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“If you take care of your employees, they will take care of your business” by Richard Branson. It is the employees who support the employer to retain the customers and run the business. With the decision of the Advance Ruling Authority, Kerala [Caltech Polymers Pvt. Ltd. - 2018 (4) - AUTHORITY FOR ADVANCE RULING - KERALA] the employer will have to think twice before providing healthy environment to the employees. Wherein it was held that “Recovery of food expenses from the employees for canteen services provided by company would come under the definition of ‘outward supply’ as defined in the Section 2(83) of the Act, 2017, and therefore, taxable as a supply of service under GST”

The important aspect which was overlooked by AAR and needs attention is that Schedule III under Section 7(2) specifies that any services provided by an employee to the employer in the course or in relation to his employment shall be neither a supply of goods nor supply of services. In short, the consideration paid by the employer to the employee under the contract of employment shall be out of the scope of levy of GST.

The term “in the course or in relation to his employment” has not been specifically defined under the GST law, which has to be taken from trade, commerce and industry practices. It is understandable that the provision made under Schedule III indicates not only the salary paid to the employees but also the considerations which are being paid to the employees as per the contractual agreement. What are the activities/consideration which can be treated as ‘in the course or in relation to the employment’? The dictionary meaning of the term ‘in the course’ means during the specified time and the term ‘in relation to’ means in the context of or in connection with.

Thus, it makes it clear that any transactions which form part due to the contractual agreement during the tenure of the employment will out of the scope of GST. Like -
· Allowances mentioned as per the appointment letter of employees – travel allowance, food allowance, daily allowance etc.
· Perquisites - Accommodation, car, meal vouchers, etc.
· Providing of transport facility
· Providing laptop for work
· Providing food at subsidized rate or for free
· Reimbursement of expenses like accommodation, drivers salary, medical expenses

Apart from the above, any transaction which occurs in connection or association with the
employment will also be out of the scope of GST like-
· Refreshments (tea/coffee), lunch provided during the course of employment
· Reimbursement of expenses incurred by the employees in the course or furtherance of business.

Last but not the least, Section 7(2) overrules section 7(1), thus makes it more flawless that any transactions which are provided by the employee to employer in the course/relation to the employment shall be out of the scope of GST. Once the activity comes under Schedule III, then anything contradicts or withstands this clause shall be ineffective or inoperative qua this clause. 
Section 7(2) - Notwithstanding anything contained in sub-section (1),-
(a). activities or transactions specified in Schedule III; or
(b). such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.”

Can the meals provided at the subsidised rate be termed as ‘supply’ as held by the AAR?

Based on the definition of business and outward supply, AAR held that it will be a taxable supply. However, AAR failed to consider Section 7 of the Act. Section 7(1) defines ‘supply’ which includes-
· all forms of supply made or agreed to be made
· for a consideration by a person
· in the course or furtherance of business

Can a mere payment of some portion of the cost render the activity as in the course or furtherance of business? Though the term “in course or furtherance of” is not defined under the GST but the word ‘business’ has been defined in the GST law. Broadly it means any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity whether or not it is for pecuniary benefits. Any activity ancillary or incidental to these activities is also covered as business.

It would be therefore essential to refer the dictionary meaning of the said phrase. The Australian Concise Oxford Dictionary (1997) defines the phrase 'in the course of' as 'during' and the word 'furtherance' as to mean 'furthering or being furthered; the advancement of a scheme etc.'

In the instant case, the employer is manufacturer of the footwear and is providing the canteen
services by the employer exclusively for the employees as per the Factories Act. Can providing of canteen services to its employees be termed as an activity ancillary or incidental to trade, commerce etc.?

The Hon’ble Supreme Court of India, has referred to the above observation of Andhra Pradesh High Court in the matter of State of Tamil Nadu and Another versus Board of Trustee of the Port Trust of Madras - Judgment dated 26 March 1999 (3) – SUPREME COURT OF INDIA and mentioned that “We agree with the above observations subject to the following clarification or modification. If the main activities are `business' then the sales in connection with or incidental or ancillary thereto need not have been intended as a business or commercial activity. Their mere connection with or being incidental or ancillary to something else which was ‘business' was sufficient to include such sales in the main business. The second part of the last extract starting with the words ‘But the converse is not true', are to be modified to mean that if the main activity falling under sub-clause (i) did not amount to business, normally these sales made in connection with or were incidental or ancillary to the main activity would not be 'business' but there could still be an exception where the sales so connected or incidental or ancillary to the main "non-business" activity were proved to have been made with an independent intention to do business and the burden of proof to prove the exception would fall on the revenue.”

In the light of the above interpretation by the Apex court, canteen services cannot be treated
as ancillary to the business activity of manufacturing footwear. Firstly, canteen services are provided is an ingredient of the wage negotiation with employer and would form part of the consideration under employment agreement. Secondly, Factories Act mandates the employer to provide food/meal to the employees and lastly, canteen cannot be termed as a business activity. Hence, if canteen can be termed as expenses for use in the course of business than a business activity itself, then the same cannot be termed as ‘supply’ to be taxed under GST. Though assumed, If providing of the subsidised meals to employees as per the contract of employment or as per the provision of various laws which makes it compulsory for the employer to provide canteen services like Factories Act, is construed as ‘supply’ under Section 7(1), even then the same will not prevail over Section 7(2).

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