Salary Deductions for Canteen Services Not Considered Supply of Service though ITC is available as canteen services provided are obligatory in nature

[CA Bimal Jain]

The AAR, Gujarat in the case of IN RE: M/S. DORMER TOOLS INDIA P LTD - 2024 (6) TMI 222 - AUTHORITY FOR ADVANCE RULING, GUJARAT, ruled that the nominal amount deducted by the Applicant from employee salary would not be considered as supply of services as per Section 7 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”). The AAR, Gujarat further ruled that ITC would be available to the Appellant as per proviso to Section 17(5)(b) of the CGST Act, wherein the canteen service provided by the Applicant is obligatory in nature.

Facts:

M/s Dormer Tools India Pvt Ltd (“the Applicant”) is engaged in the business of manufacturing and sale of industrial products. The Applicant, in compliance with the provisions of the Factories Act, 1948 (“the Factories Act”), has availed the services of the Canteen Service Provider (“CSP”) for the preparation and supply of food to its employees for which the Applicant recovers a certain amount from its employees. 

The Applicant has filed an application for advance ruling on whether the canteen services provided by the Applicant in lieu of which nominal amount is deducted from employee salary would be considered as supply of services under GST and whether the Applicant is eligible to claim ITC on the amount of GST paid for CSP services and related inputs such as cooking facilities, utensils.

Issue:

Whether the amount deducted from employees for providing canteen service would be considered as supply of service, and whether ITC can be claimed on input services for providing canteen services to the employees?

Held:

The AAR, Gujarat in IN RE: M/S. DORMER TOOLS INDIA P LTD - 2024 (6) TMI 222 - AUTHORITY FOR ADVANCE RULING, GUJARAT, held as under:

• Observed that as per Section 7 of the CGST Act, supply includes all forms of supply of goods/services or both, such as sale, transfer, barter exchange, license, rental lease or disposal for which consideration is paid by the person in the course or furtherance of business. The exception is Schedule I, which includes the activities made or agreed to be made without consideration, and Schedule III, which includes activities that are neither to be treated as a supply of goods or services.
• Noted that, as per Circular No. 172/04/2022-GST dated July 6, 2022 (“the Circular”), it is clarified that the perquisites provided by the employer to employees in terms of the contractual agreement would not fall within the purview of GST.
• Further noted that, as per the Circular, the proviso at the end of clause (b) of section 17(5) of the CGST Act applies to the entire clause 17(5)(b) of the CGST Act, which states that ITC would not be blocked in relation to goods or services supplied as enumerated under clause (b) of sub-section (5) of Section 17 of the CGST Act, on which GST is paid, in case the said goods or services supplied are obligatory in nature.
• Ruled that, the nominal amount deducted by the Applicant from employee salary would not be considered as supply of services as per Section 7 of the CGST Act.
• Further Ruled that, ITC would be available to the Appellant as per proviso to Section 17(5)(b) of the CGST Act, wherein the canteen service provided by the Applicant is obligatory in nature.

Relevant Provision:

Section 17(5)(b) of the CGST Act

Section 17: Apportionment of Credit and Blocked Credit     

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (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 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 for an employer to provide the same to its employees under any law for the time being in force

Relevant extract of the Circular No. 172/04/2022-GST dated July 6, 2022:

“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 the services provided by employee to the employer in relation to his employment. It follows therefrom 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.”

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