GST on Canteen Recoveries from Employees and Notice Pay: In re Carraro India Private Limited (AAAR Maharashtra)

The Appellate Authority for Advance Ruling, Maharashtra, in In re Carraro India Private Limited examined two recurring issues under the GST regime:

  1. GST implications on recovery of subsidised canteen charges from employees through salary deduction, and
  2. GST applicability on recovery of salary in lieu of unserved notice period (notice pay).

This ruling is particularly relevant for manufacturing entities and other establishments that are legally required to run canteens under Section 46 of the Factories Act, 1948, and who routinely deal with notice pay adjustments on employee exits.

Factual Background of the Applicant

Business Operations and Registration

  • The applicant, M/s Carraro India Private Limited, is a company incorporated under the Companies Act, 1956.
  • It operates a manufacturing facility at 82/2, Pune Nagar Road, Ranjangaon MIDC, Pune-412220.
  • The unit manufactures transmissions, axles, skid steer assembly and final drives for windmills.
  • The assessee is registered under the GST regime in Maharashtra with GSTIN 27AAACC5292M1ZB and carries out both domestic sales and exports, including supplies to related party Carraro S.P.A. in Italy.

Statutory Canteen Obligation

The assessee employs around 900 workers at its factory. Being covered by the Factories Act, 1948, it is bound by Section 46, which mandates:

“In any specified factory wherein more than 250 workers are ordinarily employed, a canteen or canteens, shall be provided and maintained by the Occupier for the use of the workers.”

As the entity in control of the factory, the assessee qualifies as the “occupier” under Section 2(n) of the Factories Act, 1948. To discharge this obligation:

  • A dedicated canteen area has been set up within the factory premises.
  • The assessee provides infrastructure such as tables, chairs, utensils, storage areas, washing facilities, and washrooms.
  • A third-party Canteen Service Provider is engaged under a contract to:
    • Bring ready-to-eat food,
    • Deploy and manage serving staff, and
    • Comply with statutory obligations related to their workforce (PF, gratuity, ESI, group accident policy, etc.).

Internal Personnel Policy for Canteen Facility

The canteen usage terms are governed by the assessee’s Personnel Policy No. CIL/HR/PERS/02 dated 01 April 2008. Key features:

  • Employees may take lunch/dinner only in the factory canteen during designated breaks.
  • A fixed deduction of ₹500 per month is made from the salary of an employee opting for the canteen facility, regardless of actual food cost.
  • If an employee avails the facility for less than 20 days in a month with prior intimation, the deduction is done on a pro-rata basis.
  • Employees can opt out of the facility with prior notice (by 25th of the preceding month).
  • Visitors are not allowed to use the canteen; it is strictly for employees.

The balance canteen cost over and above ₹500 per employee per month is borne by the assessee. Thus, the food is effectively subsidised, with part of the cost recovered from employees and the remainder funded by the employer.

Crucially, the canteen exists purely due to the employer–employee relationship and statutory mandate. An individual not in employment cannot access this facility.

Notice Pay Recovery – Employment Terms

Employment Contracts and Policies

Each employee is issued an appointment letter specifying:

  • Designation, band, date of joining, posting location, and
  • Detailed salary structure and other service conditions.

Exit and resignation terms stipulate:

  • During probation:
    • One month’s notice by either side or salary in lieu of the shortfall.
  • After confirmation:
    • Two months’ notice by either side or salary in lieu of the shortfall (subject to mutual agreement).

This is further fleshed out in the assessee’s Notice Pay Policy and Personnel Joining and Relocation Policy (clause 3(9)):

  1. During probation:

    • Notice period: 1 month.
    • Shortfall in notice is recovered from the employee based on last drawn salary (Basic salary + Personal allowance).

  2. Post-confirmation:

    • Notice period: 2 months.
    • Any shortfall is similarly recovered based on last drawn salary (Basic salary + Personal allowance).

The amount representing unserved notice is adjusted against the employee’s full and final settlement. It is neither treated as a separate fee nor as a consideration for a positive service; rather, it is regarded as a contractual deduction to compensate the employer for breach of notice terms.

Issues Raised Before the Advance Ruling Authority

The assessee approached the Authority for Advance Ruling with the following specific questions:

  1. Canteen Charges:
    • Whether deduction of a nominal amount (₹500 per month) from employee salaries for availing canteen facilities constitutes a “supply of service” by the employer under Section 7 of the CGST Act, 2017 and MGST Act, 2017?
    • If yes, whether GST is payable on the amount recovered from employees?
    • Whether input tax credit (ITC) is available on GST charged by the Canteen Service Provider, and if so, whether ITC is limited to the proportion of cost borne by the assessee?