SERVICE TAX RULING
1. Whether the industrial canteen contractors were entitled to claim the exemption from service tax under the earlier regime has been a vexed issue.
“Services provided in relation to serving of food or beverages by a canteen maintained in a factory covered under the Factories Act, 1948 (63 of 1948), having the facility of air-conditioning or central air-heating at any time during the year;”
3. Hence the issue was whether the services of industrial canteen contractors of supplying food to the employees, when invoice is raised on the concerned factory (covered under the Factories Act, 1948), can be covered under the said exemption entry ? or whether the industrial canteen contractors will be regarded as an outdoor caterers and hence will be liable to tax ?
4. Allahabad Bench of CESTAT in the case of ICS Food Pvt. Ltd. v. Commissioner of Service Tax, Noida (APPEAL No. ST/70494/2017-CU[DB]) in an unreported decision held that industrial canteen contractors shall be covered under the above referred exemption Entry No. 19A due to following reasons:
a) Notification uses the phrase “canteen maintained in a factory” and not “maintained by and/or run by a factory”. If the intent of the Notification were to be as interpreted in the impugned Order-in-Original, then the wording in the Notification should have been “maintained by and/or run by the factory”. Therefore, a narrow interpretation of Sl. No.19A of the Notification, based on the fact that an outdoor caterer is maintaining the canteen, is neither warranted nor contemplated in the Notification.
b) Maintaining canteen for employees is a statutory requirement under the Factories Act for certain category of factory and outsourcing the same is not barred under the Act ibid and Rules made thereunder. In the circumstances, if the Notification is interpreted to mean that exemption will be available only when the canteen is run by factory, such interpretation will be doing violence to the language of the Statute and in fact will amount to adding words in the Notification which is not permitted under established law. Further such interpretation may result in taxing of the services received by the factory employees as the service provider is receiving consideration only from the factory. Such an interpretation is neither mandated nor intended under the Notification.
c) Even if such services are considered as OUTDOOR CATERING, those have been used for providing services in relation to serving food and beverages in a canteen.
APPLYING THE SAME TO GST
5. Now Entry No. 7(i) appearing in the Rate Notification No. 11/2017-Central Tax (Rate) reads as under:
“Supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied, other than those located in the premises of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes having declared tariff of any unit of accommodation of seven thousand five hundred rupees and above per unit per day or equivalent.”
6. Further following explanation has been added to the said Entry vide Notification No. 13/2018-Central Tax (Rate), dated 26-7-2018:
“Explanation 1. — This item includes such supply at a canteen, mess, cafeteria or dining space of an institution such as a school, college, hospital, industrial unit, office, by such institution or by any other person based on a contractual arrangement with such institution for such supply, provided that such supply is not event based or occasional.”
7. Hence the issue before us is whether the added Explanation on 26.07.2018 can be applied retrospectively (i.e. w.e.f. 15.11.2017) when the rate of tax on such services was reduced to 5% ? This is important because input tax credit (“ITC”) in respect of outdoor catering service has been blocked u/s 17(5)(b)(i) of the CGST Act, 2017. It is only from the date that the CGST Amendment Act, 2018 is implemented that the ITC shall become eligible (in cases where it is mandatory under any law).
8. We are of the view that the added Explanation can be applied retrospectively due to the following reasons:
a) Entry 7(i) referred above provides that supply must be “by a canteen” amongst other things. Words to the effect that such canteen should be “maintained in a factory or any other premises” or “maintained and/or run by the factory or company” are missing. In absence of said words, all the supplies of food by such canteen irrespective of the person providing such supply should be covered. The decision referred above also supports the view that had the intention of legislators be to only cover supplies by a canteen maintained or run by the company itself and not industrial canteen contractors, the same would have been explicitly stated in the Entry itself. Any interpretation otherwise would tantamount to adding words to the said Entry or doing violence with the language, neither of which is permitted.
b) CBIC had issued circular No. 28/02/2018-GST dated 08th January, 2018 which when read with corrigendum dated 18th January, 2018 stated that supply of food or drink by a mess at an educational institution shall be taxed at 5% irrespective of the fact that such facility is either run by the institution/ students themselves or is outsourced to a third person.
c) In the above backdrop, the Explanation added on 26.07.2018 only clarifies the position already supported by a judicial decision as well as CBIC circular. It has to then be considered as retrospective.
d) One can also refer to Sec. 11(3) of the CGST Act, 2017 which provides that Government may for the purpose of clarifying the scope or applicability of any notification issued under Sec. 11(1), insert an explanation in such notification by a notification at any time within one year of issue of the notification and every such explanation shall have effect as if it had always been the part of the first such notification. Notification No. 46/2017-Central Tax (Rate), dated 14-11-2017reducing the rate of tax to 5% has been issued u/s 11(1). Hence even by applying Sec. 11(3) we can conclude that the added Explanation has to be applied retrospectively.
9. If the above view is taken, the industrial canteen contractors can issue a credit note u/s 34(1) of the CGST Act, 2017 for reclaiming the excess tax charged earlier (please consider the time limit for issuing such credit note for invoices pertaining to FY 2017-18). It must however be noted that the rate of 5% has a condition wherein such contractor is not permitted to avail ITC. Hence in such cases he will be under an obligation to reverse the ITC claimed earlier. The trade-off between the difference in the rate (i.e. 13%) and ITC to be reversed needs to be worked out before taking the final decision.
(views are strictly personal)