28.12.2023: No Input Tax Credit admissible on subsidised food being served to employees: Himachal Pradesh AAAR

The Himachal Pradesh Appellant Authority for Advance Rulings, in the case of M/S. FEDERAL-MOGUL ANAND BEARINGS INDIA LIMITED vide Order No. HP/AAAR/RP-DY/FM/01/2023 dated 26.09.2023, has held that GST will be paid on the subsidised food and ITC will not be available. 

In this case, the Appellant involved in the business of manufacture, supply and distribution of automotive components used in two/three/four-wheeler automobiles. The Appellant had set up canteen facility at the unit, for the benefit of its employees and workers, in accordance with the provisions of the Factories Act, 1948, wherein a canteen has to be provided and maintained by the specified factory for the use of the workers in case more than two hundred and fifty workers are ordinarily employed, a canteen has to be provided and maintained by the specified factory for the use of the workers.

The Appellant had sought Advance Rulings on the following issues:

  1. “Whether the subsidized deduction made by the Appellant from the Employees who are availing food in the factory would be considered as a “supply” by the Appellant under the provisions of Section 7 of Central Goods and Service Tax Act, 2047 and Himachal Pradesh Goods and Service Tax Act, 2017.
  2. Whether Input Tax Credit (ITC), on the GST charged by the Canteen Service Provider, would be eligible for availment to the Appellant.

The Advance Rulings, Himachal Pradesh vide Order No. HP-AAR-21/2021-7865-68 dated 22.03.2023, in its rulings has held that there is no contractual agreement between the appellant and the employees/ contract workers for providing subsidised food and, therefore, benefit of the circular cannot be extended to the appellant. 

The AAR in its rulings referred Circular No. 172/04/2022-GST dated 06.07.2022, wherein it is stated it is mandated that any perk provided to the employee, in terms of contractual agreement, is outside the purview of GST.

The Appellant aggrieved by the decision of the AAR, Himachal Pradesh and preferred the same before the AAAR. The Appellant contended that since it is statutorily mandated in the Factories Act that canteen facilities are to be established in the factory, therefore, it is immaterial whether such a clause is mentioned in the contractual contract or not. Since, under the law, employees have the right to receive benefits, therefore, absence of this clause in the employment agreement cannot be the basis for denial of benefit of the above circular in his case. The Appellant in his contention stressed that  circulars issued by CBIC are binding on and to be followed by revenue. 

After going through the facts presented and arguments made, the AAAR observed that services provided by the employer to the employee, in the course of employment, are out of the purview of GST. Naturally, an employer pays some compensation, either in monetary (money) form or otherwise (kind), to the employee.

The AAAR, Himachal Pradesh stated that Employment Agreement lists out the compensation which is agreed to be granted by the employer to the employees towards their services. If any perk is mentioned in the employment contract, then it becomes binding for the employer to provide the same to the employees, otherwise such an employer can be sued in the court of law for the breach of condition of employment contract. Therefore, anything provided beyond the employment contract, is a part of sweet will or largesse on the part of employer and cannot be insisted upon by an employee. Viewed from this angle, a perk, which is not specified in the employee contract, is not in lieu of services, supplied by the employer to the employee but the largesse or matter of good will on part of such employer. Therefore, absence of mention about supply of subsidised food, in employment contract, cannot be equated with perk mentioned in the employment contract as talked about in Circular No. 172/04/2022-GST dated 06.07.2022 of CBIC.

Therefore, “absence of mention about supply of subsidised food, in an employment contract, cannot be equated with perk mentioned in the employment contract as talked about in the above referred CBIC circular,” AAAR said in its recent ruling, and held the AAR ruling on ineligibility of ITC.

Though the orders of the AAAR and AAR (Advance Rulings Authority) are applicable on the applicant and jurisdictional tax officials only, many such rulings have become the base for policy decisions. Since there have been contrary rulings on the issue of applicability of GST on subsidised food provided to employees, it is expected that the GST Council would soon come out with a clear direction on it.

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