Explore the Gujarat AAAR ruling in Troikaa Pharmaceuticals Ltd. on GST applicability and ITC eligibility for employee canteen recoveries under the Factories Act. Key takeaways for GST compliance in manufacturing firms.
GST compliance, few issues spark as much debate as the tax treatment of employee welfare services. Canteen facilities, often a statutory must-have in factories, sit at the intersection of labor laws and indirect taxation. Manufacturers frequently subsidize meals for workers, recovering a portion from salaries— but does this trigger GST? And what about input tax credit (ITC) on the bills paid to service providers?
Enter the Troikaa Pharmaceuticals Limited case, a pivotal GST case law from Gujarat that clarifies these gray areas. This ruling, spanning an Authority for Advance Ruling (AAR) decision in 2022 and an Appellate Authority for Advance Ruling (AAAR) affirmation in 2025, offers clarity on recoveries from both direct employees and contractual workers. For tax professionals, students dissecting GST rules, and business owners navigating the GST Act, this case is a roadmap to compliance. Let's unpack it step by step.
Legal Framework: Weaving GST with Labor Obligations
To grasp the Troikaa ruling, start with the basics. The Goods and Services Tax (GST) regime, governed by the Central Goods and Services Tax (CGST) Act, 2017, taxes "supplies" of goods or services. But not everything counts as a supply. Schedule III of the CGST Act carves out exceptions, like services between employer and employee "in the course of or in relation to employment" (Entry 1). This shields routine perks from tax.
Enter Section 46 of the Factories Act, 1948—a non-negotiable for factories employing 250 or more workers. It mandates canteen facilities, with costs shared between employer and employees. The government sets subsidy guidelines, but the intent is clear: promote worker welfare without undue burden.
GST complications arise under Section 7 (defining supply) and Section 2(31) (consideration). Recoveries might look like taxable services if they involve third-party providers. Then there's Section 17(5)(b), which blocks ITC on food-related inputs unless the facility is legally obligatory for employees. A 2022 CBIC Circular (No. 172/04/2022-GST) further refines this, exempting employer-provided perquisites and allowing ITC for mandatory setups.
For contractual workers, the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA), adds layers. Contractors primarily handle welfare, but principal employers step in if they falter (Sections 20-21). This distinction fuels the debate in Troikaa's scenario.
Facts of the Case: A Factory's Daily Dilemma
Troikaa Pharmaceuticals Limited, a Gujarat-based manufacturer of generic drugs, runs a bustling factory with over 500 workers. Of these, 288 are direct employees on its payroll, while 223 are contractual hires from agencies like M/s Tirupati Enterprises and M/s Clean India Services. To comply with Section 46, Troikaa outsources canteen operations to a third-party provider.
Here's how it works: The provider prepares and serves lunch and dinner, invoicing Troikaa for the full cost (say, Rs. 60 per meal) plus 5% GST, based on actual headcount. Troikaa subsidizes 50% (Rs. 30), recovering the rest from direct employees via salary deductions—then remits it to the provider. No markup; it's pure pass-through.
For contractual workers, it's nuanced. The provider bills Troikaa only for the subsidized 50%, while workers pay their share directly. Troikaa's contract with agencies explicitly denies any employer-employee tie, placing welfare duties on contractors per CLRA. Yet, Troikaa pays agencies gross wages, including embedded canteen allowances, and oversees site operations.
Fearing GST liability on recoveries and ITC denial, Troikaa sought advance ruling in 2022. The questions? Precisely those in our title: Is GST due on these recoveries? And can ITC flow through on provider bills?
Authority for Advance Ruling (AAR) Decision: Drawing the Line
In its August 10, 2022, order (GUJ/GAAR/R/2022/38), the Gujarat AAR delivered a split verdict, hinging on the employee-contractor divide. For direct employees, no GST on recoveries. The AAR leaned on Schedule III, Entry 1, viewing the facilitation as incidental to employment—not a business supply under Sections 2(17) and 2(83). Echoing the CBIC Circular, it stressed the obligatory nature under the Factories Act, citing precedents like Tata Motors' AAR where similar subsidies escaped tax.
But for contractual workers? GST applies. Lacking an employer-employee bond (per Supreme Court tests in Balwant Rai Saluja v. Air India), recoveries form an "outward supply" of services (Schedule II, Clause 6). Consideration exists via deferred payments, making it taxable despite no profit motive.
On ITC, the AAR invoked the Section 17(5)(b) proviso: Available for employees' meals, as mandated by law and clarified in the Circular. Blocked for contractors, since CLRA shifts primary duty to agencies—no obligation on Troikaa unless contractors default (unproven here).
This ruling balanced welfare mandates with GST's supply-centric lens, but Troikaa appealed, arguing uniform treatment.
Appellate Authority for Advance Ruling (AAAR) Decision: Upholding with Precision
Fast-forward to February 28, 2025 (GUJ/GAAAR/APPEAL/2025/07). The AAAR dismissed Troikaa's appeal, affirming the AAR wholesale. After hearings and submissions, it dissected the contract's fine print: Clause 19 explicitly nixes employer status for contractors, and payments showed no agency failure under CLRA Sections 20-21.
Key reinforcement? The CBIC Circular's Issue 5 exempts employee perquisites, but not third-party dealings sans relationship. For ITC, Issue 3 extends the proviso to obligatory foods—covering employees only. The AAAR rejected Troikaa's CLRA reinterpretation, noting principal employers' backup role doesn't create bonds or obligations.
In essence, the AAAR fortified the AAR's logic, emphasizing evidence over intent. No natural justice breach; the ruling stands firm.
Analysis: Debating the Divide in GST Case Law
This dual ruling spotlights GST's nuanced application. Why the employee-contractor split? At heart, it's relational. Direct employees trigger Schedule III protections; their recoveries are "in relation to employment," not commerce. Contractual setups, per CLRA, preserve agency independence—turning recoveries into taxable facilitation services.
Critics argue this fragments compliance. Why penalize manufacturers for holistic welfare when Section 2(l) of the Factories Act lumps all "workers" together? Yet, the rulings counter: Tax follows form, not equity. No profit? Irrelevant—consideration seals supply status.
On ITC, the proviso's 2019 insertion was a boon, but its employee-only scope (per Circular) irks. For contractors, blocked credits inflate costs, potentially hiking drug prices. Broader implications? Aligns with GST Council's 2018 push for simplified welfare taxation, but invites challenges if contractors "fail"
|
Aspect |
Direct
Employees |
Contractual
Workers |
|
GST on Recovery |
No (Schedule
III, Entry 1; CBIC Circular Issue 5) |
Yes (Section
7(1)(a); Supply of service) |
|
ITC
Availability |
Yes (Section
17(5)(b) proviso; Obligatory under Factories Act) |
No (Blocked;
CLRA primary duty on contractor) |
|
Key Legal
Anchor |
Employer-employee
relationship |
No such
relationship; Agency contract |
|
Practical
Burden |
Minimal;
Pass-through seamless |
Higher; Taxable
outward supply |
This table underscores the binary: One shields, the other exposes. Future GST case law might test Supreme Court intervention, especially on "worker" definitions.
Impact & Practical Implications: Navigating Compliance in the Factory Floor
For manufacturers like Troikaa, this means segmented accounting: Track employee vs. contractor usage meticulously. HR teams must audit contracts for relationship clauses; finance, segregate invoices for ITC claims. Smaller firms with mixed workforces face amplified scrutiny—expect audits probing "true" obligations.
Broader ripples? Encourages in-house canteens to dodge third-party GST, though scalability bites. Taxpayers gain certainty: No GST on employee shares reduces litigation; blocked ITC for contractors nudges better agency vetting.
Students of GST rules will note this as a textbook on interplay—Factories Act mandates meet GST Act's supply test. Professionals: Update SOPs; leverage the Circular for audits. In a post-2025 landscape, it tempers costs while upholding revenue integrity.
Conclusion: Clarity Amid the Canteen Steam
The Troikaa saga distills a core truth: GST respects relationships over routines. No tax on employee recoveries, ITC flows there; but contractual shares bear the levy, credits stall. This GST case law, rooted in 2022-2025 orders, equips taxpayers with actionable intel—consult the full texts for nuances.
Takeaway? Compliance thrives on precision. HR, loop in tax early; firms, revisit contracts. As GST evolves, such rulings light the path—ensuring welfare doesn't weigh down the balance sheet.
Disclaimer: - The information provided in this blog is for educational and informational purposes only and is based on the publicly available details. It does not constitute legal, tax, or professional advice. Readers are encouraged to consult qualified professionals for advice tailored to their specific circumstances. The views expressed are derived from the ruling and do not reflect any endorsement or opinion by the blog author or website.
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