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ITC on Food supply services arranged at Factory canteen for employees
By G. Mani, Advocate
Aug 25, 2021

ONE of the biggest conundrums revolving around GST Law is Input Tax Credit (hereafter referred to as ITC) eligibility on food supply service arranged at Factory canteen for employees. The recent decision of the Authority for Advance Ruling, Gujarat in the case of M/s Tata Motors Ltd. has compelled me to share my views on this for the learned readers' perusal.

All of you must be aware that it took along time for settlement of cenvat credit eligibility litigation on majority of the services during the Pre GST Regime. Even after the said cenvat credit settlement during the period 2004-2012,when Negative List of Services was introduced for taxability of services effective from 1 st July, 2012; a large number of Forums still went and requested the Government to provide a Negative List of cenvat credit so as to have hassle free compliance. Such was the array of interpretations that were possible because of the language used in the statutory provisions.

As a surprise,GST Regime carried a Negative List of ITC in the form of Blocked Credit through Section 17(5) of the CGST Act (hereinafter referred to as the Act). But the drafting has not been done with an independent mind set of matching to a major tax reform GST.What was stated in the exclusion clause of erstwhile input &input service definition Rule 2(k)& 2(l) of Cenvat Credit Rules, 2004 has been simply copied. As a result, erstwhile settled cases have again come to the surface for another round of litigation in the GST Regime.

However in the GST Regime, sincere and concrete attempts are being made in the form of GST Council Meet,where proposals for law amendment and reduction of tax rates are being made after taking into consideration the ambiguity in law and the need to ensure ease of doing business. In the 28 th GST Council Meeting held on 21.07.2018, one of the proposals was to amend blocked credit provision Section 17(5) of the Act, so as to expand ITC admissibility and also to provide clarity on certain ineligibility.

Gujarat Authority for Advance Ruling dis-allows ITC

But the Gujarat Authority for Advance Ruling without considering the background of law amendment proposed by the GST Council has rejected the captioned ITC benefit by citing and relying on punctuations like "colon" and "semi colon".AAR has refused to consider the citation of the case law CCE, Nagpur vs. Ultratech Cements Ltd. – TOG-1858-HC-BOM-ST-2010 on the point that the decision was rendered in Service Tax era whereas the present issue is to be decided within the confines of GST Act.If that is the case how the Authority can rely on Pre GST case laws to apply "colon" and "semi colon" punctuation theory is not clear.

The case laws referred and cited by AAR are completely in different context and some of them are regarding customs tariff classification.With regards to reading of the service tax exemption notification (clause 2(s) of Notification No. 25/2012 – S.T. dated 20.06.2012) to "governmental authority" decided by Patna High Court in the case of Shapoorji Paloonji & Company Pvt. Ltd. vs. CCE, Patna – TOG-404-HC-PTN-ST-2016 the same has been appealed and it is pending in the Supreme Court. Above all it is very important to note that the said decision has been distinguished by the same Authority himself after reading with the same punctuation of "semi colon" in the GST exemption notification to "governmental authority"(Sl.no.4 of Notification No.12/2017 – C.T. dated 28.06.2017) in the case of National Dairy Development Board– TOG-168-ARA-GST-2019 While the former case law pertains to Service Tax era the latter case law is in GST era.

Blocked credit amendment through Finance Act, 2018

The correct approach to decide the captioned ITC eligibility is comparing Section 17(5) (a) & (b) of the Act before and after the amendment carried out through Finance Act, 2018 effective from 1 st February, 2019.Following table shows the comparison.

Section 17(5) (a) & (b)Section 17(5) (a) & (b)

Before 01.02.2019 After 01.02.2019

Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(a)    motor vehicles and other conveyances except when they are used–

(i)        for making the following taxable supplies, namely:—

(A)    further supply of such vehicles or conveyances; or

(B)    transportation of passengers; or

(C)   imparting training on driving, flying, navigating such vehicles or conveyances;

(ii)       for transportation of goods;

b)    the following supply of goods or services or both—

(i)       food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where an inward supply of goods or services or both of a particular category 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;

(ii)       membership of a club, health and fitness centre;

(iii)      rent-a-cab, life insurance and health insurance except where––

(A)    the Government notifies the services which are obligatory for an employer to provide to its employees under any law for the time being in force; or

(B)    such inward supply of goods or services or both of a particular category is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as part of a taxable composite or mixed supply; and

(iv)       travel benefits extended to employees on vacation such as leave or home travel concession;

Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(a)    motor vehicles for transportation of persons having approved seating capacity of not more than thirteen persons (including the driver), except when they are used for making the following taxable supplies, namely:—

(A)    further supply of such motor vehicles; or

B.    transportation of passengers; or

C.   imparting training on driving such motor vehicles;

(aa) vessels and aircraft except when they are used––

(i)    for making the following taxable supplies, namely:—

(A)    further supply of such vessels or aircraft; or

(B)    transportation of passengers; or

(C)   imparting training on navigating such vessels; or

(D)   imparting training on flying such aircraft;

(ii)    for transportation of goods;

(ab) services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa):

Provided that the input tax credit in respect of such services shall be available—

(i)  where the motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) are used for the purposes specified therein;

(ii) where received by a taxable person engaged—

(I)   in the manufacture of such motor vehicles, vessels or aircraft; or

(II) in the supply of general insurance services in respect of such motor vehicles, vessels or aircraft insured by him;

(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:

Provided that the input tax credit in respect of such goods or 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 a taxable composite or mixed supply;

(ii)      membership of a club, health and fitness centre; and

(iii)     travel benefits extended to employees on vacation such as leave or home travel concession:

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."

Changes effected

It can be seen that the following changes have been effected through the amendment.

1. From total blocking of ITC on Motor Vehicles, an exception has been carved out to Motor Vehicles with a seating capacity of over 13 Passengers.

2. Other conveyance has been specified for vessels & air crafts and ITC has been allowed similar to Motor Vehicles, without any number of Passengers condition.

3. ITC benefit has been extended to manufacturer of motor vehicles, vessels and aircrafts.

4. Ineligibility of ITC for general insurance on motor vehicle up to the seating capacity of 13 passengers, vessels and aircrafts has been made it transparent without any ambiguity.

5. ITC benefit allowed for mandatory obligation by law for an employer to provide to its employees viz. i) rent a cab ii) life insurance and iii) health insurance has been extended to i) food and beverages ii) outdoor catering iii) health service (which includes both life and health insurance) iv) cosmetic & plastic surgery v) leasing, renting or hiring of motor vehicles, vessels & aircrafts vi) membership of a club, health & fitness centre and vii) travel benefits extended to employees on vacation such as leave or home travel concession.

Background and Facts for amendment

It is pertinent to note that the above amendment has been carried out after detailed discussion in the 28 th GST Council Meet for extending ITC eligibility. AAR's decision to consider the mandatory law provision only to the clause (b)(iii) and not to the entire clause(b) is a mis-conception of a statutory provision and will not stand before the eyes of law in the backdrop of the following facts.

1. 28 th GST council Meet has recommended extension of ITC benefit and not a restriction of ITC.

2. Rent a cab, life insurance and health insurance as appeared before amendment in clause (b) (iii) has been merged with food and beverages, outdoor catering group after amendment in clause (b) (i).

3. If AAR's interpretation is accepted then ITC allowed before amendment for Rent a cab, life insurance and health insurance based on mandatory law condition shall not be allowed after the amendment effective from 01.02.2019. GST Council's meet decision and the purpose of law amendment through Finance Act, 2018 will get defeated.

4. C.B.I. & C Press Note No.177/2018 dated 21.07.2018 issued after 28 th GST Council Meet vide para no.9 states that "scope of ITC is being widened and it would now be me made available with respect to goods or services which are obligatory for an employer to provide to its employees, under any law for the time being in force.

Classification of canteen service

Further in the case of Rashmi Hospitality Services Pvt. Ltd.– TOG-67-ARA-GST-2018 the AAR Gujarat has held that supply of food by a third party to an Industrial canteen is liable to be classified as an "outdoor catering service" with a levy @ 18% and the same has been upheld by AAAR– TOG-152-AAAR-GST-2019. Here also one can find that it is not classifiable as "outdoor catering service" under SAC 996334 as "outdoor catering service" is meant only for events, marriage and other functions. It is rightly classifiable as services provided at canteen under SAC 996333 for which Board Circular no.28/02/2018 – GST dated 08.01.2018 clarifying for mess facility to educational institution is equally applicable.

After the issuance of Notification No.20/2019 – C.T. (Rate) dated 30.09.2019 it has become very clear without any ambiguity that third party services at Industrial canteen will fall as a "Restaurant service provided other than the specified premises with SAC 996331 attracting a levy @5% under sl.no.7(1)(ii) of the said Notification.The notification carries a condition that ITC charged on goods and services used in supplying the service has not been taken. This condition is for the service provider and not for the service recipient. Hence a factory having more than 250 workmen which has mandatory obligation to provide canteen facility to workmen in terms of Section 46 of Factories Act, 1948 is entitled to ITC for the food supply services provided the said facility is arranged in their Industrial canteen through a third party caterer.

If the canteen is run by the company without involving any third-party then the company being a service provider is not eligible to take ITC of goods and services used for running such canteen. Also if the company is having total number of workmen below 250and not covered under Section 46 of the Factories Act then ITC is not admissible even for the third party caterer service arranged at the Industrial canteen.

Some parting words

I would also like to inform that in some quarters, there is a thought revolving around paying GST @18% and taking ITC without any dispute in the future. This is a myth and contrary to the notification & classification. Notification No.11/2017 – C.T. (Rate) dated 28.06.2017 as amended by Notification No.20/2019 – C.T. (Rate) dated 30.09.2019 is not an optional one – it is anexemption notification with a condition without any option.

(The views expressed are strictly personal)