COURT BITES SERVICE TAX ON AC RESTAURANTS

[Dr. Sanjiv Agarwal]

Service Tax is applicable on sale or supply of food stuff in air-conditioned restaurants whether or not it is part of any hotel or other establishment. Even the eating joints in air-conditioned malls and eateries like Pizza Hut, Mc Donald's, Coffee Cafe Day, Subway etc are also liable to Service Tax on supply of food and beverages in their premises as all of these are air-conditioned. W.e.f. April 2013, such restaurants suffer levy of Service Tax even if they do not have a license to sell or serve alcoholic beverages which was a pre-condition for levy of Service Tax prior to April, 2013.

Under the Service Tax law, service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity is a declared service.

In terms of article 366(29A) of the Constitution of India, supply of any goods, being food or any other article of human consumption or any drink (whether or not intoxicating) in any manner as part of a service for cash, deferred payment or other valuable consideration is deemed to be a sale of such goods. Such a service therefore, cannot be treated as service to the extent of the value of goods so supplied. The remaining portion however constitutes a service. It is a well settled position of law, declared by the Supreme Court in case BHARAT SANCHAR NIGAM LTD. (BSNL) Versus UNION OF INDIA [2006 (3) TMI 1 - Supreme court], that such a contract involving service along with supply of such goods can be dissected into a contract of sale of goods and contract of provision of service. Since normally such an activity is in the nature of composite activity, difficulty arises in determining the value of service portion.

It may be noted that definition of service in section 65B(44) contains an exclusion in clause (1A) in relation to transfer, delivery or supply of goods which are deemed to be sale under clause 29A of Article 366 of the Constitution.

Although services provided by any kind of restaurant are covered in this entry, the emphasis is to levy tax on services provided by only such restaurants where the service portion in the total supply is substantial and discernible. Thus the following category of restaurants are exempted –

• Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and which has a license to serve alcoholic beverage. The condition of bar license has been withdrawn w.e.f. 1^st April, 2013.
• Below the threshold exemption

Under Service Tax Law, service portion in an activity wherein goods, being food or any other article of human consumption or any drink, whether or not intoxicating, is supplied in any manner is a taxable service on which Service Tax is payable. However, supply of foods or drink is also a deemed sale in our Constitution on which sales tax or value added tax (VAT) is payable. Such an activity cannot be treated as a service and Service Tax levied thereon. But the Government levied Service Tax on such activities claiming that it is only taxing the service component of the overall transaction involving supply of food or drinks and thus levied a Service Tax on 40 percent in the food supply bill of an air conditioned restaurant.

Kerala High Court has last week (on 3^rd July, 2013) in a batch of Writ Petitions filed by KERALA CLASSIFIED HOTELS AND RESORTS ASSOCIATION & OTHS. VERSUS UNION OF INDIA & OTHS. [2013 (7) TMI 431 - KERALA HIGH COURT] struck down the said levy as unconstitutional and hence invalid holding it to be beyond the legislative competence of Parliament. The petitioners argued that levy of Service Tax on food supply by the centre transgresses upon the subject matter falling under the State list i.e., entry 54 and entry 62 respectively of the list II of the Seventh Schedule of the Constitution and therefore, beyond the legislative competence of the Parliament. The court observed that the every purpose of incorporating the definition of tax on sale or purchase of goods in India's Constitution was to empower the State Governments to impose tax on the supply, whether it was by way of or as part of any service of goods either being food or any other article for human consumption or any drink. The Constitution permits sale of goods during service as taxable and if there is any service, it forms part of sale of goods. As such, the State Governments alone have the legislative competence to enact a law imposing a tax on service component of sale of food or drinks. Not only this, the court said that the service providers were entitled to seek refund of the amount of Service Tax so paid. The high court's pronouncement of judgment stipulates as follows:

• It is declared that Sub Clause (zzzzv) and (zzzzw) to clause 105 of section 65 of the Finance Act 1994 as amended by the Finance Act 2011 is beyond the legislative competence of the parliament as the clauses are covered by Entry 54 and Entry 62 respectively of List II of Seventh Schedule.
• That if any payments have been made by the petitioners on the basis of the impugned clauses, they are entitled to seek refund of the same.

In case of hotels or accommodation, such services were also brought into tax net w.e.f. May, 2011. However, services by way of renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent are exempt from levy of Service Tax. The high court also struck down the levy of Service Tax on accommodation services provided by hotels in the same judgment.

Thus, this judgment should bring cheers to the entire hotel and restaurant industry, which is already facing the brunt of recession and economic slowdown. Also, hotel and restaurant goers would be happy. While the Government may go into appeal to apex court, hotels and restaurants in the country would certainly welcome this move which will provide them a sigh of relief.