2025 (4) TMI 221 - AAR - GST

Eligibility to take ITC for the GST charged by the canteen service provider for the canteen services (on the portion which is borne by the company) for its employees where the canteen facility is mandatory in terms of section 46 of the Factories Act 1948 read with rule 72 of Gujarat Factories rules 1963 - HELD THAT - Input Tax Credit will be available to the applicant in respect of food and beverages as canteen facility is obligatorily to be provided under the Factories Act 1948 read with Gujarat Factories Rules 1963 as far as provision of canteen service for employees working at the factory is concerned. It is further held that the ITC on GST charged by the canteen service provider will be restricted to the extent of cost borne by the applicant only.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Authority for Advance Ruling (AAR) were:

• Whether the applicant company is eligible to claim Input Tax Credit (ITC) on the GST charged by the canteen service provider (CSP) for canteen services provided to its employees, where such canteen facility is mandatory under section 46 of the Factories Act, 1948 read with rule 72 of the Gujarat Factories Rules, 1963.
• Whether the proviso at the end of clause (b) of sub-section (5) of section 17 of the CGST Act, 2017 applies to the entire clause (b) or only to sub-clause (iii) of clause (b), thereby affecting the eligibility of ITC on canteen services.
• To what extent the ITC can be claimed, especially considering that employees bear a proportionate charge for canteen services and the applicant bears the remaining cost.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Eligibility to claim ITC on GST charged by CSP for mandatory canteen services

Relevant legal framework and precedents:

The primary statutory provisions considered were:

• Section 46 of the Factories Act, 1948, which mandates factories employing more than 250 workers to provide canteen facilities.
• Rule 72 of the Gujarat Factories Rules, 1963, which operationalizes the canteen provision.
• Section 17(5)(b) of the Central Goods and Services Tax (CGST) Act, 2017, which lists blocked credits including food and beverages, outdoor catering, etc., but contains a proviso allowing ITC where such goods or services are obligatory for an employer to provide under any law.
• CBIC Circular No. 172/04/2022-GST clarifying the scope of the proviso in section 17(5)(b).
• Relevant case law including rulings from Gujarat Appellate Authority for Advance Ruling (e.g., M/s. Tata Motors Ltd.) and earlier AAR rulings (M/s. AIA Engineering Limited and M/s. Dormer Tools India Pvt. Ltd.).

Court's interpretation and reasoning:

The AAR noted that the canteen facility is mandatory under the Factories Act and Gujarat Factories Rules for factories employing more than 250 workers, which applies to the applicant. The amendment to section 17(5)(b) of the CGST Act effective from 1.2.2019 introduced a proviso allowing ITC on goods or services that an employer is obliged to provide under any law. The Circular No. 172/04/2022-GST clarified that this proviso applies to the entire clause (b), not just to sub-clause (iii).

The Authority emphasized that since the applicant is legally mandated to provide canteen services, the ITC on GST charged by the CSP is eligible to be claimed to the extent of the cost borne by the applicant. This interpretation aligns with the GST Council's intent to widen the scope of ITC where the supply is obligatory under law.

Key evidence and findings:

• The applicant's registration under GST and Factories Act, 1948.
• The canteen agreement with the CSP and the canteen policy submitted during the hearing.
• The fact that the canteen services are provided within the factory premises to employees, satisfying the statutory mandate.
• Invoices raised by CSP including GST charges, with cost-sharing between employees and the applicant.

Application of law to facts:

The Authority applied the proviso in section 17(5)(b) to the facts, concluding that since the canteen facility is mandated by law, the applicant is entitled to claim ITC on the GST charged by the CSP. However, the ITC is restricted to the portion of the cost borne by the applicant, excluding the amount recovered from employees, as that portion is not borne by the applicant.

Treatment of competing arguments:

The applicant argued that the entire clause (b) is subject to the proviso, relying on CBIC Circular No. 172/04/2022-GST and relevant rulings. The Authority accepted this interpretation, rejecting any narrower reading that would limit the proviso only to travel benefits extended to employees on vacation (sub-clause (iii)).

Conclusions:

ITC on GST charged by CSP for mandatory canteen services is available to the applicant, restricted to the cost borne by the applicant, excluding the employee's share.

Issue 2: Applicability of proviso to entire clause (b) of section 17(5) or only sub-clause (iii)

Relevant legal framework and precedents:

The key provision is section 17(5)(b) of the CGST Act, 2017, which prohibits ITC on certain supplies including food and beverages, but contains a proviso that allows ITC if the supply is obligatory under law. The CBIC Circular No. 172/04/2022-GST directly addresses whether the proviso applies to the entire clause or only to sub-clause (iii).

Court's interpretation and reasoning:

The Authority relied heavily on the CBIC Circular which clarified that the proviso applies to the entire clause (b) and not merely to the travel benefits sub-clause (iii). This interpretation was supported by the GST Council's recommendations and press notes indicating an intent to widen the scope of ITC where supplies are obligatory under law.

Key evidence and findings:

The circular's explicit clarification and the legislative history of the amendment to section 17(5)(b) were pivotal in the Authority's reasoning.

Application of law to facts:

Applying this interpretation, the canteen services, which fall under food and beverages in clause (b), qualify for ITC if mandated by law, as in this case under the Factories Act.

Treatment of competing arguments:

No contrary interpretation was accepted; the Authority firmly adopted the CBIC Circular's clarification.

Conclusions:

The proviso to section 17(5)(b) applies to the entire clause (b), enabling ITC on mandatory supplies such as canteen services.

Issue 3: Extent of ITC claim considering cost-sharing with employees

Relevant legal framework and precedents:

Section 17(5) of the CGST Act restricts ITC where the supply is not for business or where the cost is borne by others. The principle that ITC can only be claimed on the portion of cost borne by the registered person applies.

Court's interpretation and reasoning:

The Authority held that since employees pay a proportionate charge for canteen services and the applicant does not derive any commercial benefit or profit from this amount, the ITC claim must be restricted to the portion of GST charged on the cost borne by the applicant only. The portion reimbursed by employees is excluded from ITC claim as it is not an expense borne by the applicant.

Key evidence and findings:

The agreement with CSP and the canteen policy evidenced the cost-sharing arrangement and the absence of commercial profit motive in amounts collected from employees.

Application of law to facts:

The Authority applied the principle that ITC is only available on inputs used in the course or furtherance of business and borne by the registered person. Accordingly, the ITC claim was limited to the applicant's share of the cost.

Treatment of competing arguments:

The applicant's contention that the entire GST on the canteen service invoices should be eligible was rejected to the extent of the employee's share.

Conclusions:

ITC on GST charged by CSP is allowable only to the extent of the cost borne by the applicant, excluding the portion recovered from employees.

3. SIGNIFICANT HOLDINGS

The Authority's crucial legal reasoning is captured verbatim as follows:

"Input Tax Credit will be available to the applicant in respect of food and beverages as canteen facility is obligatorily to be provided under the Factories Act, 1948, read with Gujarat Factories Rules, 1963 as far as provision of canteen service for employees working at the factory is concerned."

"The ITC on GST charged by the canteen service provider will be restricted to the extent of cost borne by the applicant only."

"The proviso after sub-clause (iii) of clause (b) of sub-section (5) of section 17 of the CGST Act is applicable to the whole of clause (b) of sub-section (5) of section 17 of the CGST Act."

Core principles established include:

• ITC is available on inputs or input services which are obligatory for an employer to provide under law, notwithstanding the general block on ITC for food and beverages under section 17(5)(b).
• The proviso to section 17(5)(b) applies to the entire clause (b), not just to travel benefits.
• ITC entitlement is limited to the portion of expenses actually borne by the registered person, excluding any cost recovered from employees or others.

Final determinations on each issue are:

• The applicant is eligible to claim ITC on GST charged by the CSP for mandatory canteen services under the Factories Act and Gujarat Factories Rules.
• The proviso to section 17(5)(b) applies to the entire clause (b), thereby enabling ITC on such mandatory canteen services.
• ITC is restricted to the portion of the cost borne by the applicant, excluding the amount recovered from employees.