Case Law Details
In re Musashi Auto Parts India Private Limited (GST AAAR Haryana)
The Appellant has claimed that the gift items have been used in ‘Business Promotion’ viz. the furtherance of business and credit is admissible in terms of Section 16 of the CGST/SGST Acts.
ITC cannot be taken by a taxable person on the items i.e. goods and services which are used for personal consumption. The items mentioned by the Appellant viz. Sweets; Dry fruits; Electronic Items and Gold & Silver Coins etc. are essentially being given to the relevant persons as items of personal use/ consumption. The ITC, thus, is not admissible on the same.
Read AAR Order : No ITC on distribution of sweets, dry fruits etc for business promotion
FULL TEXT OF THE ORDER OF APPELLATE AUTHORITY FOR ADVANCE RULING, HARYANA
The present appeal has been filed under Section 100 (1) of Central Goods and Service Tax Act, 2017 /Haryana Goods and Service Tax Act, 2017 (hereinafter referred to as CGST Act / HGST Act, respectively) by M/s. Musashi Auto Parts India Private Limited against the Advance Ruling No. HAR/HAAR/R/2019-20/18 issued vide Memo No. 1058/AAR dated 28.08.2020 in Application No. 18/2019-20 dated 22.11.20/9.
A copy of order of the Advance Ruling Authority issued on 28.08.2020 was received by the appellant on 31.08.2020 and the appeal has been filed on 25.09.2020 which is within time in terms of Section 100(2) of the CGST Act 2017.
I. BRIEF FACTS OF THE CASE
M/s Musashi Auto Parts India Pvt. Ltd., Rewari is engaged in the manufacture and supply of auto parts and is registered under GST in Faridabad.
In terms of Factories Act 1948 the Appellant are mandatorily providing canteen facility as they have 2400 full-time employees, viz. more than 250. A nominal amount, i.e. without commercial objective, is recovered to avoid wastage of food and resource and in order to maintain discipline. The same is recovered by way of card punch or coupon sale.
Secondly, the applicant purchases Gold/Silver coins, electronic gift items, sweets, dry fruits etc. for the purpose of business promotion.
II. QUESTIONS FOR ADVANCE RULING
Advance Ruling was requested on the following questions:-
CANTEEN SERVICES
a. “Whether company is eligible to take Input Tax Credit on GST charged by vendor for Canteen services availed by it for its employees;
b. Whether distribution of Coupons among employees attracts GST liability? If yes, under which SAC (Services Accounting Code) tax shall be deducted;
c. Is it correct to determine the fair market value of coupons, based on the rate charged to employees;”
DISTRIBUTION OF GIFT ITEMS FOR BUSINESS PROMOTION
a. “Whether company is eligible to take ITC on such business promotion expenses or not?”
ADVANCE RULING
The Advance Ruling Authority gave the following Ruling:-
a. “The company is not eligible to take ITC on GST charged by vendor for Canteen services availed by it for its employees;
b. The distribution of coupons among employees will attract tax liability.
c. The Coupon value shall form part of the total taxable value of the caterer i.e. service provider.”
and
a. “The company is not eligible to take ITC on business promotion expenses”.
III. GROUNDS OF APPEAL
In the Appeal documents, the applicant submitted the following:
Statement of Facts:-
1. They are registered under GST and in furtherance of business viz. manufacture and supply of auto-parts, they use GST paid goods & services qualifying under the definition of Input Tax of S.2(62);
2. Apart from employees engaged in manufacture, employees providing managerial service also work in the factory;
3. Unit works round the clock and there are total 2400 full time employees;
4. Also there arc contract based employees;
5. Under factory act it is mandatory to provide food facility where employees working are more than 250;
6. They provide canteen services and incur expenses on Canteen contractor for food-stuff and maintenance of canteen operations;
7. They deploy own personnel for supervision and management; for providing utilities viz. supply of utensils and equipment etc.
8. They recover nominal amounts from employees which is without commercial objectives but to maintain discipline and avoid waste of food;
9. All employees do not avail the facility; those who avail get to pay the nominal amount ibid by way of procured coupons or card-punch per meal;
10. After adding from appellant/ company’s own account the canteen contractor’s bill is paid;
11. They are availing Input Tax Credit on the Canteen Contractor’s services and are also paying GST on the amount recovered from sale of coupons;
12. Further, they purchase gift items such as Sweets; Dry fruits; Electronic Items and Gold & Silver Coins etc. and distribute amongst Customers/ agents etc. for business promotion;
Grounds of Appeal:
1. That, they are engaged in manufacturing & supply of Automobile Parts of Two Wheelers and Four Wheelers and are registered in GST.
2. In furtherance to business they use GST paid goods and services and avail input tax credit.
3. They operate round the clock in shifts, having approximately 2400 number of full time working employees as well as contract based employees. They provide canteen/food facilities for employees which is mandatory under Factories Act where employees are more than 250.
4. They adheres to all rules, regulations and statutory obligations as Factories Act/ ESI/EPF & Mise Provisions Act / Welfare Rules /Industrial Disputes Act / Contract Labour (Regulation and Abolition) Act etc.
5. That in order to maintain peace and tranquility and ensuring smooth industrial Relations they provide statutory and non-statutory facilities for employees.
6. They recover a nominal amount from the employees as a reimbursement of expenses under employment contract, without any commercial objective but to maintain discipline and prevent wastage of food and resources.
7. Not all employees avail the facility. The nominal amount is recovered by way of Coupon or a card punch per meal at a subsidised cost to be paid to canteen contractor. That, rest of the cost is incurred by them. Same is paid in full to canteen contractor.
8. They avail Input tax credit of GST amount paid to Service Provider and create GST liability on the amount recovered from sale of coupons to its Employees.
9. Further, they purchases edible items like Sweets, Dry fruits and gifts like electronics, gold & silver coins/articles for the purpose of Business Promotion in order to distribute the same among customers and agents etc.
10. They sought advance ruling on the mentioned questions,
11. That the ruling given is void as the order pronounced was beyond limitation period therefore it became void ab-initio.
12. That, the authority for advance ruling, could not understand the intention of law regarding eligibility to Input Tax Credit against canteen facility, it being a mandatory facility to be provided to its employee. That, Section 16 provides the credit.
13. A reading of Section 16 discloses the following as eligibilities:-
a. The person availing the credit should be a ‘registered person’;
b. The credit should be of input tax charged on any supply of goods or services or both to the registered person;
c. The said supply of goods or services or both are used or intended to be used in the course or furtherance of the registered person’s business;
14. The restriction on input tax credit in respect of ‘Canteen Services’ is not applicable when the said service is mandatory by law and not optional on the applicant to be provided to its employee. Section 17(5) needs to be carefully appreciated regarding admissibility of input tax credit on the supply of canteen services from the canteen contractor.
15. Section 46(1) of Factories Act, 1948 specifies that factory wherein more than two hundred and fifty workers are ordinarily employed, a canteen or canteens shall be provided and maintained by the occupier for the use of the workers.
16. Section 17(5)(b)(i) specifies the situation where input tax credit is not available to the registered person. That, relevant clause reads as under:-
“Section 17. Apportionment of credit and blocked credits –
(5) Notwithstanding anything contained in sub-section (1) of Section 17 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-
(a) ….
(b) the following supply of goods or services or both 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”.
17. That Section 17(5) is a ‘notwithstanding’ clause to enable provisions of Section 16(1) of the Act. The rationale for granting input tax credit is to avoid cascading effect of taxes. Thus, ‘notwithstanding’ in Section 17 discloses that only an exception has been made to the generality of beneficial provisions. That, it is a settled principle of law that exceptions ought to be read strictly and interpreted to provide best benefits. That, Hon’ble Supreme court has also mandated this in,-
-Mangalore Chemicals and Fertilizers Ltd. v. Deputy Commissioner 1991 (55) E.L.T. 437 (S.C.),
– Union of India v. Wood Papers Ltd. &Anr. 1990(47) ELT 500
– Nutan Gems 1989 (39) ELT 503 (SC),
18. That, common proviso to Section 17(5) has been inserted in the Act w.e.f 1st February, 2019 vided amendment Act of 2018, “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”.
That, the proviso clarifies that something mandatorily done in furtherance of business is allowable for Input Tax credit.
19. That the authority for advance ruling (AAR) mis-interpreted the said proviso that it gives ‘mandatory’ effect to goods or services pertaining only to 17(5)(b)(iii) rather than to 17(5)(b) of CGST Act, 2017 as a whole. That, a careful reading of relevant provisions makes the law very clear.
20. That the authority have given only partial answer to question for advance ruling and have left out a ruling on SAC to be used in case of coupon distribution. That, in their understanding there is no tax on distribution of coupon. That ITC to the extent of recovery from employee shall be reversed by the company and hence there is no SAC applicable to distribution of coupons.
21. That as far as the question of fair market value is concerned, the canteen facility is not a taxable supply on the part of the company. That, canteen accounts are auditable documents and is based on facts of expenses incurred and amount received as a token from the employees and are highly subsidized. That the Canteen has to be run on NON-PROFIT basis (REF: Rules 74 and 75 read with Section 46 of the Factories Act). This is strictly as per Factories Act compliance and not as a business venture /activity. The proceeds from coupon or card punch cannot be construed as a supply as it is not even for recovery of the cost of item being a simple activity for the employees and as per compliance of Factory Act.
22. That the authority for advance ruling (AAR) seemed confused in denying ITC treating canteen services as not an outward supply and simultaneously considering coupon distribution as a taxable outward supply. That, if it is a supply then as per Section 16 of CGST Act, 2017, ITC on inward canteen services shall be allowable to the applicant.
23. That, Input Tax Credit on inward supply of Canteen Services shall be allowed being used for furtherance of business activity which is manufacturing and supply of automobile parts.
24. That applicant company also purchases sweets, dry fruits, coins etc for the purpose of business promotion. Being a manufacturing business mainly dealing in the manufacturing of automobile parts so the company has to give some benefits to its customer and employees by the way of presents in order to promote its business and if the applicant company would be denied of taking credit on expenses related to business promotion then the same shall lead to a cascading effect of tax and may resulted into a step back option for company from the business activity. There by the company shall be allowed to tax credit of tax paid in the course or furtherance of its business activity as per Section 16 of the CGST Act, 2017. In view of the above said contention, we would like to invite your kind attention towards the landmark judgments in which the expense related to business promotion is allowable for ITC. The same are mentioned as under:-
1. Coca Cola India Pvt. Ltd, vs. Commissioner of Central Excise (2009-VIL-06-HC-B0M-ST),
The Mumbai High Court held, “that ‘activities in relation to business’ would cover all conceivable activities that were directly or indirectly related to the functioning of the business, since the word ‘business’ itself related to an integrated and continued set of activities and was not confined and restricted to mere manufacturing.”
As result, the High Court arrived at a clear finding that the definition of ‘input services’ would have wide amplitude.
2. PAM PHARMACEUTICALS & ALLIED MACHINERY CO. P. LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, MUMBAI V
“CENVAT Credit denied of service tax paid on club membership of Association – membership of the club does not fall within the definition of input service, and the same is not related to manufacturing activities – Held that The membership of the business club like the Entrepreneur organization is indirectly related to the promotion of the business of the appellant. The expenses incurred on membership of the club are forming part of the assessable value and as per the judgment in the case of Coca Cola P. Ltd. (2009 (8) TMI50
– BOMBAY HIGH COURT) wherein observed that “Once the cost incurred by the service has to be added to the cost, and is so assessed, it is a recognition by Revenue of the advertisement services having a connection with the manufacture of the final product. This test will also apply in the case of sales promotion. Therefore keeping in view the judgments cited (supra) the expenses incurred on the membership of the business club is an ‘input service’ and appellant can legally take CENVAT Credit of the expenses incurred on the membership of the club.”
25. That, input tax credit of tax paid on input supplies which is used in the course or furtherance of business is not to be denied where the business promotion expense is purely an expense done for the furtherance of business activity.
26. That, where two interpretation of a tax provision are possible, the one in favour of the assessee should be preferred as held by Hon’ble Punjab and Haryana high Court in ACIT v. Hindustan Milk Foods (1975) 98 ITR 441, that . In regard to the interpretation of fiscal statutes, the rule is well-settled that where two interpretations are possible, that interpretation should be adopted which is beneficial to the assessee. In this view of the matter, we see no reason to differ from the decision of the Tribunal.”
Prayer in Appeal: –
The Appellant has prayed to, “…set-aside/ modify the impugned advance ruling/ pass any further or other orders as deemed fit”.
IV. RECORD OF PERSONAL HEARING
Shri Ankit Awal attended the personal hearing on 25.08.2021 on behalf of the Appellant and emphasized on all the points already made in the Appeal whether as the grounds of Appeal or as their understanding of the facts in the case. However nothing new was added and the submissions amounted to reiteration of the earlier submissions only.
V. DISCUSSION AND FINDINGS
The questions raised for Advance Ruling are being reproduced below for ready reference:-
CANTEEN SERVICES
a. “Whether company is eligible to take Input Tax Credit on GST charged by vendor for Canteen services availed by it for its employees;
b. Whether distribution of Coupons among employees attracts GST liability? If yes, under which SAC (Services Accounting Code) tax shall be deducted;
c. Is it correct to determine the fair market value of coupons, based on the rate charged to employees;”
DISTRIBUTION OF GIFT ITEMS FOR BUSINESS PROMOTION
a. “Whether company is eligible to take ITC on such business promotion expenses or not?”
A. Canteen services
A.1 We take the second question, “Whether distribution of Coupons among employees attracts GST liability? If yes, under which SAC (Services Accounting Code) tax shall be deducted?” first for determination.
The question basically is regarding taxability of the ‘canteen services’ being provided to the employees, mandatorily and at ‘no-profit’ under the Factories Act, and reportedly at a highly subsidised nominal value, by the Appellant.
The said services are being provided under the provisions of Factories Act. The relevant Section 46 of the Factories Act 1948 is reproduced below:-
“46. Canteens.- (1) The State Government may make rules requiring that in any specified factory wherein more than two hundred and fifty workers are ordinarily employed, a canteen or canteens shall be provided and maintained by the occupier for the use of the workers.] (2) Without prejudice to the generality of the foregoing power, such rules may provide for,-
(a) the date by which such canteen shall be provided;
(b) the standards in respect of construction, accommodation, furniture and other equipment of the canteen;
(c) the foodstuffs to be served therein and the charges which may be made therefor;
(d) the constitution of a managing committee for the canteen and representation of the workers in the management of the canteen;
[(dd) the items of expenditure in the running of the canteen which are not to be taken into account in fixing the cost of foodstuffs and which shall be borne by the employer;]
(e) the delegation to the Chief Inspector, subject to such conditions as may be prescribed, of the power to make rules under clause (c).”
Rule 74 of the Punjab Factories Rules 1952 which is applicable to the State of Haryana, reads as under:-
“Rule 74: [Framed U/S 46(1) of the Act] Prices to be charged (1) Food, drink and other items served in the canteen shall be sold on a no-profit basis and the prices charged shall be subject to the approval of the Canteen Managing Committee. (1-A). In computing the prices referred to in sub-rule (1), the following items of expenditure shall not be taken into consideration, but will be borne by the occupier- (a) the rest for the land and building; (b) the depreciation and maintenance charges of the building and equipment provided for the canteen: (c) the cost of purchase, repairs and replacement of equipments including furniture, crockery, cutlery and utensils; (d) the water charges and expenses for providing lighting and ventilation: (e) the interest on the amount spent on the provision and maintenance of the building, furniture and equipment provided for the canteen.”
[emphasis supplied]
We find that No-profit and mandatory services being provided under legal obligation are tied to the employer’s obligation towards the employees. These services, we find, are uniformly available to all the employees and are not restricted to any class of employees. These canteen services are, therefore, available to the employees essentially as a facility in the course of their employment. These are akin to facilities like uniform, safe-environs and first-aid.
Accordingly we hold that a provisioning of canteen service to employees is not a taxable activity chargeable to GST.
This replies to the 3rd question also, viz., “Is it correct to determine the fair market value of coupons, based on the rate charged to employees?”. The activity itself being outside the tax net, there is no need for the valuation of the same for taxation purposes.
A. 2 Now we take the first question, “Whether company is eligible to take Input Tax Credit on GST charged by vendor for Canteen services availed by it for its employees” for determination.
Section 16 to the GST Acts provides that credit of GST paid on the goods and services availed in the course of furtherance of business is available to a supplier of taxable goods or services as Input Tax Credit (ITC) for credit into his ‘Input Credit Ledger’ which later can be utilised towards payment of his tax liability.
Section 17 provides for apportionment of such Input Tax Credit. The same also provides for blocking of such ITC in certain situations which have been detailed in sub-Section 17(5).
It is observed that the Advance Ruling Authority (AAR) had granted the Ruling, “The company is not eligible to take ITC on GST charged by vendor for Canteen services availed by it for its employees”.
The ruling was given by the Advance Ruling Authority on the finding, “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 the light of above provision, the applicant is not eligible for claim of input tax credit. “
The provisions of sub-Section 17(5)(b) have since been amended w.e.f. 1.02.2019 and read as under:-
“(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.]”43
[43 Substituted for,-
“(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;”
by The Central Goods and Services Tax (Amendment) Act, 2018 (No. 31 of 2018) – Brought into force w.e.f. 01st February, 2019.]
Thus, we find that the substitution w.e.f. 1.02.2019 has imparted clarity to the relevant provisions of Section 17(5). After the substitution, it is now clear that Input Tax Credit on the ‘Food and Beverage’ services are available only where the registered person is making an outward taxable supply of the same category of goods or services.
The Appellant has further argued that the proviso, “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” introduced w.e.f. 1.02.2019 is applicable to the canteen/ ‘Food & Beverage’ service.
We find that this argument is not correct. The 2 respective provisos, we find, are applicable to respective supplies. The proviso to clause (i) viz., “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;” is applicable only to clause (i) viz., “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”. Similarly the proviso to clause (iii) viz., “(iii) travel benefits extended to employees on vacation such as leave or home travel concession” is applicable only to clause (iii) viz., “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.”
The above position is very clear from the respective positioning of colons (:) and the semi-colons (;) in sub-Section 17(5).
Thus the benefit of the said proviso “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. ” has been made available only to the activity of “(Ui) travel benefits extended to employees on vacation such as leave or home travel concession”. The same, we hold, is not available to the canteen service/ (supply of Food and Beverages as a service).
Accordingly we find, and hold, that the Input Tax Credit is not admissible to the Applicant.
Accordingly, the Questions for Advance ruling are replied as under:-
CANTEEN FACILITY
Question 1:
“Whether company is eligible to take Input Tax Credit on GST charged by vendor for Canteen services availed by it for its employees;
Ruling:
No. Company M/s. Musashi Auto Parts India Private Limited is not eligible to Input Tax Credit on the GST charged by vendor, for Canteen services availed by it and provided to its employees.
Question 2:
Whether distribution of Coupons among employees attracts GST liability? If yes, under which SAC (Services Accounting Code) tax shall be deducted;
Ruling:
No. Distribution of Coupons among employees does not attract GST liability.
Question 3:
Is it correct to determine the fair market value of coupons, based on the rate charged to employees;”
Ruling:
No. Since distribution of Coupons among employees does not attract GST liability, there is no need to determine any value for that purpose.
GIFT ITEMS
The ground mentioned in Appeal is, “The ITC related to business promotion expense is not denied under Section 17(5) of the CGST Act, 2017.” The Question posed for Advance Ruling, was:-
“Whether company is eligible to take ITC on such business promotion expenses or not?”
The Appellant has claimed that the gift items have been used in ‘Business Promotion’ viz. the furtherance of business and credit is admissible in terms of Section 16 of the CGST/SGST Acts.
The Section 16 reads as under:-
“16. Eligibility and conditions for taking input tax credit.- (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.”
However, as discussed supra, the ITC is admissible subject to the restrictions provided under Section 17 of the GST Acts. It is observed that sub-Section 17(5), clause (g) clearly forbids ITC admissibility on the items of personal consumption. The clause reads as under:-
“(5) Notwithstanding anything contained in sub-section [1} of section 16 and sub- section (7) of section 18, input tax credit shall not be available in respect of the following, namely:-
……………
……………………….
(g) goods or services or both used for personal consumption;”
Thus it is clear that the ITC cannot be taken by a taxable person on the items i.e. goods and services which are used for personal consumption. The items mentioned by the Appellant viz. Sweets; Dry fruits; Electronic Items and Gold & Silver Coins etc. are essentially being given to the relevant persons as items of personal use/ consumption. The ITC, thus, is not admissible on the same.
Accordingly, the Question for Advance ruling is replied as under:-
Question:
Whether company is eligible to take ITC on such business promotion expenses or not?
Ruling:
No. Applicant is not eligible to take ITC on such business promotion expenses.
