2014 (11) TMI 393 - HC - Service Tax

Levy of service tax on Supply of food and beverages in a restaurant - Constitutional validity of sub clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011 - single Judge found that the matters covered by sub clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011, are matters enumerated in Entries 54 and 62 respectively, of List II of the Seventh Schedule to the Constitution and hence, beyond the legislative competence of the Union to impose tax on such matters, invoking Entry 97 of List I of the Seventh Schedule of the Constitution - Held that - Supply of food and beverages in a restaurant, as indicated above, prior to the Constitution (Forty Sixth Amendment) Act, the same was considered to be wholly a service. When the whole transaction was held to be a service, the States could not have imposed tax in respect of that transaction. However, by virtue of the Constitution (Forty Sixth Amendment) Act, this transaction was also deemed to be a sale, conferring authority on the States to tax on the whole consideration received by the person making the supply of food and beverages. Thus, after the Constitution (Forty Sixth Amendment) Act, tax could be imposed and levied by the States on the value of the goods involved in the works contract and tax could be imposed and levied by the Union for the value of the services involved in the works contract. As far as the supply of food and beverages in a restaurant is concerned, after the Constitution (Forty Sixth Amendment) Act, tax could be imposed and levied for the whole amount of the consideration received by the person making the supply of the food and beverages. Sub clause (zzzzv) of Clause 105 of Section 65 of the Finance Act, 1994, relates to the supply of food and other consumables in restaurants. After the Constitution (Forty Sixth Amendment) Act, the said activity is deemed as a sale of goods. After the Constitution (Forty Sixth Amendment) Act, it cannot be said that it is an activity of service. When the said activity is deemed to be a sale of the food and other articles of human consumption, by a constitutional definition, tax on the said activity can be imposed only by the States in view of Entry 54 in List II of the Seventh Schedule. In view of the words used in article 366(29A) (f), the bill raised on the customer cannot be split as charged for the service part and as charged for the food part and that the supply of food by the restaurant owner to the customer, though it may be a part of the service that he renders by providing good furniture, furnishings and fixtures, linen, crockery and cutlery, music etc., tax is leviable for the whole amount of the consideration received by the restaurant owner. In other words, in view of the aforesaid constitutional amendment, it cannot be said that there is any service involved in the supply of food and other articles of human consumption in a restaurant. It is thus evident that the matter covered by sub-clause (zzzzv) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011 is a matter enumerated in Entry 54 of List II of Seventh Schedule and the States alone have the legislative competence to enact any law imposing tax on the said matter. Matter covered by sub-clause (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011, is a matter enumerated in Entry 62 of List II of Seventh Schedule and the States alone have the legislative competence to enact any law imposing tax on the said matter. since the whole of the consideration received by a restaurant owner for supply of food and other articles of the human consumption, including the service part of the transaction, is exigible to tax by the State by virtue of the constitutional definition, it is not open to the Union to characterise the same transaction as a service for imposition and levy of service tax. No reason to interfere with the decision of the learned single Judge - Decided against Revenue.

Summary

Issues Involved:
1. Legality and enforceability of sub-clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011.
2. Legislative competence of the Union to impose tax on services enumerated in sub-clauses (zzzzv) and (zzzzw).
3. Interpretation of "sale of goods" and "service" in the context of the Constitution (Forty-Sixth Amendment) Act.

Detailed Analysis:

1. Legality and Enforceability of Sub-clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994:

The appeals challenge the common judgment that declared sub-clauses (zzzzv) and (zzzzw) of Clause 105 of Section 65 of the Finance Act, 1994, as amended by Finance Act, 2011, illegal and unenforceable. These sub-clauses pertain to services provided by air-conditioned restaurants serving alcoholic beverages (zzzzv) and accommodation services provided by hotels, inns, guest houses, etc., for less than three months (zzzzw). The Union introduced these amendments under the residuary power of Entry 97 of List I of the Seventh Schedule to the Constitution, which includes any tax not mentioned in List II or List III.

2. Legislative Competence of the Union to Impose Tax on Services Enumerated in Sub-clauses (zzzzv) and (zzzzw):

The petitioners, hoteliers running air-conditioned restaurants, argued that the matters covered by the new sub-clauses fall under Entries 54 and 62 of List II of the Seventh Schedule, thus falling within the State's legislative competence. Entry 54 pertains to taxes on the sale or purchase of goods, while Entry 62 relates to taxes on luxuries, including taxes on entertainments, amusements, betting, and gambling. The petitioners contended that Article 366 (29A) of the Constitution, introduced by the Constitution (Forty-Sixth Amendment) Act, deems the supply of food and beverages in restaurants as a sale, enabling States to tax under Entry 54 of List II. Similarly, the accommodation services in hotels are covered under Entry 62 of List II, already taxed by the Kerala Tax on Luxuries Act.

The learned single Judge concluded that the matters covered by sub-clauses (zzzzv) and (zzzzw) are indeed enumerated in Entries 54 and 62 of List II, respectively, making the Union's imposition of service tax beyond its legislative competence.

3. Interpretation of "Sale of Goods" and "Service" in the Context of the Constitution (Forty-Sixth Amendment) Act:

The judgment delves into the interpretations given by the Apex Court on the concept of "sale of goods" in the context of works contracts and the supply of food in restaurants, both before and after the Constitution (Forty-Sixth Amendment) Act. The Amendment Act introduced Article 366 (29A), which includes a tax on the supply of goods, including food and beverages, as a deemed sale, thereby enabling States to impose tax on such transactions.

The Apex Court's decision in State of Madras v. Gannon Dunkerley & Co. (1958) established that a building contract, being indivisible, could not be taxed as a sale of goods. Similarly, in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi (1978), it was held that the supply of food in a restaurant is a service, not a sale. The Constitution (Forty-Sixth Amendment) Act changed this by deeming such transactions as sales, enabling States to tax the entire consideration received for the supply of food and beverages.

The petitioners argued that post the Constitution (Forty-Sixth Amendment) Act, the supply of food and beverages in a restaurant, deemed a sale, cannot be treated as a service for service tax purposes. The Union's invocation of Entry 97 of List I for imposing service tax on these transactions was thus challenged.

Conclusion:

The court upheld the learned single Judge's decision, affirming that the matters covered by sub-clauses (zzzzv) and (zzzzw) are indeed enumerated in Entries 54 and 62 of List II, respectively. Therefore, the Union lacks the legislative competence to impose service tax on these matters. The Writ Appeals were dismissed, maintaining that the entire consideration received by a restaurant for the supply of food and beverages, including the service part, is taxable by the State, not the Union.