Background of the case
- Applicant is the business of manufacturing and supply of auto parts.
- Company is mandated under the Factories Act 1948 to provide canteen / food facilities to its employees.
- Applicant company spends on purchase of utensils, fuel, utilities etc for the purpose of maintenance and operation of the canteen.
- A nominal amount is recovered from the employees towards the food by way of coupons
- The company also buys gold, dry fruits, sweets, electronics etc for the purpose of gifting it to employees, suppliers and customers and uses it for gifting and business promotion.
Issues to be resolved:
- Whether the company is eligible to take Input Tax Credit on GST charged by vendor for canteen service availed by its employees?
- Whether distribution of Coupons amount employees attract GST Liability?
- Is it correct to determine fair market value of coupons based on the rate charged to employees?
- Whether the company is eligible to take input tax credit on business promotion expenditure or not?
Reply by AAR:
The conjoint reading of section 16 and 17(5)(b) of CGST Act suggest that the input tax credit 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.
In the instant case, the applicant is a registered taxable person who is paying tax (GST) on the inward supply of goods or services or both, food and catering service in this case. But the applicant is engaged in the business of manufacturing of automobiles and not in the business of provision of food or catering. The mandate 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, 2017 The applicant has relied upon the following proviso for its claim of input tax credit.
“Provided that the input tax credit 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.”
But a careful reading of section 17(5) would suggest that this proviso is with regard to the provision contained in section 17(5)(b)(iii) and not section 17(5)(b)(i). In light of the above provisions, the applicant is not eligible for claim of input tax credit with respect to the goods and services tax paid by it against the receipt of food and catering services supplied by the vendor.
As per agreement between the applicant and canteen service provider, 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 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.
The applicant has further contended that 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 under Para 1 of Schedule III of the CGST Act, 2017 But Para 1 of the Schedule reads:-
“Services by an employee to the employer in the course of or in relation to his employment.” It suggests that the services of employees to the employer are excluded from the purview of GST and not vice-versa. Hence, the coupons issued by the applicant are taxable.
The applicant company purchases sweets, dry fruits, coins etc for the purpose of business promotion. The company contends that, being in manufacturing business, mainly dealing in the manufacturing of automobile parts, the company has to give some benefits to its customers and employees by way of presents in order to promote its business and if the applicant company would be denied taking credit on expenses related to business promotion, then the same shall lead to a cascading effect of tax and may result in a step back option for company from the business activity. The applicant has also relied upon some rulings of the Bombay High Court in this regard.
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) expressly bars input tax credit in respect of disposal of goods by way of gifts.