Canteen services- analysis of Advance Ruling Authority, Kerala

[Suriyanarayanan Iyer]

Canteen services under GST- an analysis of the advance ruling in Caltech Polymers Private Limited [ 2018 (4) TMI 582 - AUTHORITY FOR ADVANCE RULING - KERALA ]

The Authority for Advance Ruling-Kerala has decided on 26/03/2018 that recovery of the expenses from the employees for the canteen services provided by a company would come under the definition of’ outward supply’ as defined in section 2 (83) of the CGST Act, 2017 and therefore will be taxable as a supply of service under GST.

2) The said decision is based on the interpretation of definition of’ business’ in section 2 (17) of the CGST Act by the authority and its conclusion that supply of food by the applicant company to its employees would definitely come under the phrase’ any activity or transaction in connection with or incidental or ancillary to sub- clause (a) occurring in sub- clause (b) ibid.

2.1) The definition of’ business’ considered by the Advance Ruling Authority, Kerala is extracted below.

‘ Business’ includes: – (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;

b) any activity or transaction in connection with or incidental or ancillary to sub- clause (a); ‘

2.2) A somewhat similar decision construing more or less identical definition of “business” under the Andhra Pradesh General Sales Tax Act 1957 came to be decided by the Andhra Pradesh High Court in Hyderabad Asbestos Cement Products Ltd Versus State of Andhra Pradesh- 1970 (4) TMI 151 - ANDHRA PRADESH HIGH COURT . The said decision was approved by the Honourable Supreme Court in its judgement reported as State of Tamil Nadu Versus Burmah Shell Oil Storage And Distributing Co Of India Ltd- 1972 (10) TMI 95 - SUPREME COURT OF INDIA The Andhra Pradesh High Court held that in view of the definition of’ business’ as amended by the Amendment Act of 1966, proof of profit-motive is unnecessary to constitute business and that the transaction of supply of food and drink to the workmen in the canteen maintained by the assessee, in pursuance of the Factories Act and the Rules, were sales and constituted business for the purposes of the Act.

2.3) The apex court decision in Burmah Shell was, though holding the field and not explicitly overruled/reversed, came to be ignored by the apex court itself in respect of cases involving sale of unserviceable spares etcetera by State Transport Corporations. In such cases, the apex court went into the dominant object of service by the State Transport Corporations and held that sale of unserviceable parts etcetera by such transport corporations cannot be subjected to sales tax/VAT. The decision of the Delhi High Court reported as Commissioner of Sales Tax Versus Delhi Transport Corporation- 1996 (7) TMI 576 - DELHI HIGH COURT  discusses about the dominant object test in respect of state transport corporations and the departure made by the Supreme Court itself from its earlier decision in Burmah Shell in various subsequent pronouncements relating to transport corporations. Thus the dominant object of the undertaking/business vis-à-vis the activities/sales sought to be taxed has been considered by the Supreme Court as well as the high Courts for giving relief to the assessees even after the amendment to the definition of the term’ business’ rendering any activity without any profit motive also as a “business” coupled with the phrase’ incidental or ancillary or in connection therewith’ used in such definitions.

3) A three-member bench of the Madhya Pradesh High Court in its decision reported as Commissioner of Sales Tax Versus Hukumchand Mills Ltd- 1995 (12) TMI 362 - MADHYA PRADESH HIGH COURT considered the entire gamut of case law in its judgement dated 19 December 1995. The issue involved in the said case was whether canteen sales were liable for tax under the MP General Sales Tax Act.

3.1) After noting the Burmah Shell decision of the Supreme Court and the Hyderabad Asbestos Cement Case approved therein, considering the subsequent decision of the Supreme Court in Northern India Caterers India Ltd- 1978 (9) TMI 154 - SUPREME COURT OF INDIA as well as the earlier decision in Raipur Manufacturing Co Ltd- 1966 (9) TMI 82 - SUPREME COURT OF INDIA, the full bench of the Madhya Pradesh High Court held that sale of food articles in the canteen were not exigible to tax. The review petition filed by the revenue against the said decision was dismissed by another three-member bench of the Madhya Pradesh High Court as per reports in 2004 SCC online MP 163.

4) A question can arise that the decisions against the revenue cited above are only in respect of VAT/sales tax on canteen sales whereas the CGST Act, 2017 is a comprehensive legislation for tax on both goods and services.

4.1) But the fact that the said CGST Act considers that ‘services by an employee to the employer in the course of or in relation to his employment’ will not be an activity or transaction which shall be treated either as a supply of goods or as a supply of services vide entry in serial no 1 in Schedule III of the CGST Act, 2017 is a relevant fact not considered by the Advance Ruling Authority Of Kerala. 

4.1.1) The issue is, can it be considered that the same legislature which enacted the law that services by an employee in the course of or in relation to his employment will not be liable for GST could have intended that reimbursement of expenses to an employer who runs a canteen due to the statutory mandate under the Factories Act will be liable for GST?

4.2) Though the Advance Ruling Authority has considered the declaration of composite supply in clause 6 of the Schedule II to the GST Act for concluding that there is a supply in terms of section 7 (1) (a) of the CGST act, 2017, it has failed to notice that the expression’ in any other manner whatsoever’ occurring in the declaration relating to composite supply has to be construed ejusdem generis only. That is, only if the supply in the canteen is by way of or as part of any intended service activity /business of employer, it can fall under the definition of ‘composite supply’. Reliance is placed on the judgement of the Bombay High Court in ANK Seals Versus Employees State Insurance Corporation- 2006 (2) TMI 687 - BOMBAY HIGH COURT  wherein the Bombay High Court held that the phrase ‘in any other manner whatsoever’ has to be construed ejusdem generis and acquisition of the undertaking by the central government will not fall within the sweep of the said phrase occurring after‘transfers that factory or establishment in whole or in part, by sale, gift, lease or license’.  

4.2.1) Thus, the reasoning of the Advance Ruling Authority that the supply of food and other articles in the canteen run by the employer due to the mandate under the Factories Act falls under “composite supply” for the purposes of GST seems to be stretching the definition of composite supply beyond warranted or intended by the law. 

5) The Advance Ruling Authority, Kerala has also concluded that since the applicant recovers the cost of food from its employees, there is consideration as defined in section 2 (31) of the CGST Act, 2017. The said conclusion seems to be highly doubtful in terms of the detailed discussion of the law on the subject by the three-member bench of the Madhya Pradesh High Court in Hukumchand Mills case.

Conclusion

It can be expected that that the decision by the Advance Ruling Authority, Kerala in Caltech Polymers Case holding that supply of food in the canteen maintained by the employer without any profit motive is liable for GST will be contested in many judicial forums by the assessees. It will be better if the central government brings in necessary amendments of exemption to fulfil its avowed objective of avoidance of litigation and the certainty of levy/exemptions under GST.