GST Caselaw

#GSTCase-84-Tax Rate on supply of food by Caterers to employees of a Company under a contractual obligation with the Company-Circular and AAR are at opposite ends

#GSTCase-84-Tax Rate on supply of food by Caterers to employees of a Company under a contractual obligation with the Company-Circular and AAR are at opposite ends  

                                                                                                                                                                CA Arpit Haldia

Goodwill Industrial canteen [2018] 97 taxmann.com 451 (AAR – TAMILNADU)

  1. Query
  2. What is the rate of tax on catering services provided to various companies wherein applicant prepares food at their place and supply to the employees of their clients/companies.
  1. Facts

Applicant furnished their agreement with the client for running Industrial Canteen at the Factory. As per the contract entered by the Applicant with the client, the premises for services to be provided for canteen has been made available to the Applicant by the client along with required furniture, fittings, cooking and catering utensils, and crockery and cutlery items apart from providing water, electricity and fuel. The Applicant has to purchase the required provisions, vegetables, etc. prepare food stuff as per the menu given by the Management using the Applicant’s manpower. This will be served to the employees, by collecting coupons on behalf of the client. Based on the coupons collected, the Applicant will give a bill and payment will be made by the company to the Applicant on monthly basis.

 

  1. Observation by AAR

Applicant is vested with management of the canteen facilities. The Applicant himself does not get paid for by the consumers of the food and beverages. The Recipient of the services are the companies who enter into contract with the applicant. AAR then observed the legislative history on tax rate on outdoor catering services:

 

Scenario-1- Tax Rate between 1st July 2017 to 14th November 2017

 

 

Heading 9963 (Accommodation, food and beverage services)

(i) Supply, by way of or as part of any service or in any other manner whatsoever, of goods. being food or any other article for human consumption or drink, where such supply or service is for cash, deferred payment or other valuable consideration, provided by a restaurant eating joint including mess. canteen, neither having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year nor having licence or permit or by whatever name called to serve alcoholic liquor for human consumption.

 

 

(v) Supply, by way of or as part of any service or in any other manner whatsoever in outdoor catering wherein goods, being food or any other article for human consumption or any drink (whether or not alcoholic liquor for human consumption), as a part of such outdoor catering and such supply or service is for cash, deferred payment or other valuable consideration.

 

Scenario-2- Tax Rate between 15th November 2017 to 25th July 2018

The tax rates under SI.No. 7 came under Scrutiny and the same was taken up by the council for consideration. Tax Structure of different categories of Restaurants, with a view to their possible rationalization/reduction was mandated to be examined. The same was examined at the 23rd Meeting of the GST Council held on 10th November 2017. The council discussed the various aspects involved in respect of the rate of tax on the supply is reproduced below:

65.29. Keeping in view the discussion as above, the Council agreed to apply tax rate of 5% tax without input tax credit on all standalone restaurants and a rate of tax of 18% with input tax credit on a restaurant in a hotel having room of declared tariff of more than Rs. 7,500 per night. The take-away food from a restaurant shall have similar tax treatment as that for the restaurant. Outdoor catering shall. however, attract tax at the rate of 18% with input tax credit and there would be no change in Composition scheme for restaurant.”

Accordingly, Notification No. 11/2017 CT (Rate) was amended vide Notification No. 46/2017 dated 14th November 2017 as below:

(ii) against serial number 7,-

(a) for item (i) in column (3) and the entries relating thereto in columns (3), (4) and (5), the following shall be substituted, namely:—

“(i) Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or drink, where such supply or service is for cash, deferred payment or other valuable consideration, 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.

 

2.5% Provided that credit of input tax charged on goods and services used in supplying the service has not been taken [Please refer to Explanation no. (iv)]-“;
 

(v) Supply, by way of or as part of any service or in any other manner whatsoever in outdoor catering wherein goods, being food or any other article for human consumption or any drink (whether or not alcoholic liquor for human consumption), as a part of such outdoor catering and such supply or service is for cash, deferred payment or other valuable consideration.

9%  

 

It can be observed that no amendment was made in SI.No 7(v) of Notification No. 11/2017 CT (Rate). From the discussions, it is evident that the intention of having tax rate of 5% as in Sl.no 7(i) is only in respect of supply of foods in Standalone restaurants and other similar eating joints and that in Hotels wherein the declared tariff of any unit of accommodation is less than Seven thousand Five hundred only. That it is applicable in cases where the consumers who purchase the food & beverages, do so on the premises of the supplier of such food & beverages and directly pay to such supplier. From the contract furnished, it is seen that the applicant prepares the food using his own labour on the premises of the companies, who is the recipient of the service, and serve the food to consumers who don’t make payment for to the applicant. The applicant is paid only by the company. The above GST Council discussions and decisions also clearly differentiate a restaurant/canteen/mess run independently and the services extended by the applicant which tall under the category of outdoor catering. The very likely scenario of ‘Outdoor Caterer’ trying to call himself as a ‘restaurant’ has been discussed and the decision to lower the tax rate only to restaurants has been taken by the council. Therefore, the supply of food by the applicant in the premises of client, whether prepared in that place or brought and served is more appropriately covered by the description at SI.No. 7(v) of the Notification No. 11/2017 -C.T. (Rate) dated 28.06.2017 and is liable to tax at 9% CGST and 9% SGST.

 

Scenario-3- Tax Rate subsequent to 26th July 2018

GST Council in the 27th Council Meeting held on 4th May 2018, discussed and on 21.07.2018, the following decision as given in the press note was taken and the same is reiterated below:

“18. Rationalize entry relating to composite supply of food and drinks in restaurant, mess, canteen, eating joints and such supplies to institutions (educational, office, factory, hospital) on contractual basis at GST rate of 5%: and making it clear that the scope of outdoor catering under 7(v) is restricted to supplies in case of outdoor/indoor functions that are event based and occasional in nature.”

To effect the above decision of the Council, the Notification No. 46/2017 was amended vide Notification No. 13/2018 dated 26th July 2018 as follows:

In the said notification, in the Table. —

(i) against serial number 7, in column (3),-

(a) for item (i) and the entries relating thereto in columns (3), (4) and (5) the following shall be substituted, namely: —

“(i) 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. 

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.

Explanation 2.—This item excludes the supplies covered under item 7(v).

 

2.5 Provided that credit of input tax charged on goods and services used in supplying the service has not been taken [Please refer to Explanation no. (iv)]”
 

(v) Supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, at Exhibition Halls, Events, Conferences, Marriage Halls and other outdoor or indoor functions that are event based and occasional in nature.

9

 

From the above, it is clear that the instant case of the applicant is making supply of services in the dining space of the industrial units and offices which is squarely covered in the Explanation 1 to SI.No 7(i) and SI.No 7(v) now only covers supply at functions which are occasional and event based. The supply of food to institutions which were earlier covered under entry at SI.No. 7(v) has been included under SI.No. 7(i) of the Notification No. 11/2017 CT (Rate) with effect from 27th July 2018 and thereupon is liable to tax at the rate of 5% subject to the condition that credit of input tax charged on goods and services used in supplying the services are has not been taken read with Explanation (iv) of said Notifications.

 

  1. Held

Services of applicant of supplying food and beverages on the premises of industrial unit/office, which are on the terms of the contract with M/s Kone Elevators and such other contracts, are liable to tax at the rate of 9% CGST under SI.No. 7(v) of Notification No. 11/2017 -CT. (Rate) dated 28.06.2017 and 9% SGST under SI.No. 7(v) of G.O.(Ms) No. 72 dated 29.06.2017 No. III(2)/CTR/532(d-14)/2017 for the period upto 26.07.2018 and from 27.07.2018 onwards at the rate of 2.5% CGST under SI.No. 7(i) of the Notification No. 11/2017-C.T. (Rate) as amended and at the rate of 2.5% SGST under SI.No. 7(i) of G.O.(Ms) No. 72 dated 29.06.2017 No.II(2)/CTR/532(d-14)/2017 as amended subject to the condition that credit of input tax charged on goods and services used in supplying the services are has not been taken read with Explanation (iv) of said Notifications.

 

  1. Comment

The ruling needs reconsideration on following parameters and more than the reconsideration, it needs clarification from GST Council:

 a) Ignores the principle laid down by Circular No. 28/02/2018-GST dated 08th January 2018 as amended by the corrigendum issued on dated 18th January 2018: –

 

The said circular although issued in respect of the catering services provided to the educational institutions clarified that

 

If the catering services, i.e., supply of food or drink in a mess or canteen, is provided by anyone other than the educational institution, then it is a supply of service at entry 7(i) of notification No. 11/2017-CT (Rate) [as amended vide notification No. 46/2017-CT (Rate) dated 14.11.2017] to the concerned educational institution and attracts GST of 5% provided that credit of input tax charged on goods and services used in supplying the service has not been taken, effective from 15.11.2017.”

 

The said circular clarified that catering services provided to the educational institution attracts GST at the rate of 5%. On the similar footing, catering services provided by the applicant also would fall under Entry 7(i) and would be taxable at the rate of 5%.

 

It would be important to highlight that in the GST Council meeting held on 21st July 2018, as part of agenda following was mentioned:

 

  1. The scope of outdoor catering does need rethinking, especially in light of the fact that separate circulars for educational institutions mess and Indian Railways catering have already been issued clarifying the applicable rate of GST thereon. The matter has been discussed in detail in F.No. 354/3/2018-TRU and 354/3/2018-TRU (Part I) and in several broadsheets. Both the circular and order clarifying GST rate on educational institutions and Catering in Indian Railways may be withdrawn.

The suggested amendments in the Tax Rate Schedules were made but the circular issued earlier were not withdrawn with retrospective effect (withdrawn with effect from 27th July 2018 vide Circular No. Circular No. 50/24/2018-GST), thereby evidencing that insertion of explanation entry 7(i) was clarificatory in nature (otherwise they would have been withdrawn retrospectively).

 

b) Explanation 1 inserted in Entry 7(i) without changing main entry and but Explanation 2 making reference to Entry 7(v) inserted alognwith substitution of 7(v)

 

The heart of the controversy lies in these two explanations inserted in Entry 7(i) on dated 26th July 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.

Explanation 2.—This item excludes the supplies covered under item 7(v).

The issue now arises is that firstly the two circulars have not been withdrawn. They still persist for the entries prior to 26th July 2018. Secondly, Explanation has been inserted in Entry 7(i) without amending the main Entry.  Thirdly, Entry 7(v) has been substituted and after substitution Explanation has been added in Entry 7(i) to provide that it does not contains supplies under the heading 7(v). Therefore, following scenarios occur:

 

  • Explanation 1 and 2 to Entry No. 7(i) operates retrospectively
  • Explanation 1 and 2 to Entry No. 7(i) operates prospectively
  • Explanation 1 to Entry No. 7(i) operates retrospectively and Explanation 2 to Entry No. 7(i) operates prospectively

 

Before arriving at the conclusion lets analyse impact of inserting an explanation which was explained by Apex Court in the matter of M/s. Aphali Pharmaceuticals Ltd. v. State of Maharashtra, AIR 1989 SC 2227 as under:

 

  1. An Explanation, as was found in Bihta Marketing Union v. Bank of Bihar, AIR 1967 SC 389: (1967) 1 SCR 848, may only explain and may not expand or add to the scope of the original section. In State of Bombay v. United Motors, AIR 1953 SC 252 : (1953) SCR 1069, it was found that an Explanation could introduce, a fiction or settle a matter of controversy. Explanation may not be made to operate as “exception” or “proviso”. The construction of an Explanation, as was held in Collector of Customs v. G. Dass and Co., AIR 1966, SC 1577, must depend upon its terms and no theory of its purpose can be entertained unless it is to be inferred from the language used. It was said in Burmah Shell Oil Ltd. v. Commercial Tax Officer, AIR 1961 SC 315: (1961) 1 SCR 902, that the explanation was meant to explain the Article and must be interpreted accordinging to its own tenor and it was an error to explain the Explanation with the aid of the Article to which it was annexed. We have to remember what was held in Dattatraya Govind Mahajan v. State of Maharashtra, AIR 1977 SC 915 (928): (1977) 2 SCR 790, that mere description of a certain provision, such as “Explanation” is not decisive of its true meaning. It is true that the orthodox function of an explanation is to explain the meaning and effect of the main provision to which it is an explanation and to clear up any doubt or ambiguity in it, but ultimately it is the intention of the legislature which is paramount and mere use of a label cannot control or deflect such intention.

 

State of Bombay v. United Motors (supra) laid down that the interpretation must obviously depend upon the words used therein, but this must be borne in mind that when the provision is capable of two interpretations, that should be adopted which fits the description. An explanation is different in nature from a proviso for a proviso excepts, excludes or restricts while an explanation explains or clarifies. Such explanation or clarification may be in respect of matters whose meaning is implicit and not explicit in the main section itself. In Hiralal Ratanlal v. State of U.P. (1973) 1 SCC 216 (225) : (AIR 1973 SC 1034 (1040)), it was ruled that if on a true reading of an Explanation it appears that it has widened the scope of the main section, effect be given to legislative intent notwithstanding the fact that the Legislature named that provision as an Explanation. In all these matters courts have to find out the true intention of the Legislature. In D. G. Mahajan v. State of Maharashtra, (supra) this Court said that legislature has different ways of expressing itself and in the last analysis the words used alone are repository of legislative intent and that if necessary an Explanation must be construed according to its plain language and ‘not on any a priori consideration.

 

Further lets go through the relevant extract of the Apex Court Judgement in Vatika Township on retrospectivity of the Legislation, which provided as under:

 

The obvious basis of the principle against retrospectivity is the principle of ‘fairness’, which must be the basis of every legal rule as was observed in the decision reported in L’Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Co.Ltd[4]. Thus, legislations which modified accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect; unless the legislation is for purpose of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing this dicta, a little later.

 

  1. We would also like to point out, for the sake of completeness, that where a benefit is conferred by a legislation, the rule against a retrospective construction is different. If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In Government of India & Ors. v. Indian Tobacco Association[5], the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay v. State of Maharashtra & Ors.[6] It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. However, we are confronted with any such situation here.

 

  1. In such cases, retrospectively is attached to benefit the persons in contradistinction to the provision imposing some burden or liability where the presumption attaches towards prospectivity. In the instant case, the proviso added to Section 113of the Act is not beneficial to the assessee. On the contrary, it is a provision which is onerous to the assessee. Therefore, in a case like this, we have to proceed with the normal rule of presumption against retrospective operation. Thus, the rule against retrospective operation is a fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication. Dogmatically framed, the rule is no more than a presumption, and thus could be displaced by out weighing factors.

 

  1. Let us sharpen the discussion a little more. We may note that under certain circumstances, a particular amendment can be treated as clarificatory or declaratory in nature. Such statutory provisions are labeled as “declaratory statutes”. The circumstances under which a provision can be termed as “declaratory statutes” is explained by Justice G.P. Singh[7] in the following manner:

 

“Declaratory statutes The presumption against retrospective operation is not applicable to declaratory statutes. As stated in CRAIES and approved by the Supreme Court : “For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word ‘declared’ as well as the word ‘enacted’. But the use of the words ‘it is declared’ is not conclusive that the Act is declaratory for these words may, at times, be used to introduced new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is ‘to explain’ an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language ‘shall be deemed always to have meant’ is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law which the Constitution came into force, the amending Act also will be part of the existing law.” The above summing up is factually based on the judgments of this Court as well as English decisions.

 

A Constitution Bench of this Court in Keshavlal Jethalal Shah v. Mohanlal Bhagwandas & Anr.[8], while considering the nature of amendment to Section 29(2) of the Bombay Rents, Hotel and Lodging House Rates Control Act as amended by Gujarat Act 18 of 1965, observed as follows:

 

“The amending clause does not seek to explain any pre-existing legislation which was ambiguous or defective. The power of the High Court to entertain a petition for exercising revisional juris-diction was before the amendment derived from s. 115, Code of Civil Procedure, and the legislature has by the amending Act attempted to explain the meaning of that provision. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act.”

 

On a combined reading of the above, it can be argued along with the circular issued on dated 8th January 2018 that Explanation 1 would act retrospectively since it clarifies an existing situation and Explanation 2 to Entry 7(i) would act prospectively since entry 7(v) was modified and Explanation 2 was inserted along with substitution of entry 7(v).

 

c) In case of conflict between two entries, entry which is more beneficial to the taxpayer can be opted by the taxpayer

Further, even if it is contended that prior to the amendment catering services provided to the Institution were falling under both 7(i) (as contended in the Circular Dated 8th January 2018) and also 7(v) (as held by AAR Tamilnadu), then also the option which is most beneficial to the taxpayer can be opted by them. Since the most beneficial is entry 7(i), therefore it would be applicable on the assessee.

 

d) Binding Force of the Departmental Circular unless contrary held by the Supreme Court

Last but not the least is that since clarification issued on 8th January 2018 has not been withdrawn and since it is a departmental circular, beneficial to the assessee therefore it has a binding force upon the assessee. But it seems that this also has been diluted by the Board subsequent to the decision of Hon’ble Apex Court in the matter of M/s Ratan Melting & Wire Industries Vs Commissioner of Central Excise, Bolpur. CBEC issued Circular No. 1006/13/2015-CX dated the 21th September,2015 clarifying the legal validity of the Circulars post the judgement of the Hon’ble Apex Court wherein it clarified that

  1. A large number of judgements have been delivered by the Hon’ ble Supreme Court on various aspects of Central Excise, Service Tax or Customs consequent upon the constitution of special bench on 28.02.2015 to expeditiously decide appeals in Indirect taxes. However, there may be Board circulars on some of these issues which are contrary to the judgement delivered by Hon’ ble Supreme Court. The issue is whether the field officers are bound by such circulars, during the period the circular has not been rescinded.
  2. In this regard, attention is invited to the judgement of Hon’ ble Supreme Court dated 14thOctober2008 [2008(231) E.L.T.22(SC)/2008-TIOL-104-SC-CX-CB] in case of M/s Ratan Melting & Wire Industries Vs Commissioner of Central Excise, Bolpur. In the said judgement Hon’ ble Supreme Court has held at para 6 & 7 that-

“ “6.Circular and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the court to direct that the circular should be given effect to and not to a view expressed in a decision of this court or the High Court. So far as the clarification/circulars issued by the central Government and of the state Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the court. It is for the court to declare what the particular provision of statute says and it is not for the Executive. Looked at from other angle, a circular which is contrary to the statutory provisions has really no existence in law…

7……….. to lay content with the circular would mean that the valuable right of challenge would be denied to him and there would be no scope for adjudication by the High Court or the Supreme Court. That would be against very concept of majesty of law declared by Supreme Court and the binding effect in terms of Article 141 of the Constitution’’  

  1. Therefore, it is clarified that Board Circulars contrary to the judgements of Hon’ble Supreme Court become non-est in law and should not be followed. Reference of such circulars should be made to the Board so that further action of rescinding these circulars can be expeditiously taken up. Board may also initiate such action suo-moto. All pending cases on the issue, including those in the Call-Book, decided after the date of the judgement should, conform to the law laid by the Hon’ble Supreme Court or High Court, as the case may be, irrespective of whether the circular has been rescinded or not.
  2. The above direction would also apply to the judgements of Hon’ble High Court where Board has decided that no appeal would be filed on merit. However, where appeal has been filed by revenue against the High Court’ s order, pending adjudication should be transferred to the Call-Book and such appeals should be kept alive.Conclusion: Therefore, although circular favours the assessee but doubt still persists on the basis of the minutes of the GST Council referred by AAR in its decision for interpretation of the relevant entry (In that case, circular would have to be withdrawn with retrospective effect). It may be apt that suitable clarification may be issued by GST Council in this regard just has been done in the case of Food supplied by Educational Institutions and IIM.
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

To Top