TAXABILITY ISSUES IN SUPPLY OF FOOD IN SEZ

[Dr. Sanjiv Agarwal]

What is the nature of supply of food and beverages in various offices including units in Special Economic Zones (SEZs) – restaurant or canteen and whether supply of food to employees in SEZ area could be considered as zero rated supply having no levy of goods and services tax (GST) came up before Authority of Advance Ruling (AAR, Maharashtra) in Merit Hospitality Services Pvt. Ltd. 2018 (7) TMI 1492 - AUTHORITY FOR ADVANCE RULING - MAHARASHTRA ; . The taxability was tested under section 5, 9 15 and 16 of IGST Act, 2017 and later on appeal before Appellate Authority by Advance Ruling (AAAR, Maharashtra) reported as  IN RE: MERIT HOSPITALITY SERVICES PVT. LTD.  2018 (11) TMI 335 - APPELLATE AUTHORITY FOR ADVANCE RULING MAHARASHTRA ;].

Advance Ruling of AAR

According to factual matrix in the instant case, the applicant is engaged in the business of supply of goods, being food any other article for human consumption or drink. The food is prepared at the location of applicant and then distributed to various companies at different locations (including in SEZ area).

The applicant sought advance ruling on following issues:

1. Whether the activity undertaken by it could be called as canteen activity and the applicable rate of 5 per cent be charged on bills?
2. Can both the activities put together i.e. supply and distribution of food to the employees of 'A' Ltd. be called as canteen services and applicable rate of 5 per cent be charged on bills?
3. Under such circumstances, can it still be claimed that applicant is running a canteen and the applicable rate of 5 per cent be charged on bills?

4. On supply of food in SEZ area, following questions were framed:

a) Can applicant claim that since the food is supplied directly to SEZ area hence no GST is applicable?

b) Can applicant claim that it is running a canteen in SEZ area hence no GST is applicable?

c) Can applicant claim that it is running a restaurant in SEZ area and hence applicable GST rate is 5 per cent only?

The facts common to all four issues is that the food is prepared at the applicant's own kitchen and is distributed to various companies at different locations.

The factual matrix and gist of ruling on these four scenarios are as follows:

Case I

The applicant company had entered into a contract for supply of food to the employees of the company say 'A' Ltd. The contract was signed between applicant and 'A' Ltd for supply of food. As per the terms of contract applicant has to supply the food at 'A' Ltd.'s premises. The distribution of the food is directly done by the staff of 'A' Ltd. The menu and the material specifications were mentioned in the contract along with the rate for various items are pre-determined between applicant and 'A' Ltd. The billing is done by applicant directly to 'A' Ltd. on monthly basis and payment is received from 'A' Ltd. to the company directly as per the terms of payment mentioned in the contract.

On whether services of applicant would fall under canteen services and taxable at the rate of 5 per cent, the Notification No. 11/2017-Central Tax (Rate) dated 28-6-2017, under Serial No. 7 Heading 9963(i) covers accommodation, food and beverages services. Under this Notification after amendments uptill now GST at the rate of 5 per cent is chargeable in case of services by a restaurant, eating joint including mess and canteen. In order to ascertain whether the activities of the applicant would fall under Sr. No. 7, Heading 9963(i) of the above referred Notification, it needs to be examined as to what a restaurant, eating joint, mess and canteen are. 'Restaurant, as per Cambridge English Dictionary is a place where meals are prepared and served to customers. A place of business where people can choose a meal to be prepared and served to them at a table, and for which they pay, usually after eating. However, it is found that with the progress of time and civilization and further increasing demands and expectations from restaurants by customers and also the restaurants with intent to further grow their businesses have started providing 'take away' or even 'home delivery' services to customers as per their instant order out of the items that are there in the menu of the restaurants. However, a special feature to be noted is that in such cases there is no pre-entered agreement or contract between the restaurant or customers except for the expectations which the customer has as per reputation about food and services of the restaurant. From the above broad essentialities of a restaurant it can be seen that the services being provided by the applicant in Case-I would not fall under restaurant service.

The definition of the word 'canteen' as given in S.No. 7, Heading 9963(i) of Notification No. 11/2017 is also relevant. As per general understanding, while differentiating with a restaurant, that 'canteen' is a small cafeteria or snack bar, especially one in a military establishment, school or place of work while 'restaurant' is an eating establishment in which diners are served food at a table and it is outside the premises of military establishment, school or place of work. Thus broadly, a canteen is mostly referred to as an eating place provided by an organization, college, university, military, police, government, for the staff/students workforce. In the instant application, the applicant had clearly stated that they are not providing services to any college, university, military, police or government but to only business organizations or companies or their employees as per different situations mentioned by the applicant in his application.

Thus, in view of the question in regard to Case-I, it was to be checked if services as per Case-I can fall under provision of canteen services in a company or industrial establishment.

In respect of restaurant, canteen, eating joint and mess, in respect of the facts, the company is registered as an outdoor caterer under the GST Act. They were registered as an outdoor caterer under the service tax regime also. The food is prepared at the applicants own kitchen which is not inside the premises of recipient units and is carried and distributed to the various companies at their different locations. The above are the common provisions in respect of supply by the applicant company. The other details are as per different situations given as Case-I, Case-II, Case-III and Case-IV.

The details of supply are as under:

(i)		The contract is for supply of food between the applicant and a company 'A Ltd'. It is not for running a canteen.
(ii)		Food is to be supplied at 'A Ltd.'s premises.
(iii)		The distribution of food is done by the staff of 'A Ltd'. Applicant is only supplying food.
(iv)		The menu, specifications and rate are as per contract of supply of food entered into between the applicant and A Ltd.
(v)		The billing is done by the applicant directly to A Ltd. on monthly basis and the payment is received from A Ltd. as per contract.

It was observed that the service being provided by the applicant would not be covered under Serial No. 7 Heading 9963(i) of Notification No. 11 of 2017 as amended. The service being provided by the company would clearly fall under Group 99633 - Food, edible preparations, alcoholic and non-alcoholic beverages serving services and further under service code 996337 - Other Contract Food Services which are in the nature of outdoor caterer services [food preparation and/or supply services based on contractual arrangements with the customer, at institutional, governmental, commercial or industrial location/s specified by the customer other than for transportation companies, on an ongoing basis; food service concession services, i.e. the provision of operating services by operators of eating facilities such as canteens and cafeterias]. Thus, classification of the services being provided by the applicant as per Case-I details would be taxable under Serial No. 7 Heading 9963 (v) at the rate of 18 per cent under GST as applicable.

Case II

The facts are same as mentioned in Case I except that in addition to supply of food on the request of the client the applicant also undertake the services of distribution of food for which applicant raises separate bill charging 18 per cent GST/SGST.

On whether both the activities put together i.e. supply and distribution of food to the employees of 'A' Ltd. be called as canteen services and applicable rate of 5 per cent be charged, it was ruled that the undertaking of additional responsibility of services of distribution of food by the applicant would in no way impact the classification or taxability of the services being provided by the applicant as per discussions in respect of Case-I above.

Case III

On where the employees of 'A' Ltd. have formed 'Employees Co-op. Society' which is registered under the Societies Registration Act and such society runs a canteen for the employees of 'A' Ltd. and the contract of supply of food of applicant is with 'Employees Co-op. Society ' and not with 'A' Ltd., on employees running a canteen, can it still be claimed that applicant is running a canteen and the applicable rate of 5 per cent be charged, it was ruled that the Employees Cooperative Society running the canteen themselves would in no way impact the catering transaction with the applicant. In respect of details given of Case-Ill the essence of transaction between the applicant and the Employees Cooperative Society is not changing. Now instead of the company A Ltd., the outdoor catering services are being provided to the Employees Cooperative Society which would be taxable at the rate of 18 per cent only as already discussed in respect of Case-I and Case-II above.

Case IV

The applicant enters into a contract with a company called say 'B' Ltd. 'B' Ltd. is having its unit in SEZ area (Special Export Zone). The supply of food is done by applicant to the employees of 'B' Ltd. and payment for the same is made by the employees of 'B' Ltd. directly to applicant.

(a)

Can Merit Hospitality claim that since the food is supplied directly to SEZ area hence no GST is applicable?

The benefit of zero rated supply as per section 16(1)(b) would be allowed only when supply is to SEZ developer or a SEZ unit.

The benefit of zero rated supply would be allowed to a domestic unit only if supply of goods or services to a SEZ unit or developer is only in respect of authorized operations as mentioned in the Letter of Approval of the Development Commissioner as per section 15(9) of the SEZ Act.

However, in the case details provided by the applicant in Case IV, it is not forthcoming whether 'B Ltd' is an authorized unit in SEZ as per section 15(9) of the SEZ Act and as to what are the authorized operations of 'B Ltd' in SEZ and whether supply of food to B Ltd or its employees is covered under authorized operations as allowed/approved by the Development Commissioner. If it is not covered under authorized operations then this supply of food by the applicant to SEZ employees would not be eligible for the benefit of zero rated supply.

 (b) Can Merit Hospitality claim that it is running a canteen in SEZ area hence no GST is applicable?

The applicant cannot claim that they are running a canteen in SEZ. Rather their service would be in the nature of outdoor catering service as per discussions in detail above.

(c) Can Merit Hospitality claim that it is running a restaurant in SEZ area and hence applicable GST rate is 5 per cent only?

The applicant cannot claim that they are running a restaurant in SEZ, rather their service would fall under outdoor catering service as per discussions in details above. As all the facts which are required for decision in respect of Case-IV have not been put before this authority, in view of the lack of complete facts, this question cannot be answered by this authority with limited facts.   In conclusion, the Authority for Advance Ruling thus,  ruled that supply of food by applicant as a registered outdoor caterer to employees of customer company at its premises cannot be called as canteen services and would be liable to GST at rate of 18 per cent as outdoor catering service under Serial No. 7 [Heading 9963 (v)].

Appellate Ruling by AAAR

However, being aggrieved by the advance ruling, an appeal was preferred before the AAAR u/s 100 of the CGST Act, 2017 on the following grounds :

1. Note answering the questions under case IV, viz,

1. Merit Hospitality claim that since the food is supplied directly to the SEZ area, hence no GST is applicable?
2. Can Merit Hospitality claim that it is running a canteen in SEZ area, hence no GST is applicable?
3. Can Merit Hospitality claim that it is running a restaurant in SEZ area and hence applicable rate is 5% only?

2. Not deciding the issues of applicability of GST rate for supplies for supplies made to unit situated in Special Economic Zone (SEZ) as raised in the case IV.

3. Failing to distinguish applicability of GST Act and rules in case of domestic situations and that in goods and services supplied in a unit based in SEZ area.

It was submitted that u/s 16(1)(b) of the IGST Act, 2017, supply of goods or services or both to a SEZ unit or a developer of SEZ are treated as ‘zero’ rated supplies. Further, Section 16(3) of the IGST Act allows a registered person to made a ‘zero rated supplies’ without payment of Integrated tax subject to conditions, safeguards and procedure as laid out under rule 96A. As per Rule 96A(1), various requirements have been laid out for exports which under Rule 96A(3) mutatis mutandis apply to services given to SEZ units.

According to section 16(1) of IGST Act, 2017, ‘zero rated supply’, as provided under Section 16(1) of the IGST Act, 2017, which is reproduced  below:

“Section 16(1) ‘Zero rated supply’ means any of the following supplies of goods or services or both, namely:-

(a)       export of goods or services or both; or

(b)       supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.”

The AAAR observed that it is crystal clear that the supply made by the appellant to the employees of the unit located in SEZ cannot be construed as zero rated supply by any stretch of imagination, as the employees can neither be treated as SEZ developer nor as SEZ unit. Accordingly, GST will be applicable as per the classification of the services determined in terms of the scheme of the classification of services as provided under the Notification 11/2017-C.T. (Rate) dated 28.06.2017 as amended by the Notification No. 46/2017-C.T. (Rate) dated 14.11.2017.

It was further observed that the applicant has claimed that since it is running a restaurant in SEZ area , the applicable rate of GST will be 5 percent which lacks rational in as much as the applicant is presuming and is putting pre-emptive notion before the Appellate Authority as to they are running the restaurant in the SEZ area and then asking authority to decide upon the GST rate applicable on such activities. To answer this question, first we would like to discuss the meaning of the 'Restaurant'. 'Restaurant' is not defined under the GST Act. Therefore the meaning of Restaurant as provided in the Cambridge Dictionary referred to. As per the Cambridge Dictionary, Restaurant is a place where meals are prepared and served to the customer. Now, on perusal of the submissions made by assessee on 1-10-2018, wherein they have categorically submitted that they are registered as 'Outdoor Caterers' and are basically  engaged in providing the corporate catering services to their offices/ units as per the terms and conditions of the contracts entered with them and they prepare the food in their own kitchen and then distribute is to various companies at different locations.

It is apparent that the food is being cooked at one place and being distributed to the various different locations of the companies with whom they have entered into contract. This event is not covered under  the definition of the 'restaurant services'. Thus, the claim of running restaurant services in the SEZ area is not tenable and hence the GST rate of 5 per cent is not correct.  The services of supplying food by the applicant to the employees of the unit located in the Special Economic Zone is not covered under the zero rated supplies in terms of section 16(1)(b) of the IGST Act, 2017 and the service are also not in the nature of restaurant services.

Final Ruling

Based on its analysis of facts and interpretation of law, the AAAR concluded that :

1. Services of supplying food to employees of units located in SEZ are not covered under zero rated supply u/s 16(1) of the IGST Act, 2017.
2. Employees can never be treated as a SEZ developer nor as any SEZ unit
3. Since food is cooked at one place and then distributed to various companies / locations under a contract, the activity can not be called as ‘restaurant service’ and as such, GST@5 percent will not be applicable
4. GST shall be levied at applicable rate as per scheme of classification as per Notification No. 11/2017 –CT (Rate) dated 28.06.2017.

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