position to avail the credit of GST paid to the Contractor. On the other hand Company is required to pay GST on the Outward Supply of the Canteen Services provided by them to their employees. In terms of the Valuation Rules mentioned herein above the value of supply between the related persons has to be open market value. This means the subsidized price of Rs. 40/- is not relevant. The open market value in respect of second part of transaction will be Rs. 100/- and not Rs. 40/-. In totality the combined effect on Company will be 10% i.e. first Company will not be able to avail the ITC of 5% tax paid to the Contractor and second Company is required to pay 5% tax on outward supply.

    It is learnt that some of the industries are availing the ITC of the GST paid by the canteen contractor and the GST on proportionate basis is being paid/debited as far as second part of transaction is concerned. The issue has been deliberated upon in detail. In this connection attention is invited to CBIC press release dated 10.07.2017. (This press release is available on the website on CBIC) The relevant para of the press release is given hereunder:

    “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 be 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).”

    On the going through the aforesaid press release it may be seen that if a service is provided free of charge by an employer to all the employees in terms of contractual agreement, the same will not be subjected to GST provided appropriate GST was paid, when procured by the employer. It has also been mentioned that the same position is applicable when the contract between employer and employees provides that it is a part and parcel of the cost to Company (C2C).

    Therefore, in view of above press release the position that emerges is as follows:

    The Company is in a position to avail the ITC of the GST paid by the canteen contractor in terms of amended Section 17(5) of CGST Act, 2017. In this situation the services provided by a canteen contractor is an input service for the Company like any other input service as it is the cost to Company. This situation holds good when the canteen services are being supplied free of charge. However in the case of Company Rs. 40/- is being charged from an employee (subsidized rate) instead of free of charge. In other words if Rs. 100/- is being paid to the canteen contractor, Rs. 60/- is the cost to Company and Rs. 40/- is being borne by an employee. As the Company is now required to pay GST on Rs. 40/- @5% without availing ITC leads to implication that the ITC of input service used in payment of GST on Rs. 40/- is not available to the Company and need to be reversed. The net position will be that the credit of Rs. 3/- is available and GST on amount of Rs. 40/- is liable to be reversed as it is not cost to Company.

    But the proposed liability mentioned, as discussed above, in view of the press release may not hold good for the simple reason that the press release has no legal backing. The reliance on press release becomes more perilous as the press release is dated 10.07.2017 whereas subsequent to this, the Advance Ruling Authority in the case of Caltech Polymers Pvt. Ltd. 2018 (4) TMI 582 – Authority for Advance Ruling Kerala, has given the ruling that recovery of food expenses from the employees for the canteen services provided by the Company would come under the definition of outward supply. This position was further confirmed by Appellate Advance Ruling Authority. Therefore, seen in this perspective (when a press release has no legal backing and the advance ruling authority has decided otherwise), the proposition based on press release is not advisable.

    It may also be mentioned though out of context that efforts have been made to find out the practice being followed by other industries and it has been learnt that most of the Industries are following the position mentioned in first proposition i.e. the canteen contractor paying GST @5% and the Company is also paying the GST @5% without the availment of ITC.

Opinion

Keeping in view of the detailed legal analysis and discussion afore, we opine as hereunder.

  • Canteen services provided by Company to their employees are in the nature of services in furtherance of business and when supplied for a consideration, it will be treated as “Outward Supply” and attract GST @5%.

  • In case such Canteen Services are part of the pay package of the employees Company is not required to charge any GST as the same being cost to Company. The moment any charges are recovered whether subsidized or otherwise for providing food it becomes “Outward Supply”. As the employees and employer are related persons under the Valuation Rules of GST, the valuation of the Canteen Service will be governed by the said Rules. As per Valuation Rules the GST is required to be charged on the open market value which means GST is payable on full value of say Rs. 100/- irrespective of the amount recovered from the employees.

  • Notification no. 11/2017 CT (Rate) dated 28.06.2017 as amended which bars availment of input tax credit will override Section 17(5) which allows input tax credit in view of the amendment where it is obligatory for an employer to provide the said service to its employee under any law for the time being in force. Therefore, no input tax credit of GST paid to the contractor would be available to Company.