Subsidized deduction from employees towards canteen-facility taxable; CBIC Press-Release applicable when services provided FOC

In the matter of Federal Mogul Goetze India Ltd

Karnataka AAR rules that the subsidized deduction made by employer (Applicant manufacturing auto components in its factory) from its 3200 employees working in factory who are availing food from in-house canteen facility “would be considered towards ‘supply’ of canteen services” u/s 7 of CGST/KGST Act 2017; AAR observes that, since the services are covered under services provided in canteen and other establishments classified under SAC 996333, said services are taxable @5% without ITC as per Sl. No. 7 of Notification No. 11/2017-CT (R); Consequently, AAR clarifies that applicant is not entitled to ITC of the GST paid on manpower supply services that are used for providing canteen facility to employers; Observes that applicant has engaged the services of third party for manpower supply services to operate and manage the canteen within the factory premises as mandated under the Factories Act, 1948; Further, AAR notes that it is an admitted fact that Applicant themselves are running the canteen and is charging Rs. 50 per month from union employees and Rs 10 per month from contractual employees, and fact that these charges are pre-decided and deducted from employees salary establishes “contractual relationship” between Applicant and its employees; Explains that the Applicant, in fact of the case, satisfies the 3 limbs of Section 7; On the first limb, since the Applicant has agreed to abide by the Factories Act, “providing canteen facilities to employees is legal requirement and not an option”  and the existence of contractual relationship is further evident from the fact that Applicant is charging its employees; AAR states that the fact that ‘consideration’ is being charged and paid by employees is sufficient to establish contractual relationship with reciprocal obligations leading to supply of service;  As regard the third limb (i.e. supply effected in course or furtherance of business), AAR finds that, the Applicant as a ‘manufacturer’ whose activity is covered u/s 2(17(a), is running the canteen  facility which is incidental to main manufacturing activity which is covered in ‘business’ u/s 2(17)(b) and said facility undoubtedly helps in progress of business; Rules out the  applicability of CBIC Press Release dated July 10, 2017 (para 3) prescribing no GST for supply by employer to employee in terms of contractual agreement, highlights that the said press release is applicable when services are provided ‘free of charge’ but in this case, Applicant is recovering consideration for supply which is deducted from salary on monthly basis; On the issue of valuation, elucidates that since the applicant and employees are related persons, clause (c) of Rule 28 (dealing with value of supplies between distinct or related persons) alone is applicable and therefore, GST is liable to be paid by the applicant on the value of said supply to be determined under rule 30 or 31 of CGST Rules.