Factory Canteen ITC Under GST: Karnataka AAR Ruling in the Case of Aditya Auto Products & Engineering India Pvt. Ltd.

Background and Context

The Karnataka Authority for Advance Ruling (AAR) recently delivered a significant ruling on the admissibility of Input Tax Credit (ITC) concerning canteen services provided within factory premises. The ruling arose from an application filed by M/s Aditya Auto Products & Engineering India Pvt. Ltd., a manufacturer and trader of automotive components classified under HSN 8708, primarily catering to Original Equipment Manufacturers (OEMs) and Tier-I automotive suppliers.

The applicant operates three manufacturing facilities across Karnataka, employs approximately 1,288 regular workers, and holds registration under the Factories Act, 1948. To discharge its statutory obligation of providing canteen facilities, the company had engaged third-party Canteen Service Providers (CSPs) across all manufacturing locations.

The central question placed before the Authority was straightforward yet significant for the manufacturing sector at large:

Whether ITC is admissible on GST charged by CSPs for catering services provided at factory premises, where such services are mandatorily required to be provided under Section 46 of the Factories Act, 1948?

Factual Matrix of the Case

Canteen Arrangement for Regular Employees

The applicant maintained canteen facilities for its regular workforce on a subsidized basis. A fixed monthly amount ranging between ₹2,200 and ₹2,250 per employee was recovered through salary deductions. The balance cost — forming the larger share of the actual canteen expenditure — was absorbed by the applicant itself. No GST was charged on the amount recovered from regular employees.

Canteen Arrangement for Contract Workers

For contractual workers deployed at the factory premises, the applicant raised monthly invoices on the respective contractors or suppliers for recovery of a similarly concessional amount. On these invoices, GST was discharged at the applicable rate of 5%. The applicant clarified that such recoveries were purely in the nature of cost reimbursement and carried no commercial or profit-driven intent.

Key Contentions of the Applicant

The applicant advanced the following legal positions before the Authority:

  • The canteen facility is provided strictly in compliance with Section 46 of the Factories Act, 1948, which constitutes a statutory mandate.
  • The activity of providing canteen services to employees does not constitute a "supply" within the meaning of Section 7 of the CGST Act, 2017, since it is carried out in the course of and incidental to employment.
  • There is no element of independent commercial intent or profit motive in the operation of the canteen facility.
  • The amount recovered from employees is nominal and substantially lower than the actual cost paid to the CSP.
  • In terms of Circular No. 172/04/2022-GST dated 06.07.2022, ITC is available on services that an employer is obligated to provide under any law.
  • The blocking provision under Section 17(5) of the CGST Act, 2017 is inapplicable because the facility arises from a statutory obligation and not from any independent business activity.

Section 16 – Eligibility to Claim ITC

Section 16 of the CGST Act, 2017 lays down the foundational rule:

"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."