2014 (11) TMI 1021 - HC - Service Tax

Legislative competence of the Parliament - Levy of service tax on air conditioned restaurant and hotel, inn, guest house, club or campsite under sub-clauses (zzzzv) and (zzzzw) of Clause (105) of Section 65 of Finance Act, 1994 - serving of food or beverage, including alcoholic beverages or both, in its premises - providing of accommodation for a continuous period of less than three months - Held that - Bombay High Court in the case of Indian Hotels and Restaurants v. Union of India 2014 (4) TMI 447 - BOMBAY HIGH COURT has observed that, It is therefore, dear that a sales tax is on sale of goods. While selling, supply thereof is contemplated and covered by Article 366(29A)(f) of the Constitution of India. It does not mean that the service during the course of or while supplying the goods is taxed, but the tax is and remains on sale of goods. That is why the State Legislatures were held to be empowered to impose, levy, assess and recover tax on sale of articles of food and drink which have been termed as goods. Parliament had the legislative competence to levy Service tax on sub-clauses (zzzzv) and (zzzzw) of clause (105) of Section 65 of the Act. - Decided against the assessee.

Issues Involved:
1. Legislative competence of the Parliament to levy Service tax under sub-clauses (zzzzv) and (zzzzw) of Clause (105) of Section 65 of the Finance Act, 1994.
2. Applicability of the 46th Amendment to the Constitution, particularly Article 366(29A)(f), concerning the taxation of composite transactions involving the sale of food and drinks in hotels and restaurants.
3. Overlapping of Service tax and Sales tax on the same transaction and the application of the aspect theory.

Detailed Analysis:

1. Legislative Competence of the Parliament:
The petitioners contended that the amendments made to the Finance Act, 1994, by inserting sub-clauses (zzzzv) and (zzzzw) to Clause (105) of Section 65, were beyond the legislative competence of the Parliament. They argued that these amendments resulted in an illegal levy of Service tax on transactions involving the sale of food and drinks, which should fall exclusively under the purview of the State's Sales tax or Value Added Tax (VAT) as per Article 366(29A)(f) of the Constitution.

The court examined the legislative competence of the Parliament under Article 248 and Entry 97 of List I of the VII Schedule, which grants Parliament the power to legislate on any matter not enumerated in the State List or Concurrent List, including the imposition of taxes not mentioned in those lists. The court found that the Parliament had the authority to levy Service tax on services provided by air-conditioned restaurants and hotels with licenses to serve alcoholic beverages, as specified in sub-clauses (zzzzv) and (zzzzw).

2. Applicability of Article 366(29A)(f):
The petitioners argued that the transactions in question were deemed sales under Article 366(29A)(f) of the Constitution, which includes the supply of food and drinks as part of a service. They contended that this provision empowered the State to levy Sales tax on such transactions, thereby excluding the Parliament's competence to levy Service tax.

The court referred to several Supreme Court judgments, including the Builders' Association of India and the Federation of Hotels and Restaurant Association of India, which upheld the State's power to levy Sales tax on deemed sales. However, the court noted that these judgments did not preclude the Parliament from levying Service tax on the service aspect of the same transaction. The court emphasized that Article 366(29A)(f) allows the State to tax the sale of goods component, but it does not exclude the service component from being taxed by the Parliament.

3. Overlapping of Service Tax and Sales Tax:
The petitioners contended that the imposition of both Service tax and Sales tax on the same transaction amounted to double taxation. They argued that the transaction of selling food and drinks in a hotel or restaurant is a composite transaction that cannot be bifurcated into separate components for taxation purposes.

The court referred to the aspect theory, which allows different aspects of the same transaction to be taxed under different statutes. The court cited judgments from the Supreme Court, including the Bharat Sanchar Nigam Ltd. (BSNL) case, which clarified that a single transaction could involve multiple taxable events, each attracting different taxes. The court also referred to the decision in Larsen and Toubro Limited, which held that the dominant intention test is immaterial in determining the applicability of Article 366(29A).

The court concluded that the Parliament's imposition of Service tax on the service aspect of the transaction did not infringe upon the State's power to levy Sales tax on the sale aspect. The court upheld the validity of the impugned amendments to the Finance Act, 1994, and dismissed the writ petitions, affirming the Parliament's legislative competence to levy Service tax on the specified services.

Conclusion:
The court dismissed the petitions, holding that the Parliament had the legislative competence to levy Service tax on services provided by air-conditioned restaurants and hotels with licenses to serve alcoholic beverages, as per sub-clauses (zzzzv) and (zzzzw) of Clause (105) of Section 65 of the Finance Act, 1994. The court emphasized that the aspect theory allows for the imposition of different taxes on different aspects of the same transaction, and there was no merit in the petitioners' contention regarding the legislative competence of the Parliament.

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