Supply Question No.72

QUESTION
In our company we have contract agreement with caterer and providing canteen facility to our employees (which is not mandatory under factories Act) on subsidised value and approx. 25% purchase cost of the food we are recovering from our employees. Following questions are arises on this transaction:

1) We are paying 5% GST to caterers are we eligible to take ITC benefit on Canteen Expenses?
2) Is there any liability is arising on recovered amount on supply of food to employees?
3) If the tax liability arises presuming supply of food to employees what would value shall be considered for tax liability (whether full purchase value of food cost or amount recovered from employees)

ANSWER

FACTS OF THE CASE:

Canteen services are provided to employees and a subsidised rate of 25% is recovered from them. The provision of food is not mandated by the Factories Act.

LAW APPLICABLE:

1. As per clause (b) of section 17(5) CGST, the ITC on the following shall be blocked

"(b) the following supply of goods or services or both-

(i) food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or

aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance."

2. Explanation to section 15 clause (a) defines related person as

"(a) persons shall be deemed to be 'related persons' if''

(i) such persons are officers or directors of one another's businesses;

(ii) such persons are legally recognised partners in business;

(iii) such persons are employer and employee;

(iv) any person directly or indirectly owns, controls or holds twenty-five per cent or more of the outstanding voting stock or shares of both of them;

(v) one of them directly or indirectly controls the other;

(vi) both of them are directly or indirectly controlled by a third person;

(vii) together they directly or indirectly control a third person; or they are members of the same family;"

3. Valuation rule 28 dictated that in case of a transaction between related person, the value shall be

"(a) be the open market value of such supply;

(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;
(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:"

INTERPRETATION:

The provision of food to employees for a consideration constitutes a supply under section 7 of CGST and therefore the tax shall be levied u/s 9 CGST. It is important to note here that this supply is not covered under schedule III. Para (1) of the said schedule excludes "Services by an employee to the employer in the course of or in relation to his employment." from the scope of supply. This para covers only the supply flowing from employee to employer and not vice versa.

Since the transaction of supply of food from employer to employee is among related parties as defined under Explanation to Section 15 therefore Section 15(1) CGST is violated and therefore the actual transaction value (that is 25% of the actual price) can not be accepted as taxable value u/s 15. As per 15(4), the valuation rules must be referred to. Under rule 28, the value of transaction is open market value of goods or service (that is 100% of the cost of food).

When the food is procured from a catering service, a tax @ 5% is paid. However this input tax is blocked to be taken as ITC u/s 17(5)(b)(i) CGST and therefore it can not be claimed.

CONCLUSION:

So to answer your questions;

Question 1: We are paying 5% GST to caterers are we eligible to take ITC benefit on Canteen Expenses?

No. Since the ITC is blocked u/s 17(5)(b)(i) CGST, the same can not be claimed.

Question 2: Is there any liability is arising on recovered amount on supply of food to employees?

Yes. Since this is a supply u/s 7 CGST.

Question 3: If the tax liability arises presuming supply of food to employees what would value shall be considered for tax liability (whether full purchase value of food cost or amount recovered from employees)

Valuation as per Rule 28 is "Open Market Value" that is full purchase value of the food.

OUR PROFFESIONAL ADVICE :

Above answer was given in strict light of the bare act. However, in a pragmatic approach, we advise you not to deposit the tax on this transaction and following is our argument.
When food is provided to the employee it forms a part of the basic work environment provided to all the employees and this should not be given a color of supply. Because by this logic each and every disection of the "Work Environment" would result in covering various facilities under the broad defination of "Supply". For example, even tea (just like food) provided to employees can be termed as a supply even if no consideraiton is charged for it because the transactions between related parties are covered under schedule I. Various facilities like cab service, inhouse gym and recreational rooms, day care facilities for toddlers of working women are commonly provided by many companies all over India. By this logic, all these can be termed as "Supply" and would be taxed even if no consideration is recovered from employees since these transactions are covered under Schecule I.

Therefore, it becomes imperative that we differentiate between "Work Environment" and "Supply from employer to employee". Food provided should form a part of work environment even if 25% consideration is recovered from employees.

WE REITERATE THAT, this is NOT the current position of law. This is our proffessional opinion which is contrary to the law. The current law takes a stand which is unconstitutional and we expect that an amendment will be brought in law or relief will be given to all such cases by High Court / Supreme Court. (Reply dt. 26/08/2021)