By Running a corporate canteen involves more than just selecting a menu. For Indian companies, the cafeteria represents a specific intersection of statutory welfare mandates, tax liabilities, and strict food safety regulations.
A poorly drafted Master Service Agreement (MSA) exposes the Principal Employer to significant risks—ranging from denied Input Tax Credit (ITC) under GST to criminal liability for food poisoning incidents under the FSSAI.
Furthermore, the contract structure must withstand scrutiny under the Contract Labour (Regulation and Abolition) Act to prevent contract staff from claiming permanent employment status.
This guide breaks down the regulatory framework, commercial models, and essential penalty clauses required to secure your organization’s interests.
Legal Analysis
Corporate Canteen Service Agreements in India
A comprehensive guide to managing welfare obligations, commercial models, and the specific liabilities of the “Occupier”. Updated December 2025.
Catering services in Indian corporate establishments mix statutory welfare duties, facility management, and labor relations. Historically seen as a simple perk, the corporate canteen is now a critical part of employee engagement. For legal practitioners and administrators, the agreement between the Principal Employer (the Company) and the Caterer (the Contractor) acts as a primary firewall. It protects against food safety liabilities, tax litigations, and the risk of “sham contracting,” where contract workers might legally claim permanent employment status.
No single statute governs this ecosystem. It involves the Factories Act, 1948, the Contract Labour (Regulation and Abolition) Act, 1970 (CLRA), the Food Safety and Standards Act, 2006 (FSSA), and the GST regime.
The Legal Ecosystem
The Statutory Divide: Mandatory vs. Voluntary
The legal character of a canteen agreement depends on whether the facility is a statutory requirement or a voluntary perk. This distinction dictates the control a company must exercise and the liabilities it faces.
| Feature | Manufacturing (Factories Act) | Commercial (Shops & Est.) |
|---|---|---|
| Mandate Trigger | 250+ Workers (includes contract labor) | Varies by state (often voluntary) |
| Cost Recovery | No-profit basis. Cannot charge for fuel/infra. | Company discretion. |
| Management | Canteen Managing Committee (CMC) mandatory. | Company Admin team manages vendor. |
| Tax Impact (ITC) | Likely Available (Statutory Obligation) | Blocked (Section 17(5) CGST) |
Choosing the Right Commercial Model
The financial structure of the agreement often influences the legal nature of the relationship. Companies typically choose between three models. Each carries distinct operational risks.
Fixed Rate Per Plate
Vendor charges a fixed sum (e.g., ₹80) per meal.
Cost Plus Management Fee
Company reimburses raw material + fixed fee.
Subsidized Model
Employee pays X, Company pays Y.
Fixed Rate Per Plate Analysis
In this model, the vendor assumes the risk of inflation. The Company’s liability is capped. However, this creates a temptation for the vendor to cut corners on food quality (using cheaper oil or smaller portions) to maintain margins.
Legal Impact: High separation between Company and Vendor staff. Lower risk of “sham contract” allegations as the payment is output-based, not labor-based.
Price Variation Mechanisms
Agreements typically lock prices for 12 months. However, volatile food inflation (CPI-Food) can make contracts unviable for caterers, leading to sudden service disruptions.
Drafting Tip: The CPI Linkage
Instead of arbitrary hikes, link the annual revision to the Wholesale Price Index (WPI) for Food Articles published by the Ministry of Commerce.
Formula: New Rate = Old Rate × (1 + (Average WPI Increase % × 0.6))
(The 0.6 factor accounts for the fact that raw material is only 60% of the cost, with labor and overheads making up the rest).
Environmental Liability: The Hidden Trap
Under the Solid Waste Management Rules, 2016, corporate campuses are classified as “Bulk Waste Generators” (BWG). The liability to segregate and process waste lies with the Occupier (Company), not just the vendor.
- Wet Waste: Must be composted on-site or handed to authorized bio-gas plants. Dumping it in municipal bins attracts heavy fines.
- Used Cooking Oil (UCO): FSSAI prohibits reusing oil if Total Polar Compounds (TPC) exceed 25%. The agreement must mandate disposal only to RUCO (Repurpose Used Cooking Oil) authorized aggregators to prevent it from re-entering the food chain.
The Labor Law Labyrinth
The workforce deployed by the caterer—cooks, stewards, cleaners—are technically employees of the caterer. However, Indian jurisprudence often pierces the “corporate veil,” deeming these workers direct employees of the Principal Employer if the contract is found to be a “sham.”
The Balwant Rai Saluja Standard
The 2014 Supreme Court judgment in Balwant Rai Saluja v. Air India Ltd. established the “Two-Pronged Test” to determine employment status.
- Effective and Absolute Control: Does the Principal Employer direct the manner of work? Supervising quality (secondary control) is acceptable; supervising the worker (primary control) is not.
- Integration Test: Are the workers integrated into the core business? For canteens, the answer is usually no.
Interactive Risk Assessment: Control vs. Liability
Click the bars to see impact on “Sham Contract” risk.
GST and Fiscal Implications
The taxation of canteen services remains a highly litigated area.
Rate of Tax: Generally 5% without Input Tax Credit (ITC). If the service is “event-based,” it may attract 18%.
Blocked Credits: Section 17(5)(b)(i) of the CGST Act blocks ITC on food and beverages. However, a proviso allows ITC if the employer is obligated to provide the facility under any law (e.g., Factories Act).
Operational Compliance & The “Occupier” Risk
In a factory setting, the “Occupier” (usually a Director) faces strict liability. If food poisoning occurs, the Occupier cannot simply blame the vendor. The law requires due diligence.
The Statutory Hygiene Audit
SLA & Penalty Calculator
Define penalties clearly to avoid them being termed as “unliquidated damages” which require proof of loss in court. Use this tool to estimate monthly deductions based on standard industry slabs.
*Note: Total penalty is typically capped at 5-10% of the monthly invoice value in the agreement.
Standard Draft Template
The following is a comprehensive standard agreement format between a Company and a Caterer. You may copy this draft and adapt it to your specific jurisdiction and operational requirements.
AGREEMENT BETWEEN A COMPANY AND A CATERER FOR RUNNING A CANTEEN IN THE FACTORY FOR ITS STAFF
AN AGREEMENT made this …………………. day of …………………. 20……… between A B Co. Ltd., a company incorporated under the Companies Act, 1956, and having its registered office at …………………. hereinafter called “the Company”, (which expression shall, unless repugnant to context, be deemed to include its successors and assigns) of the ONE PART and X Y Catering Services Pvt. Ltd., a company incorporated under the Companies Act, 1956 and having its registered office at …………………. hereinafter called “the Caterer” (which expression shall unless repugnant to context, be deemed to include its successors and assigns) of the OTHER PART.
WHEREAS
(1) The company was in search of a good caterer to manage and run a canteen for the staff of its factory at ……………… hereinafter referred to as “the said premises”.
(2) The caterer has offered its services to manage and run the said canteen,
NOW IT IS MUTUALLY AGREED BY AND BETWEEN THE PARTIES AS FOLLOWS:
(1) Subject to the conditions of these presents, the company permits the caterer to manage and run the canteen in the said premises for a period of …………………. years from …………………. day of which may be extended from time to time for such period and on such terms and conditions as may be mutually agreed upon by the parties herein.
(2) The caterer shall supply to the employees and other persons, good and wholesome food according to menu as per Schedule hereunder written and shall charge from the employees the rates mentioned therein.
(3) The caterer shall at his own expenses use high class crockery, cutlery and utensils and shall ensure that the crockery, cutlery and utensils are properly and hygienically cleaned.
(4) The quality of foodstuff, beverages and other refreshments to be supplied by the caterer shall be of good standard to the satisfaction of the company. The company may nominate any person to inspect the foodstuff, etc. brought or prepared by the employees of the caterer to be supplied to the employees and other persons in the canteen, who shall have the power to inspect the canteen and direct the removal there from of any article of foodstuff, etc. which in his opinion be considered as unsuitable for consumption and the caterer shall carryout such direction.
(5) The caterer shall maintain and keep the canteen and washing places in the said premises in a clean and hygienic condition to the satisfaction of the company. The caterer shall provide proper receptacles for throwing refuse from the canteen and shall arrange for prompt and proper removal of such refuse from the canteen every day.
(6) The caterer shall keep the canteen open on the days and during such hours, as the company may fix.
(7) The caterer shall at his expenses employ the employees, cooks and other persons for running the canteen. The caterer shall employ such persons in the canteen, who are honest, courteous, observe personal cleanliness and free from contagious diseases. If the inspecting official nominated by the company finds that any employee or servant employed by the caterer is guilty of misconduct or not observing personal cleanliness or suffering from any contagious disease, the company may direct the caterer to remove such employee or servant, and the caterer shall carry out such direction.
(8) The caterer shall not use the premises otherwise for the purpose of running the canteen. The caterer shall not allow his employees, servants or other persons to stay in the premises.
(9) The electric and water installation in the premises shall be maintained by the company, but the electricity and water charges shall be borne by the caterer.
(10) The caterer shall comply with municipal and other regulations, rules and byelaws relating to preparation and sale of foodstuff, drinks and refreshments and shall obtain the necessary licenses in his own and byelaws name and at his own expenses.
(11) The caterer shall not make any structural alterations, or additions of any kind, either temporary or permanent to the said premises, without the previous consent in writing of the company. Any such structure shall on expiration or sooner determination of this agreement shall become the property of the company without any payment to the caterer.
(12) The caterer shall pay a sum of Rs . …………………. per month to the company for the permission hereby granted, which sum shall be payable in advance on or before the …………………. day of each month.
(13) The caterer shall not assign, underlet or otherwise part with the catering rights hereby granted by the company or any part thereof to any person, without the consent of the company in writing.
(14) The caterer shall be liable for and make good any loss or damage caused by any act or default on the part of his servants or employees, to the said premises and/or the company’s property therein permitted to be used by the caterer and listed in Annexure A to this agreement.
(15) The company shall not be responsible for any damage or loss occurring to any furniture, utensils, crockery, cutlery or other goods or articles kept in the said premises by the caterer.
(16) Upon breach of any terms and conditions of this Agreement by the caterer, or if the quality of the articles served in the canteen or the management of the canteen is considered to be unsatisfactory by the company, the company shall be entitled to terminate this agreement by giving one month’s notice in writing and the caterer shall not be entitled to any compensation in case of such termination.
(17) The caterer shall keep a complaint cum suggestion book in a conspicuous place in the canteen, in which the customers may record their complaints/suggestions. The copy of the complaints/suggestions recorded in the said complaint cum suggestion book shall be sent by the caterer to the company every month.
(18) On the expiry or earlier determination of this agreement, the caterer and his servants, employees, agents, etc. shall vacate the premises provided he shall be entitled to remove the furniture, crockery, cutlery, utensils and other articles belonging to it, without in any way causing any damage or loss to the said premises.
(19) All matters, questions, disputes or differences whatsoever arising between the parties touching the construction, meaning, operation or effect of this Agreement or out of or relating to this agreement or breach thereof, shall be settled by arbitration in accordance with the rules of the Indian Council of Arbitration.
(20) The stamp duty on this agreement shall be borne by the Caterer.
IN WITNESS WHEREOF the parties have signed this agreement in manner hereinafter appearing on the day and year first above written.
WITNESSES
1. Signed and delivered by A B Co. Ltd., the within named company by Shri………………….its duly authorized official
2. Signed and delivered by X Y Catering Services Pvt, Ltd., the within named caterer by Shri………………….its duly authorised official
Frequently Asked Questions
Can we ban the caterer from rotating staff?
No. Restricting staff rotation implies direct control, increasing “Sham Contract” risk. You can object to specific individuals for misconduct but should not dictate the roster.
Is the Company liable for food poisoning?
Under the FSSAI, the “Occupier” or nominated officer can be criminally liable. The agreement must include strong indemnities and require the caterer to hold a valid FSSAI license for the specific premises.
Who pays for water and electricity?
Typically, the Company. The agreement should define this as a “Leave and License” for the service tenure, not a lease, to avoid creating tenancy rights.
