VALUATION OF SUPPLY OF FOOD SERVICES

[Dr. Sanjiv Agarwal]

Taxable Service for Supply of Food

Service portion in supply of food any other articles of human consumption of drinks is taxable under section 66E(i) of the Finance Act 1994 as amended by Finance Act, 2012 w.e.f. 1.7.2012

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.

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.

Services Covered / Exempted

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 omitted w.e.f. 1.4.2013.
• Below the threshold exemption

The following activities are illustrations of activities covered in this entry:-

• Supply of food or drinks in a restaurant;
• Supply of foods and drinks by an outdoor caterer.

Valuation

In order to ensure transparency and standardization in the manner of determination of the value of such service provided in a restaurant or as outdoor catering a new rule 2C has been inserted in the Service Tax (Determination of Value) Rules, 2006 w.e.f. 1.7.2012 by the amendment rules of 2012.

The value of service in this case shall be determined as per Rule 2C of the Service Tax (Determination of Value) Rules, 2006. In terms of the said rule, value of the service portion shall be determined in the following manner:-

Value of service portion…..	Shall be ….. percentage of the total amount charged
In a restaurant	40
By an outdoor caterer	60

‘Total amount’ (referred to in the second column of the table above) means the sum total of gross amount charged and the fair market value of all goods and services supplied by the service receiver in or in relation to the supply of food or any other article of human consumption or any drink (whether or not intoxicating), under the same contract or any other contract, less (i) the amount charged for such goods or services provided by the service receiver; and (ii) the value added tax or sales tax, if any, levied to the extent they form part of the gross amount or the total amount, as the case may be.

In Hotel Scandic Gåsabäck AB v. Riksskatteverket 2005 (1) TMI 672 - EUROPEAN COURT OF JUSTICE, where the assessee was running hotel/restaurant and providing meals at concessional rate to its employees, it was held that taxable amount for supply of services is consideration actually received. It is irrelevant whether price paid is higher or lower than cost price.

Abatement

Vide Notification No. 26/2012-ST dated 20-6-2012, w.e.f. 1-7-2012, abatement @ 30 per cent is available from value of taxable service in respect of supply of food or any other article of human consumption or any drink, in a premises together with renting of such premises, including hotel, convention center, club, pandal, shamiana or any other place specially arranged for organizing a function together with renting of such premises provided that cenvat credit on any goods classifiable under Chapter 1 to 22 of Central Excise Tariff Act, 1985 used for providing taxable service has not been taken.

Exemption from Service Tax

Following services are exempt from levy of Service Tax vide Notification No. 25/2012-ST dated 20-6-2012 -

1. serving of food or beverages by a restaurant without bar license and without facility of air conditioning. (The condition of bar licence has been withdrawn w.e.f. 1-4-2013.)
2. services provided to educational institutions by way of catering under a Government sponsored centrally assisted mid-day meal scheme.
3. services provided is relation to serving of food or beverages by a canteen maintained in a factory covered under the Factories Act, 1948, having the facility of air-conditioning or central air heating at any time during the year (w.e.f. 22.10.2013).

Vide Order No. 1/1/2013 dated 17.09.2013, Central Government has granted an ad-hoc exemption to following services provided in the State of Uttrakhand from whole of Service Tax -

(i) Services by way of renting of a room in a hotel, inn, guest house, club, campsite or other commercial place meant for residential or lodging purposes;

(ii) Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess.

However, it may be noted that this exemption was in force for the period from 17/09/2013 to 31/03/2014.

Cenvat Credit

So far as Cenvat Credit is concerned, in terms of the Explanation 2 to Rule 2C of the valuation rules, any goods meant for human consumption classifiable under Chapter 1 to 22 of Central Excise Tariff Act, 1985 are not ‘inputs’ for provision of such service. Cenvat Credit is, therefore, not available on these item. Availability of Cenvat Credit on other inputs, input services and capital goods would be subject to the provisions of the Cenvat Credit Rules, 2004 including the provisions relating to reversal of credits contained in Rule 6. It may be noted the sale of food in the restaurant would amount to clearance of exempt goods and thus the provisions of Rule 6 of the CENVAT Credit Rules, 2004 will not applicable.

Discussions to this article

[deepak gulati]

Sir

This means that the Input credit on services will be provided full ? Also, please clarify the charging of Service Tax on food court and kiosks in AC malls. Thanks and Regards.

[RAJESH KUMAR ARORA]

Sir,

CBEC vide circular F.No.334/3/2013-TRU dated 07/1082013 clarified that If goods are sold on MRP basis (fixed under the Legal Metrology Act) they have to be excluded from total amount for the determination of value of service portion. Multinational food chains serves the food items to their clients at an printed MRP which is very higher than that printed on the same food items ( same brand same quantity) available in local market and do not pay any service tax on that value,

Is this practice correct and logical, considering that the higher MRP printed on these food items is not fair market price and as such it can be easily presumed that difference between normal MRP and MRP at which the food chains provide the foods items to their clients represent the service portion they provide in their restaurants.

[Dr. Sanjiv Agarwal]

On Mr. Deepak's query -

It appears that full credit be available. Food Court / Kiosks in AC mall will be liable to Service Tax.

Archana Chitlangia, ACA

[Dr. Sanjiv Agarwal]

On Mr. Rajesh Kumar Arora's Observation -

It appears to be legally correct. However, one may seek intervention of CCI.

Archana Chitlangia, ACA

[RAJESH KUMAR ARORA]

Is it also legal to exclude value of mrp based items from a single combo meal price. please advise the role of CCI in the matter and in what way

[RAJESH KUMAR ARORA]

Is service tax leviable in case of home delivery by or pick-up at restaurant (ac or non-ac)

[PRAGNESH ASLOT]

Dear Sir

Please tell me that how much service tax rate should be applied on service charges collected by the restaurants. is it 4.9444% or 12.36%..? some of the view that service charges cannot get benefit of abatement. is it true.? Please everybody share your opinion..?