WHETHER ITC AVAILABLE ON CANTEEN SERVICES AND BUSINESS PROMOTION EXPENSES INCURRED BY THE COMPANY
In the recent judgment of the Hon’ble AAR Haryana in M/s. Musashi Auto Parts Pvt. Ltd. [Advance Ruling No. HAR/HAAR/R/2019-20/18 dated February 4, 2020] has held that ITC is not available with respect to canteen services provided by the employer to their employees and on business promotion expenses. Further, held that the distribution of food coupons among employees for part consideration will attract tax liability and the coupon value will form part of total taxable value of the service provider i.e., caterer.
Facts of the case are as below:
M/s. Musashi Auto Parts Pvt. Ltd. (“Applicant”) is engaged in the business of manufacturing and supply of auto parts. It is mandatory for the Applicant to provide food facilities for employees, since the number of employees are more than 250 as per Section 46 of the Factories Act, 1948 (“Factories Act”).
The Applicant incurs lot of expenses on maintenance of canteen facility including deployment of its own employees for supervision and management of canteen operations. The Applicant also recovers a nominal amount (25% of the value charged by caterer) from the employees in form of card punch per meal or coupon to maintain discipline and prevent wastage of food and resources.
Further, the Applicant also purchases edible items like sweets, dry fruits and gifts like electronics, gold and silver coins/articles for the purpose of business promotion.
Issues:-
- Whether the Applicant is eligible to claim ITC on the canteen services and on business promotion expenses?
- Whether distribution of coupons to employees attracts GST liability?
Held that:-
The Hon’ble AAR Haryana in Advance Ruling No. HAR/HAAR/R/2019-20/18 dated February 4, 2020 has held as under:
ITC on Canteen Services
- Observed that, the co joint reading of Section 16 and 17(5)(b) of the CGST Act suggests that the ITC with respect to food and beverages and outdoor catering shall be available only 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 a taxable composite or mixed supply.
- Further observed that, the Applicant is engaged in the business of manufacturing of automobiles and not in the business of provision of food or catering. The mandatory part of the Factories Act to provide meals to the employees does not mean that such provision is in the course of furtherance of business. Even if the provision of food and catering had been in the course of furtherance of business, the Applicant would not have been entitled to the input tax credit in light of the express bar provided under Section 17(5)(b)(i) of the CGST Act.
- Rejected the claim of the Applicant to take ITC for the canteen services as per the proviso under Section 17(5)(b) of the CGST Act and stated that a careful reading of Section 17(5) of the CGST Act suggests that said proviso is with regard to the provision contained in Section 17(5)(b)(iii) and not Section 17(5)(b)(i)
- Held that, the Applicant is not eligible to claim ITC with respect to the GST paid by it against the receipt of food and catering services supplied by the vendor.
Distribution of Coupons:
Observed that, the Applicant was incurring expenditure with regard to many facilities like free cost of LPG gas supply, refrigerator, furniture etc. provided to the caterer. If the Applicant did not provide the supplies free of cost to the caterer, the caterer would have had to make arrangements and incur expenditure and it would have led to an increase in the cost of supply. But in this case, these facilities are provided by the Applicant free of cost and in turn, the caterer provides food to the employees of the Applicant at a subsidized rate. Further observed that, the Applicant recovers a part of the amount paid to the caterer from the employees in order to maintain discipline and prevent food wastage but in essence, these are charges recovered by the Applicant in lieu of facilities provided to the caterer. Therefore, the Applicant has been incurring the cost of LPG etc. and the caterer is subsidizing the food in lieu of that, therefore, in light of the provisions of Section 15(2)(b) and 15(2)(e) of the CGST Act, the value of coupon is a part of the value of services provided by the caterer and as such the coupon value is taxable. Rejected the Applicant’s contention that as per Para 1 of Schedule lll of the CGST Act, the amount recovered from the employees against the coupon is under employer-employee relationship and anything done under such relationship is exempt from being taxed. ITC on business promotion expenses: Observed that, the purchase and distribution of sweets, dry fruits, coins or silver items for the purpose of business promotion cannot be termed as an activity carried out in the course or furtherance of business by any stretch of imagination. Section 17(5)(h) of the CGST Act expressly bars ITC in respect of disposal of goods by way of gifts. Held that, the Applicant has itself submitted that it was distributing these items to its customers and employees by way of presents. Hence, the Applicant is not eligible for claiming ITC on these items. |
Our Views:- It was previously held by the Hon’ble AAAR, Kerala in the case of in M/s Caltech Polymers Pvt. Ltd. [Case No. CT/7726/2018-C3 order dated September 25, 2018] that the canteen services provided by the company to their employees for no profit is in course of furtherance of business, as the term business under Section 2(17) of the CGST Act also includes ancillary and incidental activities to the main business. Further, after the amendment in Section 17(5) of the CGST Act vide Central Goods and Services Tax (Amendment) Act, 2018 w.e.f February 1, 2019, a proviso got inserted under Section 17(5)(b) of the CGST Act which is applicable to all the sub-clauses of Section 17(5)(b) of the CGST Act and not only to sub-clause (iii) of Section 17(5)(b). Therefore, ITC is available on goods and services under Section 17(5)(b) of the CGST Act, where it is obligatory like under factories act for an employer to provide the same to its employees under any law for the time being in force. But it is to be noted that credit may not be admissible when there is no obligation upon the employer to provide such services to its employees, like a service provider not governed by the provisions of Factories Act and allied laws, or when a concessional rate is charged i.e. taxable at 5% GST (with no ITC). |
Also in respect of goods being distributed by the organization to its customers/ dealers/ distributors are done by them to promote their sales and brand and these expenses are already included in the cost of the items manufactured or in the provision of services. Therefore, ideally, they should not be regarded as gifts as per the provision of Section 17(5)(h) of the CGST Act which denies ITC on goods lost, stolen, destroyed, written of,f or disposed of by way of gift or free samples. “Above are the views of the authors and others views on the above are welcomed.” |
