1974 (9) TMI 86 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Constitutionality of Section 5(1) of the Andhra Pradesh General Sales Tax Act, 1957.
2. Whether the transactions in restaurants and catering establishments constitute sales or services.
3. Alleged discrimination under Article 14 of the Constitution.

Issue-wise Detailed Analysis:

1. Constitutionality of Section 5(1) of the Andhra Pradesh General Sales Tax Act, 1957:
The petitioners argued that Section 5(1) read with the first proviso of the Andhra Pradesh General Sales Tax Act, 1957, is ultra vires and unconstitutional as it relates to their business turnover. They contended that their business primarily involves service rather than the sale of goods, and thus, the State Legislature lacks the power to levy sales tax on their turnover under entry 54 in List II of the Seventh Schedule of the Constitution of India. The respondents, however, maintained that there is no constitutional infirmity in the said section and that the assessments made by the department stand valid.

2. Whether the transactions in restaurants and catering establishments constitute sales or services:
The petitioners claimed that the transactions in their establishments are essentially contracts of service, not sales. They argued that the bulk of the price paid by customers is for service charges (80%) and only a small portion (20%) goes towards the cost of materials. They relied on past judgments, including the Supreme Court's decision in State of Himachal Pradesh v. Associated Hotels of India Ltd., to support their claim that the transactions in restaurants are similar to those in hotels, which were deemed to be service-oriented and not liable to sales tax.

The court, however, disagreed with the petitioners. It referred to several precedents, including the Supreme Court's rulings in State of Madras v. Gannon Dunkerley & Co. and State of Himachal Pradesh v. Associated Hotels of India Ltd., to conclude that the transactions in restaurants involve the transfer of property in the eatables to the customer, thus constituting a sale. The court emphasized that the primary function of restaurants is to serve meals, and the transaction's essence is the sale of food items, even if it includes certain amenities like service and linen. Therefore, the court held that the transactions in restaurants are sales within the meaning of the Sale of Goods Act.

3. Alleged discrimination under Article 14 of the Constitution:
The petitioners argued that the first proviso to Section 5(1) is discriminatory as it exempts perishable items like fruits and vegetables from sales tax while taxing foodstuffs sold in hotels and restaurants. However, this argument was not pressed before the court. The court nonetheless addressed it, stating that the legislature has the authority to exempt certain goods from tax and that the petitioners are not similarly situated to vendors of fruits and vegetables to attract the vice of discrimination. Hence, the court found no merit in the claim of discrimination under Article 14.

Conclusion:
The court concluded that Section 5(1) of the Andhra Pradesh General Sales Tax Act, 1957, read with the first proviso, is not unconstitutional. It held that the transactions in restaurants and catering establishments are sales and not mere services, thus falling within the State Legislature's competence to levy sales tax under entry 54 of List II of the Seventh Schedule of the Constitution. The claim of discrimination under Article 14 was also dismissed. Consequently, the writ petitions were dismissed with costs.