2011 (4) TMI 1267 - HC - VAT and Sales Tax

Whether in the case of a catering contract, in particular outdoor catering, when the assessee has claimed in the invoices specifically the value of goods as well as the value of the services rendered and paid service tax on the service component, is it open to the sales tax authorities to levy sales tax on both the components, namely, the value of the goods and the value of services rendered? Held that - The appeals are allowed. The impugned order passed by the learned single judge as well as the assessing authority, are hereby set aside, It is declared that a contract for out-door catering is a composite contract which falls under sub-clause (f) of clause (29A) of article 366 of the Constitution of India and service tax is payable on service aspect and sales tax is payable on deemed sales aspect and it is not an indivisible contract. The assessee had deposited by virtue of the interim order of the learned single judge, a sum of ₹ 25 lakhs. Now that the assessment order are set aside declaring that the sales tax is not liable to be paid on service aspect, the Revenue shall refund the said amount of ₹ 25 lakhs within four months from the date of the receipt of this order with interest at six per cent per annum, failing which the interest payable will be 12 per cent per annum.

Issues involved:
1. Whether the sales tax authorities can levy sales tax on both the value of goods and the value of services rendered in a catering contract.
2. Legal position regarding the interpretation of composite contracts under the Finance Act and the Constitution.
3. Distinction between composite and indivisible contracts.
4. Validity of reassessment proceedings under Section 39(2) of the Karnataka Value Added Tax Act.
5. Availability and efficacy of alternative statutory remedies.

Issue-wise Detailed Analysis:

1. Levy of Sales Tax on Goods and Services in Catering Contracts:
The primary issue was whether, in a catering contract, the sales tax authorities could levy sales tax on both the value of goods and services rendered. The court held that in the case of outdoor catering, the contract is composite, involving both the supply of goods and services. The service element is predominant and visible, making it distinct from a mere sale of goods. The court concluded that the entire amount mentioned in the bill cannot be subjected to sales tax as it would amount to double taxation. The consideration received under such a contract must be apportioned between the supply of goods and the provision of services, with sales tax applicable only to the goods component and service tax to the service component.

2. Legal Position Regarding Composite Contracts:
The court referred to various provisions of the Finance Act, 1994, and the Constitution, particularly Article 366(29A)(f), which allows the supply of food and drinks as part of a service to be taxed as a sale of goods. The court cited several Supreme Court judgments, including Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi and Tamil Nadu Kalyana Mandapam Assn. v. Union of India, to emphasize that catering services are taxable as services and not merely as sales of goods. The court reiterated that the supply of food in outdoor catering is a composite contract involving both sale and service, and the service element is more significant.

3. Distinction Between Composite and Indivisible Contracts:
The court distinguished between composite and indivisible contracts, noting that a composite contract involves both service and deemed sale of goods. The court emphasized that the entire consideration under such a contract cannot be subjected to sales tax, as it includes a significant service component. The court referred to the Supreme Court's judgment in Bharat Sanchar Nigam Ltd. v. Union of India, which clarified that in composite contracts, the sale elements are separable and can be subjected to sales tax, while the service elements are subject to service tax.

4. Validity of Reassessment Proceedings Under Section 39(2):
The court examined the reassessment proceedings initiated under Section 39(2) of the Karnataka Value Added Tax Act. It noted that the initial assessment had accepted the segregation of goods and services, with VAT paid on the goods component and service tax on the service component. The court found that the reassessment proceedings lacked jurisdiction as there was no new evidence to justify reopening the assessment. The court set aside the reassessment order, declaring it invalid.

5. Availability and Efficacy of Alternative Statutory Remedies:
The court addressed the issue of alternative remedies, noting that the learned single judge had advised the assessee to bypass the first appellate authority and directly approach the Karnataka Appellate Tribunal. The court held that the right to appeal is a statutory creation, and the court cannot create new appellate forums or advise parties contrary to statutory provisions. Given the constitutional issues involved, the court deemed it proper to entertain the writ appeal and decide the matter on merits, providing clarity on the scope and levy of service tax and sales tax for future assessments.

Conclusion:
The court allowed the appeals, set aside the impugned orders, and declared that outdoor catering contracts are composite contracts involving both service and deemed sale of goods. It held that service tax is payable on the service aspect, and sales tax is payable on the goods aspect, preventing double taxation. The court ordered the refund of the amount deposited by the assessee with interest.

Order:
(a) Appeals allowed.
(b) Impugned orders set aside.
(c) Declared that outdoor catering contracts are composite contracts, with service tax on services and sales tax on goods.
(d) Refund of Rs. 25 lakhs deposited by the assessee with interest.
(e) Parties to bear their own costs.

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