ITC is inadmissible on service charges paid for canteen operator as per Section 17(5)(b)(i) of CGST Act – AAR

Introduction: An advanced ruling is a mechanism whereby taxpayers can get answers or clarifications regarding supply of goods and services, directly from tax authorities and the primary objectives for such a mechanism are to reduce litigation, attract FDI due to transparent tax liability, provide certainty with respect to tax liability and disclose ruling in an inexpensive and transparent manner. The Authority for Advanced Ruling (AAR) constituted by the tax authorities interprets tax laws for the taxpayers and it was created to address any issues faced by taxpayers and assist them by providing a decision on the clarification sought. The AAR’s appellate authority is the AAAR (Appellate Authority or National Appellate Authority for Advanced Ruling). Section 95 to Section 106 in Chapter XVII of CGST Act covers the procedures and rules related to advance rulings. An application is made by the taxpayer on the clarification sought by them. The taxpayer is provided an opportunity of being heard by the AAR. If there is consensus on resolution on the clarification sought between the AAR and taxpayer, an ‘Advance Ruling’ is issued by the AAR and on the contrary, the matter is referred to the AAAR.

The question of law which is address through this AAR is as follows:

• Whether ITC paid to service provider, running canteen inside factory is available to service recipient and if yes, if the value of service exclude nominal amount recovered from employee for using canteen facility.

Facts of the application made to AAR, by taxpayer ‘M/S. Tata Motors Ltd., (applicant)’, dated 1-Jul-2019:

The applicant, M/S. Tata Motors Ltd., operates a factory where it has to maintain a canteen facility as per Factories Act,1948. The applicant has outsourced the canteen management works to a service provider and pays the service provider for the management and maintenance of canteen facility in their premises. The applicant further recovers a nominal amount from its employees for availing the canteen facility from their salary and bears the remaining cost as salary cost. The canteen facility provided is a benefit enjoyed by the employees of the applicant and forms part of every employees ‘cost to company (CTC)’. The applicant submitted that as per Section 17(5)(b) of CGST Act, ITC on goods or services will be available, where it is an obligation for the employer to provide certain facilities to its employees as per any law in force. The applicant has further presented that they are not into the business of canteen operation. Even though, the applicant recovers a nominal amount from employee for using the canteen, the applicant states that the recovered money will not amount to ‘Supply’ as upheld by Maharashtra AAR in Jotun India (P) Ltd – 2019-TIOL-312-AAR-GST.

The clarification which the applicant has sought through the application is whether the applicant can claim ITC on the service charges paid to service provider and if yes, should the value of services exclude the nominal charges recovered by the applicant from employees for using the canteen facility. And also if GST will be applicable on the recovered nominal value from employee for availing canteen facility.

Observations and final ruling by AAR vide Order No. GUJ/GAAR/R/39/2021 dated 30.Jul.2021:

The AAR acknowledged the presentations made by the applicant and reiterated the clarification sought by the applicant. First the AAR quoted Section 17(5)(b) of the CGST Act as follows.

“(17(5)(b) : Notwithstanding anything contained in sub-section(f) of Section 16 and sub-section(f) of Section 18, input tax credit shall not be available in respect of the following, namely:-

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

(i)food and beverages, outdoor catering, beauty treatment, health service, 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:

Provided that the input tax credit in respect of such goods and services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of taxable composite or mixed supply;

(ii)……
(iii)…….

Provided that the ITC in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”

The AAR has made a distinction in the colon and semi-colon being used in drafting the section and opined that a colon is used to indicate an example or list to follow whereas a semi-colon is used to indicate that the statements are independent of each other and can stand alone as complete sentences. It has further clarified that sub-clause 17(5)(b)(i) ending with a colon followed by a proviso ending with a semi-colon are independent of sub-clause 17(5)(b)(iii) and the underlines(bold) part pertains to sub-clause 17(5)(b)(iii) and not 17(5)(b)(i). It has also quoted several case laws to reiterate its point as in PIL of Shri Jayant Verma Vs. Union of India, Mr.Vincent Mathew Vs. LIC of India etc. On the case law presented by the applicant on the portion of GST not being applicable where worker bears the cost, the AAR ignores the case as it was in the pre-GST era that the pronouncement was made.

+The AAR further ruled that ITC is inadmissible on service charges paid by applicant to service provider(canteen operator) as per Section 17(5)(b)(i) and GST is not leviable on the nominal charges paid by employee for availing canteen facility.

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