2025 (4) TMI 1096 - AAR - GST

Supply of service - deduction of a nominal amount by the Applicant from the salary of the employees who are availing the facility of food provided in the factory premises - deduction of nominal amount by the Applicant from the salary of the employees who will be availing the non-air-conditioned bus transportation facility proposed to be provided by the prospective Transport Service Provider - applicability of GST on the nominal amount to be deducted from the salaries of employees - availability of ITC on GST charged by the Canteen Service Provider for providing the catering services - availability of ITC on GST that would be charged by the Transport Service Provider for providing the non-air-conditioned bus transportation services. Taxation of nominal recovery of Canteen Services - HELD THAT - As per Income Tax Act perquisite is defined to be the value of free benefit or facility given by the employer to the employees. The collection from the employees of whatever value is not covered under perquisite . It could be inferred from the above that any service rendered free of charge or concession given for any service rendered on a concessional basis shall qualify as a perquisite. But it is to be noted that only the value/portion to the extent of concession offered by the employer is to be treated as a perquisite and not the remaining portion/value that has been charged by the employer. Applying the said analogy 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 on the value charged to the employees. Thus the recoveries made from the employees are liable to levy of tax as it is consideration against canteen services provided by the Applicant to the employees. Whether ITC of tax paid to caterer for Canteen Services is available? - HELD THAT - In the instant case the flow of the transaction is that the Canteen Contractor is providing service to the Applicant which is classifiable as Restaurant Service and the Applicant himself is also providing same service to its workers as mandated in the Factories Act 1948 i.e. he is also providing Restaurant Service to its workers. As already mentioned in para 5.2.6 the Restaurant Service compulsorily attracts rate of 5% without ITC in a non-specified premise and the Applicants premises is not specified premises in terms of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017. Therefore though the Section 17 (5) of the CGST Act 2017 does not block availment of ITC however in the present case availment of ITC is barred in terms of provisions of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended vide Notification No. 20/2019-C.T. (Rate) dated 30.09.2019. There is another way of looking at the transactions that had the Applicant not engaged any Canteen Contractor but decided to run the canteen himself as mandated in the Factories Act 1948 then also he would be required to pay 5% of GST on taxable supply without availment of any ITC in terms of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 supra. Therefore just by engaging a Canteen Contractor he can t be allowed to adopt an interpretation for availing ITC which is not available to him in a case of direct supply of Service. Whether the services by the way of non-air-conditioned bus transportation facility provided by the Applicant to its employees would be construed as supply of service under GST? - HELD THAT - Applicant has proposed to receive services from third party in respect of hire or lease or renting of transportation buses. Applicant is using these buses for transportation of its employees from their home to work place and vice versa. There is no privity of contract between the third-party transport service provider and the employees of the applicant. Hence the applicant received the service from the transport buses provider and provides transportation services to the employees. However when these services are provided by charging some consideration of whatever value it would not be perquisite or a service in lieu of employee services this would be very much supply of transportation services to the employees and liable to tax. Value in respect of which canteen and transportation services are taxable - HELD THAT - The value of the outward supply of canteen and transportation service can be considered as having two parts. First part is the amount of recovery that is made from the employees and second part is balance value of the services provided by the employer as perquisite which is in the lieu of the services provided by employees to the employer. The entire balance value of the services for which no amount is charged is the perquisite provided by the employer to the employees. As this part is in lieu of services of the employees to the employer which fall under schedule 3 the perquisite part is not taxable as a corollary deeming it to be falling in the said entry of schedule 3. Hence though the employer and employee are related parties the value on which tax is a liable to be paid is only the recovered amount from the employee as the remaining part of the value is the perquisite provided by the employer which is not liable to tax. Whether ITC is available to the Applicant on GST charged by the Transport Service Providers for providing the non-air-conditioned bus transportation services? - HELD THAT - Section 17 (5) (g) of CGST/MGST Act 2017 states that input tax credit shall not be available in respect of goods or services or both used for personal consumption. Provision of service of transportation of employees from residence to factory or office premises has been used for personal consumption or comfort of employees. The applicant is not under any statutory obligation to provide these services to his employees and the services provided comes under category of personal consumption which makes the applicant ineligible to avail input tax credit on the invoices issued to him by the transporter for transportation of employees as per Section 17 (5) (g) of CGST/MGST Act 2017. Conclusion - ia) The deduction of a nominal amount by the Applicant from the salary of the employees who are availing the facility of food provided in the factory premises would be considered as a Supply of Service by the Applicant under the provisions of Section 7 of Central Goods and Service Tax Act 2017 and Maharashtra Goods and Service Tax Act 2017. ib) GST is applicable on the nominal amount to be deducted from the salaries of employees. ic) ITC is not available to the Applicant on GST charged by the Canteen Service Provider for providing the catering services. ii) The deduction of nominal amount by the Applicant from the salary of the employees who will be availing the non-air-conditioned bus transportation facility proposed to be provided by the prospective Transport Service Provider will be construed as supply of service by the Applicant under the provisions of Section 7 of Central Goods and Service Tax Act 2017 and Maharashtra Goods and Service Tax Act 2017. iib) GST is applicable on the nominal amount to be deducted from the salaries of employees. iic) ITC will be available to the Applicant on GST that would be charged by the Transport Service Provider for providing the non-air-conditioned bus transportation services.

Summary

The core legal questions considered by the Authority for Advance Ruling (AAR) pertain to the applicability of Goods and Services Tax (GST) on nominal amounts deducted from employees' salaries for canteen and transportation facilities provided by the applicant company, and the availability of Input Tax Credit (ITC) on GST charged by third-party service providers for these facilities. Specifically, the issues are:

1. Whether the deduction of a nominal amount from employees' salaries for food provided in the factory canteen constitutes a "supply of service" under Section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act) and Maharashtra Goods and Services Tax Act, 2017 (MGST Act); if yes, whether GST applies on such deductions; and whether ITC is available on GST charged by the canteen service provider.

2. Whether the deduction of a nominal amount from employees' salaries for non-air-conditioned bus transportation services provided by a prospective transport service provider constitutes a "supply of service" under Section 7 of the CGST Act and MGST Act; if yes, whether GST applies on such deductions; and whether ITC is available on GST charged by the transport service provider.

Both issues arise in the context of facilities provided by the applicant to its employees pursuant to statutory obligations under the Factories Act, 1948, and the business necessity of ensuring employee convenience and safety.

Issue-wise Detailed Analysis:

Issue 1: Taxability of nominal deductions from employees' salaries for canteen facilities

Relevant Legal Framework and Precedents: The analysis hinges on the definition of "supply" under Section 7 of the CGST Act, which includes all forms of supply of goods or services for consideration in the course or furtherance of business, subject to exceptions in Schedule III. Schedule III excludes "services by an employee to the employer in the course of or in relation to his employment" from being treated as supply. The term "consideration" is defined in Section 2(31) of the CGST Act. Section 2(17) defines "business" broadly, including trade, commerce, manufacture, profession, and similar activities, whether or not for pecuniary benefit. Section 17(5)(b) restricts ITC on food and beverages but provides an exception where such supply is obligatory under law. Circular No. 172/04/2022-GST clarifies that perquisites provided by employers to employees under contractual agreements are not subject to GST as they are in lieu of services rendered by employees.

Judicial precedents and earlier rulings by various Authorities for Advance Ruling (AARs) and Appellate Authorities for Advance Ruling (AAARs) have addressed similar issues, including rulings in cases involving Tata Motors, Emcure Pharmaceuticals, Amneal Pharmaceuticals, Posco India, Jotun India, Zydus Lifesciences, Brandix Apparel, and others. These rulings generally hold that canteen facilities provided pursuant to statutory obligations and in the course of employment, with nominal recovery from employees, do not constitute supply under GST and hence are not taxable.

Court's Interpretation and Reasoning: The AAR examined whether the provision of canteen facilities with nominal deductions qualifies as "supply" under Section 7. It noted that the canteen facility is provided pursuant to a statutory obligation under Section 46 of the Factories Act, 1948, which mandates canteen provision for factories employing more than 250 workers. The applicant is the "occupier" of the factory and thus responsible for compliance.

The AAR observed that the employer-employee relationship is a prerequisite for availing the canteen facility, which is provided only during employment. The nominal amount deducted from salaries is a partial recovery of costs, with the balance borne by the applicant. The applicant contracts with a third-party canteen service provider who supplies the food and maintenance services and charges GST at a concessional rate of 5% without ITC.

The AAR distinguished between the two transactions: (i) supply of canteen services by the contractor to the applicant, and (ii) supply of canteen services by the applicant to its employees. It held that the applicant is supplying canteen services to employees for consideration (nominal recovery), which constitutes supply under Section 7(1) of the CGST Act, 2017. The employer-employee relationship does not exclude the transaction from being a supply; rather, Schedule III excludes only services by an employee to employer, not the reverse.

However, the AAR also noted that perquisites provided under contractual agreements are not subject to GST as clarified by Circular No. 172/04/2022-GST. Such perquisites are in lieu of services rendered by employees. The exemption applies only to the concession part (free or subsidized portion) and not to the amount recovered from employees. Thus, the nominal recovery constitutes consideration and is taxable.

Regarding ITC, the AAR referred to Section 17(5)(b) which blocks ITC on food and beverages but includes a proviso allowing ITC where it is obligatory for an employer to provide such facilities under law. Since the canteen facility is mandated under the Factories Act, ITC is not blocked under Section 17(5)(b). However, the canteen service provider supplies "Restaurant Service" at a concessional GST rate of 5% without ITC entitlement under Notification No. 11/2017-Central Tax (Rate) and its amendment. Therefore, while ITC is not blocked by Section 17(5)(b), it is not available due to the concessional rate notification. The AAR emphasized that the applicant cannot claim ITC by engaging a contractor when it would not have been available if the applicant ran the canteen itself.

Application of Law to Facts: The applicant's provision of canteen facilities with nominal recovery to employees is a taxable supply under GST. The amount recovered from employees is consideration for supply of services by the applicant to employees. The applicant is liable to pay GST on recoveries from employees. ITC on GST paid to the canteen service provider is not available due to the concessional rate notification, despite the statutory obligation to provide canteen facilities.

Treatment of Competing Arguments: The applicant argued that the canteen facility is a statutory obligation and no legal intention to supply exists, thus no GST applies. It relied on Schedule III and Circular No. 172/04/2022-GST to contend that the facility is a perquisite and not taxable. The AAR rejected the contention that no supply exists, holding that the employer is supplying services to employees for consideration. The argument that the transaction lacks reciprocity was also rejected, as the nominal recovery is consideration for supply. The applicant's reliance on precedents was noted but distinguished on facts or applicability.

Conclusion: The deduction of nominal amount from employees' salaries for canteen services constitutes a supply of service by the applicant under Section 7 of the CGST Act and is subject to GST. ITC on GST charged by the canteen service provider is not available due to the concessional rate notification.

Issue 2: Taxability of nominal deductions from employees' salaries for transportation services

Relevant Legal Framework and Precedents: The same provisions of Section 7, Schedule III, Section 2(17), Section 2(31), Section 17(5)(a) and (b), and Circular No. 172/04/2022-GST apply. Additionally, Section 17(5)(a) blocks ITC on motor vehicles for transportation of persons with seating capacity of not more than thirteen persons, except in specified circumstances. The applicant proposes to provide non-air-conditioned buses with seating capacity exceeding thirteen persons, which is relevant for ITC eligibility. Earlier rulings, including Tata Motors Limited, Integrated Decisions and Systems India Pvt. Ltd., and others, have considered the taxability of transportation facilities provided to employees.

Court's Interpretation and Reasoning: The AAR observed that the transportation facility is proposed to be provided pursuant to the employer-employee relationship and is available only to employees who display company-issued IDs and bus cards. The facility is provided to ensure employees' safety and continuity of business operations, especially given the remote factory location. The applicant contracts with a third-party transport service provider for these services.

The AAR noted that Schedule III excludes "services by an employee to the employer" but does not explicitly exclude services by employer to employee. However, Circular No. 172/04/2022-GST clarifies that perquisites provided under contractual agreements are not subject to GST. The AAR emphasized that the transportation facility provided at nominal cost is a perquisite and in lieu of services rendered by employees, and thus not subject to GST on the concession part. However, the nominal amount recovered from employees constitutes consideration and is taxable.

Regarding ITC, the AAR noted that transportation services by motor vehicles with seating capacity exceeding thirteen persons are eligible for ITC under Section 17(5)(a). The applicant's proposed buses meet this criterion. The transport service provider charges GST on the services, and the applicant is entitled to claim ITC on the GST paid, subject to conditions.

Application of Law to Facts: The nominal amount deducted from employees' salaries for transportation services is consideration for supply of services by the applicant to employees and is taxable under GST. The applicant is liable to pay GST on such recoveries. ITC on GST charged by the transport service provider is available as the vehicles have seating capacity exceeding thirteen persons.

Treatment of Competing Arguments: The applicant contended that the transportation facility is a statutory or contractual obligation and thus not a supply. The AAR rejected the argument that no supply exists, holding that the employer supplies transportation services to employees for consideration. The applicant's reliance on earlier rulings was considered but distinguished due to the clarifications in Circular No. 172/04/2022-GST and the seating capacity of vehicles involved. The contention that the service is for employees' personal convenience was noted but did not negate taxability of the supply or affect ITC eligibility.

Conclusion: The deduction of nominal amount from employees' salaries for transportation services constitutes a supply of service by the applicant under Section 7 of the CGST Act and is subject to GST. ITC on GST charged by the transport service provider is available.

Significant Holdings:

1. "The deduction of nominal amount from the employees' salaries towards the provision of canteen and transportation facilities constitutes a supply of service by the applicant under Section 7 of the CGST Act, 2017 and is subject to GST."

2. "Perquisites provided by the employer to employees in terms of contractual agreements are not subject to GST as they are in lieu of services rendered by employees; however, the nominal amounts recovered from employees constitute consideration and attract GST."

3. "Input Tax Credit on GST charged by the canteen service provider is not available due to the concessional rate notification applicable to restaurant services, despite the statutory obligation to provide canteen facilities."

4. "Input Tax Credit on GST charged by the transport service provider is available where the motor vehicles used for transportation have seating capacity of more than thirteen persons, in accordance with Section 17(5)(a) of the CGST Act."

5. "The employer-employee relationship does not exclude the supply of services by the employer to employees from the ambit of GST; Schedule III excludes only services by an employee to employer."

6. "The activity of providing canteen and transportation facilities is connected with or incidental to the principal business activity and falls within the definition of 'business' under Section 2(17) of the CGST Act."

7. "The mere statutory obligation to provide canteen or transportation facilities does not exempt the supply from GST if consideration is received."

8. "The value of supply to be considered for GST is the amount recovered from employees; the balance value borne by the employer is treated as perquisite and not taxable."

The Authority for Advance Ruling thus answered the questions as follows:

Question 1: The deduction of nominal amount from employees' salaries for canteen facility constitutes supply of service by the applicant and is subject to GST. ITC on GST charged by the canteen service provider is not available.

Question 2: The deduction of nominal amount from employees' salaries for transportation facility constitutes supply of service by the applicant and is subject to GST. ITC on GST charged by the transport service provider is available.