Availing exemption under notification no. 12/2003 towards cost of goods sold is at risk – tribunal is of the prima facie view that catering service does not involve any contract of sale

[Surender Gupta]

Sayaji Hotel Ltd. Versus CCE [2010 -TMI - 77926 - CESTAT, NEW DELHI]: - An analysis

Notification no. 12/2003 St dated 20-6-2003 provides exemption in respect of a taxable service provided from the tax equal to the service tax on the value of the goods and materials sold by the service provider to the recipient of service, subject to conditions that -

(i) there is documentary proof specifically indicating the value of the said goods and services ;

(ii) no credit of duty paid on such goods and materials sold has been taken under Cenvat Credit Rules 2004 ; or

(iii) when such Cenvat credit has been taken by the service provider on such goods and materials, he has paid an amount equal to such credit availed before the sale of such goods and material.

Tribunal heavily relied upon the decision of Apex Court in the matter of Tamil Nadu Kalyan Mandap Assn. Vs. Union of India [2004 (167) ELT 3 (SC) = 2005 -TMI - 135 - SUPREME COURT OF INDIA] in which Supreme Court has upheld the constitutional validity of levy of service tax on Mandap Keeper services. While holding that the issue is prima facie is in favor of revenue, the it has been held that:

"We have examined the contents of Notification No. 12/2003-ST dated 20/06/2003 relied upon by the appellant. The notification states that value of goods and materials sold by the service provider to a recipient of service while providing service, shall not be liable to service tax subject to the condition that there is documentary proof specifically indicating the value of the said goods and materials sold and Cenvat credit on input was not availed. In the present case in hand, when the appellant pleads that catering and mandap keeper services were separated splitting the bills, prima facie we notice that service element of catering has escaped taxation while that service was provided by the appellant to the recipient of services of mandap keeper. Prima facie, Revenue's plea of applicability of Notification No. 01/2006 - ST dated 01/03/2006 to the case of the Appellant appears to be sound when law is clear to immune goods and materials from levy of service tax."

With due respect, the author wish to state that in the same judgment in the matter of Tamil Nadu Kalyan Mandap Association, honorable Supreme Court nowhere said that the impugned activity is subject to service tax solely. Instead, the apex court has recognize the fact and law that there is overlapping between sales tax and service tax but stating that, "….The transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detect from the distinctiveness of the aspects. The consequences and facts of the legislation are not the same thing as legislative subject matter."

Therefore, once apex court has recognize the overlapping between the two, appellant is paying sales tax / VAT on the sale transaction, it would have been appropriate to held that Notification no. 12/2003 was issued to mitigate the overlapping impact of dual taxation. The same purpose is being solved through notification no. 1/2006. Though the method and scope of exemption under the two notifications are different, but the purpose is identical to avoid double taxation.

What constitute sale for the purpose of this notification?

Tribunal observed that, "Though the word 'sale' has not been defined in this notification, as per the provisions of Section 65(121) of the Finance Act, 1994, word and expression used but not defined in this chapter and defined in the Central Excise Rules, 1994 or the rules made thereunder, shall apply, so far as may be, in relation to Service tax as they apply in relation to duty of excise. As per Section 2(h) of the Central Excise Act, 1944, Sale means any transfer of goods by one person to another person in ordinary course of trade or business for cash or other valuable consideration. Same is the definition of the word 'Sale' in Section 4 of the Sale of Goods Act, 1930."

Here it is interesting to note that, while referring the definition of sales under the two statutory enactments as above, the contention of the appellant has been rejected on the basis of a Judgment of Delhi High Court decided under the provisions of Standards and Measurement Act. [Re. Federation of Hotels & Restaurants Association vs. Union of India (2010 TMI - 77929 - HIGH COURT OF DELHI)]. In this case the issue was, "whether it is impermissible for the Petitioners to charge their customers/guests the any price above the maximum retail price (MRP) mentioned on mineral-water packaged and bottled by third parties".

In Federation of Hotels & Restaurants's case, High Court has held that,

"….charging prices for mineral water in excess of MRP printed on the packaging, during the service of customers in hotels and restaurants does not violate any of the provisions of the SWM Act as this does not constitute a sale or transfer of these commodities by the hotelier or Restaurateur to its customers."

On the other side, in the matter of INDIAN RAILWAYS CATERING & TOURISM CORPORATION LTD. Versus GOVT OF NCT OF DELHI & ORS [2010 -TMI - 77928 - HIGH COURT OF DELHI], Delhi High Court has decided that, "the transaction between the petitioner-company and Indian Railways for providing food and beverages to the passengers, on board the trains, is a transaction of sale of goods by the petitioner-company to Indian Railways. It is neither a contract for providing services nor a composite contract for supply of goods and providing of services. We also hold that sale in respect of goods loaded on board the trains in Delhi, takes place, when the goods are loaded in the trains."

In view of the author of this article, had the case of Indian Railways Catering & Tourism Corporation's case been put before the tribunal, the decision would have been different.

But, the battle does not end here. Appellant has an option to content its stand at time of final hearing on the subject matter or may take alterative remedies available in the statute.