Admissibility of ITC on Canteen Facility mandated under Factories Act

Topics covered in this article are as follows:

1. Introduction
2. Relevant Legal Provisions under GST Law relating to Claim of Input Tax Credit
3. Conclusion drawn by the Gujarat AAR
4. Taxmann’s Comments on ITC admissibility
5. Conclusion

1. Introduction

The Factories Act, 1948 mandates[1] for maintaining and providing the canteen facility for the employees/workers where the number of workers employed in a factory exceeds 250.

In this regard, an employer can either provide such facility on their own or it can be outsourced to the third party caterers. As a general practice, the companies outsource the given requirement to the third party caterers wherein the caterers provides canteen services within the employer’s factory.

In many cases, the employer charges a nominal amount from the employees for providing the food in the factory premises (hereinafter referred as ‘Partial recovery for canteen services’).

In a recent Advance Ruling^[2], the Gujarat Authority of Advance Ruling (‘AAR’) held that Input Tax Credit (‘ITC’) of GST paid on the canteen facility provided by the applicant to its employees under Factories Act, 1948, would not be available.

In this write-up, we have analysed the admissibility of the ITC of the GST paid on the impugned Canteen Services and conclusions made by the Gujarat AAR (supra) in this regard.

2. Relevant Legal Provisions under GST Law relating to Claim of Input Tax Credit

Section 16 of the CGST Act, 2017 enables the registered person to avail ITC on goods or/and services which are used or intended to be used in the course or furtherance of business.

Further, Section 17(5) of the CGST Act prescribes a list of few goods and services on which ITC is not admissible. Relevant provision reads as under:

Section 17: Apportionment of credit and blocked credits

(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub- section (1) 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 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

As per the above, ITC on food and beverages, outdoor catering, etc. is not available. However, it would be available where the same is used in making outward supply (same category of supply or as an element of a taxable composite or mixed supply).

Further, the proviso given after the sub-clause (iii) allows the registered person to claim ITC where such goods or services are mandatorily required to be provided under any law.

3. Conclusion drawn by the Gujarat AAR

 The Gujarat AAR (supra) held that the proviso given after sub-clause (iii) is only applicable to Section 17(5)(b)(iii) [i.e. travel benefits extended to employees] and not to Section 17(5)(b)(i) [i.e. Food and beverages, outdoor catering…] and thus, the ITC of GST paid on canteen facility provided by applicant to its employees mandated under the Factories Act, 1948 is not available.

The AAR observed that sub-clause (i) ends with colon (:) and is followed by a proviso and this proviso ends with a semicolon (;). Therefore, sub-clause (i) is to be read independently i.e. independent of Section 17(5)(b)(iii) and proviso given after it. The proviso given after sub-clause (iii) is not connected to the sub-clause (i) and same cannot be read with the later.

4. Taxmann’s Comments on ITC admissibility

4.1 Eligibility under Section 16 of the CGST Act

 The meaning of the expression ‘in the course of business’ used in Section 16 can be said as the way the business (which may be of a purely private or trivial nature) is conducted[3].

The Hon’ble Supreme Court in a case[4] held that the expression ‘for the purpose of the business’ may include not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery. It may include measure for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile titles. It may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business. It may comprehend many other acts incidental to the carrying on of a business.

From the above, it can be inferred that expenses incurred (mandated by law or otherwise also) by a taxable person to run the business should be referred as expenditure incurred in the course of business. In order to run the business it is mandatory for the specified employers to provide the canteen facilities to the employees therefore, such expenses can be referred as expenditure incurred in the course of business.

Given the above, it can be said that impugned canteen expenses are eligible for the ITC under Section 16 of the CGST Act (subject to satisfaction of other conditions given under the GST laws).

4.2 Restriction under Section 17(5) of CGST Act

In our view, the proviso given after clause (iii) would be applicable on all the clauses given under Section 17(5)(b). The use of colon and semi-colon in the impugned provision is in line with the standard format applied by the legislature while incorporating the provisos under the statutes. Therefore, the argument that the usage of semi-colon after the proviso to sub-clause (i) restricts the applicability of proviso given after sub-clause (iii) to sub-clause (i) does not seem correct.

Notably, the indent of the proviso given after sub clause (iii) suggests that the same is applicable only to sub clause (iii) [this has not been appreciated in the order by the Gujarat AAR). This is due to the reason that the alignment of proviso has been placed in such a way that it seems that it falls within the scope of sub-clause (iii) only and thereby, not applicable for the whole clause.

However, in this regard, we may note that the expression ‘such goods or services’ used in the impugned proviso suggests that the proviso aims to extend the benefit not only in respect of ‘services’ but to ‘goods’ also. Whereas, sub-clause (iii) only provides for blocking of ITC w.r.t. ‘travel benefits extended to employees’ which are in the nature of provision of services and not goods. A similar clause was also there in the erstwhile regime of Cenvat Credit in the definition of ‘Input Services’. No such expression was used in the definition of Inputs. This further emphasis that the clause (iii) merely covers the benefits in the form of services and not goods.

It is a well settled principle that while interpreting a law one would need to give importance to each and every expression/word given in the law. In the given case, though the indent of the proviso seems to be applicable for sub-clause (iii), however, the usage of the words ‘goods or both’ in the impugned proviso suggests that it would be applicable to all the clauses given under Section 17(5) (b).

Further, we may also derive the intention of the law from the documents of NACIN and the GST Council Meetings.

The provision of blocked credit [i.e. Section 17(5)] was amended by the CGST Amendment Act, 2018 (effective from 01 February, 2019). The agenda document[5] of 28^th GST Council meeting discusses the amendment and acknowledged that earlier ITC was not available in respect of food and beverages, health benefits, travel benefits to employees, etc. and thus clause is to be amended to allow ITC on such goods and services where the provision of such goods or services or both is obligatory for an employer to provide to its employees under any law for the time being in force.

Further, the National Academy of Customs, Indirect Taxes and Narcotics (NACIN) has also clarified[6] that ITC would be allowed in respect of food and beverages, health services, travel benefits to employees, etc., after insertion of the impugned proviso.

In our view, since, sub-clause (iii) cannot be referred for the purpose of identifying ‘such goods’ therefore the only interpretation that lies in hands is that the given proviso applies on the all sub-clauses given in Section 17(5)(b).

Considering the above, we are having a view that the given proviso cannot be read independently with sub-clause (iii) but must be read in conjunction with all the three sub-clauses. Thereby, enabling the benefit of ITC not only with respect to the travel benefits extended to employees but also to food and beverages, outdoor catering, etc., where it is obligatory for the employer to provide such goods or services or both to its employees under any law.

5. Conclusion

In the above backdrop, it can be said that proviso given after sub-clause (iii) would be applicable to the whole of clause (b) and ITC would be available to the employer on expenses incurred by him to maintain or provide the canteen facility to its employees, to fulfil the mandatory requirement given under the Factories Act, 1948.

[1] Section 46 of the Factories Act, 1948

[2] Tata Motors Ltd., In re [2021] 129 taxmann.com 277 (AAR – GUJARAT)

[3] Palaparthi Ramamurthi AIR 1968 Bom 112

[4] Malayalam Plantation Ltd. 1964 AIR 1722

[5] Agenda for 28^th GST Council Meeting (Volume I)

[6] GST Weekly Update dated 14-07-2018