2025 (4) TMI 1049 - 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 - applicability of GST - Availability of ITC to the Applicant on GST charged by the Canteen Service Providers for providing the catering services - services by the way of non-air-conditioned bus transportation facility provided by the Transport Service Providers - availability of ITC on GST charged by the Transport Service Providers for providing the non-air-conditioned bus transportation services. Whether 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? - HELD THAT - If a transaction or activity is not a supply u/s 7 (1) of CGST Act then there would not be necessity to place such a transaction u/s 7 (2)(a) for deeming it to be neither supply of goods nor supply of services. Hence Applicant s activity of supply of canteen services falls u/s 7 (1) of CGST Act 2017. Only the perquisites i.e. free supplies in terms of a contractual agreement between the employer and employee are not to be subjected to GST as these are in lieu of the services provided by employee to the employer in relation to his employment. Hence 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 - As per Section 17 (5) (b) of the CGST Act ITC on food and beverages outdoor catering etc. is not available. However it is seen that a proviso after sub- clause (iii) of clause (b) of sub- section (5) of section 17 of the CGST Act is provided to clarify that the ITC in respect of such goods or services or both would be eligible where it is obligatory for an employer to provide the same to its employees under any law for the time being in force. It is clear that Canteen Contractor is providing Restaurant Service to the Applicant which is chargeable to GST @ 5% rate in terms of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended without availment of ITC. Under explanation to the aforesaid entry it has been clarified that the concessional rate is mandatory rate and availing the normal rate of tax will not apply and that is the reason the amended Notification No. 20/2019-C.T. (Rate) dated 30.09.2019 has been issued exercising power under Section 16 (1) and Section 148 of the CGST Act 2017 so as to come out of the provisions permitting availment of ITC. In other words a Taxpayer providing Restaurant Service has no option of taking ITC by providing Restaurant Service at normal GST rate - Accordingly the canteen service provider is providing the restaurant service to the employees of the Applicant on behalf the said Applicant and paying Tax at specified rate of 5% in terms of the Notification ibid. Whether the services by the way of non-air-conditioned bus transportation facility provided by the Transport Service Providers would be construed as supply of service by the Applicant to its employees under the provisions of Section 7 of Central Goods and Service Tax Act 2017 and Maharashtra Goods and Service Tax Act 2017? - HELD THAT - The perquisites in terms of a contractual agreement between the employer and employee are to be kept outside the ambit of GST. From the appointment letter given to the employees it is seen that the Company promises other benefits as per the company policy. As per the HR policy of the company company offers free transportation facility to its employees. Thus free bus transportation facility is given to the employees as part of their contractual agreement. In respect of canteen services supply of transportation services to the employees would in normal course constitute to be the supply of services u/s 7 (1) of GST Act 2017. However it is now clarified by the CBIC circular No. 172/04/2022/GST dated 6th July 2022 that perquisite provided to the employees in view of the Contractual Agreement would not be subjected to GST. It is clarified that such perquisite are in lieu of the services provided by the employees to the employer in the course of or in relation to his employment and should not be subjected to GST. As the supply of perquisite by the employer to the employee would not have respite from above two aspects mentioned at Sr.No.1 and 2 above as the said supply is neither exempted nor a Non-GST supply. Hence it would be appropriate to interpret that the perquisite given to the employees in view of the contractual agreement are in lieu of services given by the employee to the employer and would not be subjected to GST by deeming it to be part of Schedule III as a corollary to entry at Sr.No.1 of Schedule III for cohesive interpretation. In view of this supply of free transportation service provided by the employer to the employee in view of contractual agreement with them will not be supply u/s 7 of MGST ACT. 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) Nominal amounts deducted are not in the nature of perquisite provided to the employees and liable for levy of GST. ic) ITC is not available to the Applicant on GST charged by the Canteen Service Providers for providing the catering services. iia) The services by the way of non-air-conditioned bus transportation facility provided by the Transport Service Providers would not be construed as supply of service by the Applicant to its employees under the provisions of Section 7 of Central Goods and Service Tax Act 2017 and Maharashtra Goods and Service Tax Act 2017. iib) ITC is not available to the Applicant on GST charged by the Transport Service Providers for providing the non-air-conditioned bus transportation services.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority were:

(1) Whether the deduction of a nominal amount by the applicant from the salary of employees availing food in the factory canteen constitutes a "supply of service" under Section 7 of the Central Goods and Services Tax Act, 2017 (CGST Act) and the Maharashtra Goods and Services Tax Act, 2017 (MGST Act).

(1a) If so, whether GST is applicable on the nominal amount deducted from employees' salaries.

(1b) Whether input tax credit (ITC) is available to the applicant on GST charged by the canteen service providers for catering services.

(2) Whether the provision of non-air-conditioned bus transportation facility by transport service providers to employees constitutes a "supply of service" by the applicant to its employees under Section 7 of the CGST Act and MGST Act.

(2a) Whether ITC is available to the applicant on GST charged by the transport service providers for providing such bus transportation services.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Nominal Recovery for Canteen Services

Relevant Legal Framework and Precedents

The determination of whether the deduction of a nominal amount from employees for canteen services constitutes a "supply of service" hinges on the interpretation of Section 7 of the CGST Act, which defines "supply" to include all forms of supply of goods or services made for a consideration by a person in the course or furtherance of business. The definition of "business" under Section 2(17) is inclusive, covering any activity incidental or ancillary to the main business, regardless of pecuniary benefit.

Schedule III to the CGST Act excludes "services by an employee to the employer in the course of or in relation to his employment" from the scope of supply. However, the applicant's contention was that the provision of canteen services is in pursuance of a statutory obligation under the Factories Act, 1948, and thus should not be treated as a supply.

The applicant cited several advance rulings and judicial precedents (including Tata Motors Ltd., Emcure Pharmaceuticals Ltd., Amneal Pharmaceuticals Ltd., and others) to argue that such recoveries are outside the scope of GST, being in the nature of employer-employee arrangements and not in the course or furtherance of business. The applicant also relied on Circular No. 172/04/2022-GST, which clarifies that perquisites provided by employers to employees as part of the employment contract are not subject to GST.

The jurisdictional officer, in contrast, relied on precedents such as Caltech Polymers (P.) Ltd. (Kerala AAR and AAAR), Federal Mogul Goetze India Ltd. (Karnataka AAR), and others, which held that recoveries from employees for canteen services constitute taxable supplies under GST.

Court's Interpretation and Reasoning

The Tribunal analyzed the definition of "business" under Section 2(17) and concluded that activities incidental or ancillary to the principal business, such as providing canteen services to employees, fall within the definition of business. The Tribunal emphasized that the Factories Act, 1948, mandates the provision of canteen facilities for factories employing more than 250 workers, but does not specify whether such facilities must be provided free or subsidized, nor does it exempt such transactions from tax.

It was observed that there are two distinct transactions: (i) the supply of canteen services by the canteen service provider to the applicant (employer), and (ii) the supply of canteen services by the applicant (employer) to its employees. The applicant pays the canteen service provider and recovers a portion of the cost from employees, which constitutes consideration for the supply of service by the employer to the employees.

The Tribunal noted that the deduction from employees' salaries is not in the nature of a "perquisite" as defined under the Income Tax Act, 1961, since perquisites refer to free or concessional benefits provided by the employer. Only the concession or free portion qualifies as a perquisite; the portion recovered from employees is not a perquisite and is thus liable to GST.

Regarding the applicant's reliance on various advance rulings, the Tribunal clarified that such rulings are binding only on the applicant who sought them and the concerned officer, and do not have general applicability.

Key Evidence and Findings

The applicant's canteen policy stipulated that employees bear one-third of the cost of canteen services, with the remaining two-thirds paid by the company. The deduction is visible in employees' salary slips. The Tribunal found that this arrangement involves consideration and is incidental to the principal business of manufacturing, thereby satisfying the requirements of Section 7 for a taxable supply.

Application of Law to Facts

The Tribunal applied Section 7(1)(a) and 2(17) of the CGST Act, holding that the provision of canteen services to employees for a consideration (even if subsidized) is a supply in the course or furtherance of business. The deduction from salary is consideration for the supply, and the transaction is not excluded by Schedule III, as that entry applies to services by employees to employers, not the reverse.

Treatment of Competing Arguments

The applicant's arguments based on statutory obligation, lack of commercial intention, and the absence of quid pro quo were rejected. The Tribunal held that the intention for pecuniary gain is not necessary for an activity to be considered "business" or "supply." The deduction from salary is clear evidence of consideration and reciprocity. The Tribunal also distinguished the cases cited by the applicant, noting factual and legal differences.

Conclusions

The Tribunal concluded that the deduction of nominal amounts from employees for canteen services constitutes a taxable "supply of service" under the CGST Act, and GST is leviable on such amounts. Only the portion provided free or as a perquisite is outside the scope of GST; the recovered amount is taxable.

Issue 1b: Eligibility for Input Tax Credit on Canteen Services

Relevant Legal Framework and Precedents

Section 17(5)(b) of the CGST Act blocks ITC on food and beverages, outdoor catering, etc., except where it is obligatory for an employer to provide such services to employees under any law for the time being in force. Circular No. 172/04/2022-GST clarified that the proviso applies to the whole of clause (b) of Section 17(5).

The Tribunal also considered Notification No. 11/2017-Central Tax (Rate) as amended by Notification No. 20/2019-C.T. (Rate), which prescribes a GST rate of 5% for restaurant services provided by canteen contractors, with the condition that no ITC can be availed.

Court's Interpretation and Reasoning

The Tribunal acknowledged that while Section 17(5)(b) does not block ITC where the provision of canteen services is obligatory under law, the specific rate notification for restaurant services overrides this, mandating a 5% GST rate without ITC for such services provided in non-specified premises. Thus, even if the applicant is statutorily obliged to provide canteen facilities, the structure of the notification precludes ITC to the recipient (employer) when the canteen contractor charges GST at 5%.

Key Evidence and Findings

The canteen service provider was found to be charging GST at 5% without availing ITC, in compliance with the notification. The applicant, as the recipient of the service, is not permitted to claim ITC on such supplies.

Application of Law to Facts

Although the applicant is under a statutory obligation to provide canteen facilities, the rate notification prevails, and ITC is not available on the GST charged by the canteen service provider.

Treatment of Competing Arguments

The applicant's reliance on the proviso to Section 17(5)(b) and related circulars was addressed by distinguishing the impact of the rate notification, which specifically disallows ITC for restaurant services at the concessional rate.

Conclusions

The Tribunal held that ITC is not available to the applicant on GST charged by the canteen service provider for catering services, due to the restrictions imposed by the relevant notifications.

Issue 2: Taxability of Non-Air-Conditioned Bus Transportation Facility Provided to Employees

Relevant Legal Framework and Precedents

The issue centered on whether providing free non-air-conditioned bus transportation facility to employees constitutes a "supply of service" by the employer under Section 7 of the CGST Act. The applicant argued that such facilities are provided only to employees as a welfare measure and not for consideration, and thus should not be considered a supply. The applicant relied on earlier advance rulings and Circular No. 172/04/2022-GST, which clarified that perquisites provided as part of the employment contract are not subject to GST.

The jurisdictional officer, however, argued that employer and employee are related persons under Section 15, and that provision of such facilities constitutes a supply under Section 7, even without consideration, by virtue of Schedule I.

Court's Interpretation and Reasoning

The Tribunal analyzed Schedule III, which excludes "services by an employee to the employer in the course of or in relation to his employment" from the scope of supply. It further considered the CBIC Circular, which clarified that perquisites provided by the employer to the employee as part of the employment contract are not subject to GST, as they are in lieu of services provided by the employee to the employer.

The Tribunal distinguished between perquisites (free benefits) and recoveries (amounts charged to employees). In the present case, the transportation facility was provided free of cost to employees as part of the employment contract, and no amount was recovered from employees for this facility.

Key Evidence and Findings

The applicant provided evidence that the transportation facility was offered only to employees, was not available to others, and was provided free of charge. The facility was part of the employment benefits as per company policy.

Application of Law to Facts

The Tribunal applied the CBIC Circular and Schedule III, holding that the provision of free bus transportation facility to employees as a perquisite under the employment contract is not a supply under Section 7 and is not subject to GST.

Treatment of Competing Arguments

The jurisdictional officer's argument that such facilities constitute a supply between related parties under Schedule I was addressed by noting that the absence of consideration and the nature of the benefit as a perquisite under the employment contract bring the transaction within the exclusion provided by Schedule III and the CBIC Circular.

Conclusions

The Tribunal concluded that the provision of free non-air-conditioned bus transportation facility to employees does not constitute a supply of service under GST and is not liable to tax.

Issue 2b: Eligibility for Input Tax Credit on Transportation Services

Relevant Legal Framework and Precedents

Section 17(5)(b)(i) of the CGST Act blocks ITC on leasing, renting, or hiring of motor vehicles for transportation of persons, except when used for certain taxable supplies or when the vehicle has a seating capacity of more than thirteen persons. Section 17(5)(g) further blocks ITC on goods or services used for personal consumption.

The Tribunal considered judicial precedents, including Solar Industries India Limited (Bombay High Court) and Toyota Kirloskar Motor Private Limited (Karnataka High Court), which held that transportation facilities provided to employees are for personal use or consumption and are not eligible for Cenvat credit.

Court's Interpretation and Reasoning

The Tribunal acknowledged that while the applicant used vehicles with seating capacity exceeding thirteen persons, the transportation facility was provided for the personal convenience of employees and not in the course or furtherance of business. The Tribunal emphasized that the applicant is not under a statutory obligation to provide such transportation services, distinguishing it from the canteen facility mandated by the Factories Act.

Key Evidence and Findings

The transportation facility was provided for the personal convenience of employees, enabling them to commute to and from the factory, but was not mandated by law.

Application of Law to Facts

The Tribunal held that, as the transportation services are for personal consumption and not a statutory obligation, ITC is blocked under Section 17(5)(g) of the CGST Act, even if the seating capacity condition is satisfied.

Treatment of Competing Arguments

The applicant's reliance on earlier advance rulings and circulars was addressed by reference to the specific statutory provisions blocking ITC for personal consumption and the absence of a statutory obligation to provide transportation.

Conclusions

The Tribunal concluded that ITC is not available to the applicant on GST charged by the transport service provider for providing non-air-conditioned bus transportation services to employees.

3. SIGNIFICANT HOLDINGS

Core Principles Established

• The provision of canteen services to employees for a consideration (even if subsidized) constitutes a "supply of service" under Section 7(1) of the CGST Act, as it is incidental or ancillary to the principal business and for consideration. The deduction from employees' salaries is not a perquisite and is liable to GST.
• "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."
• ITC is not available to the applicant on GST charged by the canteen service provider, as the relevant rate notification for restaurant services (5% GST) specifically bars the availment of ITC, even if the provision of canteen services is statutorily mandated.
• The provision of free non-air-conditioned bus transportation facility to employees as a perquisite under the employment contract does not constitute a supply of service under GST and is not liable to tax, as clarified by CBIC Circular No. 172/04/2022-GST.
• ITC is not available to the applicant on GST charged by the transport service provider for providing such transportation services, as the service is for personal consumption of employees and is not a statutory obligation, thus falling within the blocked credit provisions of Section 17(5)(g) of the CGST Act.

Final Determinations on Each Issue

• On the deduction of nominal amounts for canteen services: "Answered in the affirmative" - such deduction is a taxable supply and GST is applicable on the amounts deducted from employees' salaries.
• On ITC for canteen services: "Answered in the negative" - ITC is not available to the applicant on GST charged by the canteen service provider.
• On the provision of free non-air-conditioned bus transportation facility: "Answered in the negative" - such provision does not constitute a supply of service under GST and is not liable to tax.
• On ITC for transportation services: "Answered in the negative" - ITC is not available to the applicant on GST charged by the transport service provider for providing such services to employees.

Verbatim Quotes of Crucial Legal Reasoning

• "The activity of supply of canteen services to the employee is in connection with or incidental or ancillary to the principal activity of the taxpayer as explained above."
• "As discussed in Para 5.1.4, only the perquisites i.e., free supplies, in terms of a contractual agreement between the employer and employee are not to be subjected to GST as these are in lieu of the services provided by employee to the employer in relation to his employment. Hence, 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."
• "Though the Section 17 (5) (b) 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."
• "We find that in the instant case, Applicant is offering the transportation facility free to its employees. Hence no GST would be applicable in respect of these services provided to the employees."
• "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."