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2025 (7) TMI 263 - AAR - GSTTaxability - Subsidised Canteen Charges - Eligibility to Claim Input Tax Credit. Taxability of Subsidised Canteen Charges - HELD THAT - Coming to Treatment of Contract and Regular Employees in Canteen GST Exemption under Section 46 of the Factories Act 1948 any factory employing more than 250 workers is mandated to provide and maintain a canteen for the use of workers. Importantly the definition of worker in Section 2(1) of the Act includes any person employed directly or by or through any agency (including a contractor) to work in a manufacturing process. Thus the obligation to provide canteen facilities extends not only to employees on the rolls but also to contract labour engaged in factory operations. There is no distinction in the statutory language that exempts employers from extending canteen benefits to contract workers. The Hon ble Supreme Court in NTPC Ltd. v. Karri Pothuraju Others 2003 (8) TMI 595 - SUPREME COURT held that contract workers employed in the premises of the principal employer fall within the scope of worker under the Factories Act and are entitled to statutory welfare measures including canteen facilities. From a GST perspective CBIC Circular No. 172/04/2022-GST dated 06.07.2022 clarifies that any perquisite provided by an employer in terms of a contractual obligation (including those arising from statutory mandates) is not a supply under Section 7 of the CGST Act. Therefore once canteen facilities are extended as part of legal obligations applicable to all workers -whether regular or contractual-the perquisite assumes the character of employment-related welfare and cannot be taxed even if a partial cost recovery is made. Therefore excluding contract employees from the GST exemption would create an artificial and unlawful classification contrary to the spirit of the Factories Act and the judicial interpretation of worker. The legal and policy framework clearly supports uniform treatment of all workers whether permanent or contract when it comes to statutory canteen facilities. Eligibility to Claim Input Tax Credit - inward supplies used in the canteen for supplying food to the employees - HELD THAT - The Proviso to Section 17(5)(b)(i) of the CGST Act 2017 allows Input Tax Credit (ITC) where the provision of food or beverages is a statutory obligation and it does not make ITC eligibility conditional upon the manner in which consideration if any is received from employees. Whether the employer bears the entire cost or recovers it partially or fully from employees has no bearing on ITC entitlement. The canteen facility as previously discussed arises from the employer-employee relationship and qualifies as a perquisite under that relationship. The law does not require that such services be provided free of cost and the availability of ITC remains independent of whether the transaction results in reimbursement or not. The eligibility for ITC comes purely by virtue of the fact that the provision for canteen facility is a statutory obligation and there does not seem to be any ground to disallow the ITC benefit provided the facility is in pursuance to a statutory obligation and that GST liability has not been passed on to the employees of the company. Thus full ITC on inward supplies used in the statutory canteen is admissible irrespective of whether the applicant recovers any portion of the food cost from its employees.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Authority for Advance Ruling (AAR) are: (a) Whether Goods and Services Tax (GST) is chargeable on the amount recovered at subsidised rates from both regular and contract employees for providing food in the in-house canteen operated by the company as mandated under Section 46 of the Factories Act, 1948. (b) Whether the company is eligible to claim Input Tax Credit (ITC) on inward supplies used in the canteen for supplying food to employees, given that the canteen operation is a statutory obligation under the Factories Act. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of Subsidised Canteen Charges under GST Relevant legal framework and precedents: Section 7 of the CGST Act defines "supply" to include all forms of supply made in the course or furtherance of business for a consideration. Schedule III excludes services by an employee to the employer in relation to employment from being treated as supply. Section 46 of the Factories Act, 1948 mandates factories employing over 250 workers to provide canteen facilities. The definition of "worker" under Section 2(1) of the Factories Act includes contract labour. CBIC Circular No. 172/04/2022-GST and CBIC press releases clarify that perquisites provided under contractual or statutory obligations are not taxable supplies under GST. Judicial precedents relied upon include:
Court's interpretation and reasoning: The AAR noted that the company operates the canteen solely to comply with the statutory obligation under Section 46 of the Factories Act and not as a business activity. The canteen policy is incorporated into the employee handbook and forms part of the employment contract, extending to both regular and contract employees. The provision of subsidised food is a welfare measure and an implied contractual term arising from statutory mandate. The Authority held that since the provision of food is a perquisite embedded in the employment relationship by virtue of law, it does not constitute a "supply" under Section 7 of the CGST Act. The amounts recovered at subsidised rates from employees, whether regular or contract, are therefore not subject to GST. Key evidence and findings: The applicant's employee handbook, canteen policy, statutory provisions of the Factories Act, and relevant judicial decisions were examined. The canteen policy explicitly includes contract employees. The statutory definition of "worker" encompasses contract labour, making the canteen facility a legal obligation for all workers. Application of law to facts: The statutory mandate and judicial precedents establish that the canteen facility is an implied term of employment. The CBIC circulars reinforce that such perquisites are not taxable supplies. Hence, the subsidised food provided under statutory obligation does not attract GST. Treatment of competing arguments: The jurisdictional officer did not raise any objections or comments. The AAR addressed any potential distinction between regular and contract employees by referring to the statutory definition of "worker" and relevant case law, rejecting any artificial classification that would exclude contract employees from exemption. Conclusion: GST is not chargeable on subsidised amounts recovered from either regular or contract employees for food provided in the statutory canteen. Issue 2: Eligibility to Claim Input Tax Credit (ITC) on Canteen Supplies Relevant legal framework and precedents: Section 17(5)(b) of the CGST Act disallows ITC on food and beverages except where the employer is legally obligated to provide them under any law in force (proviso to Section 17(5)(b)). CBIC Circular No. 172/04/2022-GST clarifies that this proviso applies to the entire clause disallowing ITC on food and beverages, allowing ITC where provision is a statutory obligation. The Factories Act mandates canteen facilities, making the provision obligatory. The Advance Ruling Authority, Uttar Pradesh, in Shriram Pistons and Rings Ltd. held that ITC is admissible on canteen supplies where GST burden has not been passed on to employees. Court's interpretation and reasoning: The Authority reasoned that the proviso to Section 17(5)(b) creates a carve-out allowing ITC on food and beverages provided under statutory obligation regardless of whether the employer recovers the cost partially or fully from employees. The eligibility for ITC depends solely on the statutory mandate and not on the mode or quantum of recovery from employees. Key evidence and findings: The statutory mandate under the Factories Act, the applicant's canteen operation, CBIC circulars, and the AAR precedent from Uttar Pradesh were considered. The applicant issues food coupons at subsidised rates, but this partial recovery does not affect ITC eligibility. Application of law to facts: Since the canteen operation is obligatory under the Factories Act, the applicant is entitled to claim full ITC on inward supplies used in the canteen. The only condition is that the GST burden must not be passed on to employees, maintaining the principle that the employer bears the tax cost. Treatment of competing arguments: The Authority rejected any notion that partial or full recovery from employees would disqualify ITC, emphasizing the clear statutory language and policy intent behind the proviso. No contrary submissions were made by the jurisdictional officer. Conclusion: The company is eligible to claim full ITC on inward supplies used in the statutory canteen, subject to the condition that GST burden is not passed on to employees. 3. SIGNIFICANT HOLDINGS "Section 7 of the CGST Act defines 'supply' to include all forms of supply made in the course or furtherance of business for a consideration. However, the applicant's provision of food through its canteen does not qualify as a business activity but rather as a welfare measure arising out of statutory compliance." "Schedule III of the CGST Act states that services by an employee to the employer in the course of or in relation to his employment shall not be treated as a supply of goods or services. By extension, the provision of benefits such as canteen meals, when provided pursuant to the contract of employment or legal obligation, is also excluded from the definition of 'supply.'" "The definition of 'worker' in Section 2(1) of the Factories Act includes any person employed directly or by or through any agency (including a contractor) to work in a manufacturing process. Thus, the obligation to provide canteen facilities extends not only to employees on the rolls but also to contract labour engaged in factory operations." "CBIC Circular No. 172/04/2022-GST dated 06.07.2022 clarifies that any perquisite provided by an employer in terms of a contractual obligation (including those arising from statutory mandates) is not a 'supply' under Section 7 of the CGST Act." "The proviso to Section 17(5)(b)(i) of the CGST Act, 2017 allows Input Tax Credit (ITC) where the provision of food or beverages is a statutory obligation, and it does not make ITC eligibility conditional upon the manner in which consideration, if any, is received from employees." "Therefore, it is held that any amount collected from employees, whether as full, partial, or no recovery, towards the cost of food provided under a statutory obligation, shall not attract GST, being in the nature of an employment-related perquisite." "Full ITC on inward supplies used in the statutory canteen is admissible, irrespective of whether the applicant recovers any portion of the food cost from its employees, subject to the condition that burden of GST has not been passed on to the employees of the company." Final determinations on each issue:
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