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TMI Blog2014 (4) TMI 447X X X X Extracts X X X X X X X X Extracts X X X X ..... not selling the 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 a tax on sale of articles of food and drink which have been termed as “goods”. Once the observations of the Honourable Supreme Court and the Constitutional definition is understood in this context, then, we do not feel that any assistance can be derived by the Petitioners from the judgment in K.Damodarasamy Naidu [1999 (10) TMI 598 - SUPREME COURT OF INDIA]. This judgment of the Honourable Supreme Court in no way decides the controversy before us far from holding that the Parliament is incompetent to impose and levy a tax on services provided in an airconditioned Restaurant. The Parliament cannot be said to have transgressed into leave alone encroached upon the power of the State Legislature to impose a tax on sale or purchase of goods vide Entry 54 of List II. The taxing power of the Parliament and traceable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign liquor (FLIII licence). The Petitioner No.2 is one of the Restaurant serving food and drinks. It is a member of the Petitioner No.1 Association. After tracing the history as to how the licences to serve foreign liquor are issued, what the Petitioners contend is that the Respondent No.1 is the Union of India. The Respondent Nos.2 to 6 are the Authorities exercising powers for levying, assessing and recovering, so also, collecting service tax. 5 It is then stated that the service tax was introduced in India by the Finance Act, 1994. The Service Tax was legislated by the Parliament under the residuary entry i.e. Entry 97 of List I of the Seventh Schedule to the Constitution of India. Section 65 of the Finance Act deals with taxable services. A number of services were sought to be made exigible to service tax by way of amendments to Section 65 of the Finance Act. While so, the Central Government by the Finance Act, 2011 made an amendment to Chapter V of the Finance Act 1994, relating to service tax, inserting sub clause (zzzzv) to clause 105 of Section 65, thereby, including one more category within the Service tax net. Annexure P2 to the Writ Petition is a copy of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annexures P2, P4 and P5, the amendments in relation to service tax, was clarified by the Ministry of Finance, Government of India, by the communication bearing D.O.F. No. 334/3/2011TRU dated 28.2.2011 (annexed at Annexure P6). It has been stated therein that the levy of service tax is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pickup or home delivery, as also goods sold at MRP and that the Finance Minister has announced 70% abatement on this service which inter alia meant to separate such portion of the bill as it relates to deemed sale of meals and beverages. By the said Notification No. 29/2011 dated 25.04.2011, the 1st May 2011 was made the appointed date on which the provisions of Finance Act, 2011 came into force. Annexure P7 to the petition is a copy of the Notification No. 29/2011 dated 25.04.2011 issued by the Ministry of Finance. The circular number No. 139/8/2011TRU dated 10.5.2011 (Annexure P8 to the petition) was issued by the Ministry of Finance, Government of India purporting to clarify the scope of the said amendment. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Maharashtra Value Added Tax (MVAT) Act at the rate of 12.5% on the gross amount paid for food items sold and also VAT as per the provisions of MVAT Act at the rate of 5% on the amount paid for liquor sold. Value Added Tax on the amount paid on food and beverages sold and the turnover tax on the amount of alcoholic beverages sold are levied and collected by the State as the said transactions are sale exigible to tax under the said Acts which exclusively fall under Entry 54 of the List II of the Seventh Schedule to the Constitution of India. 12 It is stated that the Constitution (Fortysixth Amendment) Act, 1982 amended Article 366 of the Constitution of India by inserting Clause (29A) therein. By reason of this amendment the States became entitled to levy a tax on the supply of food and drink. 13 It is stated that in the eye of law, the tax on food served in restaurants could not be levied on the sum total of the price charged to the customer. The, restaurants provide services in addition to food, and these had to be accounted for. Thus, restaurants provided an elegant decor, uniformed waiters, good linen, crockery and cutlery. It could even be that they provided music, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of India and as enumerated by Articles, Lists I and II of the Seventh Schedule and Entries therein, all of which have been extensively referred in the Petition, reveals that the Parliament may have by the Constitution (Eightyeighth Amendment) Act, 2003 inserted Entry92C in ListI relating to Taxes on services from the date to be notified. However, no such notification has been issued. It may be that the Parliament is taking aid of Entry97 of ListI and the Constitutional Articles read therewith so as to levy service tax, but levy of sales tax on Hoteliers for sale of food or beverages to the guests demonstrates that the State's power does not extend to splitting of transactions in two parts, one of service and other of sale of foodstuff with a view to bring the later under the purview of the sales tax. This was the position emerging from the judgment of the Honourable Supreme Court in the case of the State of Punjab v/s M/s Associated Hotels of India Limited, reported in (1972) 1 SCC 472. 19 Equally, the service of meals served to casual visitors to a Restaurant, was not liable to sales tax, whether, the charges are imposed for the meal as a whole or according to the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll, 2011. The Circular sought to explain the scope of restaurant services. The Circular clarified that the restaurants provide a number of services in combination with the meal and beverages for consolidated charge. The services related to the use of restaurant space and furniture, airconditioning, welldressed waiters, linen, cutlery, crockery, music on a dance floor, etc.. Thus, a new clause (zzzzv) was inserted to Section 65(105) of the Finance Act, 1994 by the Finance Act, 2011. According to the said clause, the service provided by a restaurant having specified facilities such as airconditioning and licence to serve liquor, was liable to service tax with effect from 01.05.2011. According to Mr.Sridharan, further abatement of 70% deemed to be towards sale of meals and beverages was given vide the Notification No.34/2011ST dated 25.04.2011 issued by the Central Government i.e. the delegatee. Thus, a service tax was payable on 30% of the gross amount charged by the restaurants to its customers. A tax levied under Section 65(105)(zzzzv) read with Section 66 and Section 67 of the Finance Act, 1994 is a service tax on supply of food and beverages in a restaurant falling under subclaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tax should not be confused with the nature of tax. For example, excise duty is levied on the manufacture of goods, whereas the value and time for discharge of tax is as provided under the provisions of the Central Excise Act. The Courts have upheld the validity of the levy of tax not confined to manufacturing cost or profit, but considering the sale price of the manufacturer for the reason that the measure has reasonable nexus with the nature of levy. The measure of tax is not determinative of its essential character or of the competency of the legislature to levy the tax. What is to be seen is the pith and substance or the real nature and character of the levy which has to be adjudged, with reference to the charge, viz., the taxable event and the incidence of the levy. The measure of levy can be upheld on two possible grounds, namely, (i) where the measure has reasonable nexus with the nature of levy and (ii) where the nature of levy is wide enough to cover the measure i.e. the measure is concomitant with the nature of levy. 26 In support of the above submissions, Mr.Sridharan has placed reliance on the following decisions: ( 1) (2001) 3 SCC 654 Municipal Council, Kota, Ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation to levy a tax on services provided by highend restaurants that are airconditioned and have the license to serve liquor. The Parliament has the power to make law relating to service tax by virtue of its residuary powers vested under Articles 246 and 248 read with Entry 97 of List I of the Seventh Schedule to the Constitution of India. Article 366(29A)(f) of the Constitution of India permits the States to tax the supply of food, drink or any article for human consumption, as part of any service or any other manner. 28 By placing heavy reliance upon a judgment of the Honourable Supreme Court in the case of Tamil Nadu Kalyana Mandapam Association v/s Union of India, reported in (2004) 5 SCC 632/ AIR 2004 SC 3757, Mr.Setalwad submits that the controversy before us is squarely covered by this decision. He submits that the judgment of the Honourable Supreme Court analyzes all the Entries and relevant Articles of the Constitution of India and holds that a tax cannot be struck down on the ground of lack of legislative competence by inquiring, whether, the definition accords with the layman's view of service . It is submitted by Mr.Setalwad that a levy of service tax on a parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich has licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises. Thus, any service provided by a restaurant and having the above facility, so also, the licence is termed as taxable service on which the service tax can be imposed in terms of Chapter V of the Finance Act, 1994. The controversy is that this tax cannot be imposed by the Parliament and this tax is, therefore, beyond its competence. Insofar as the present Petitioners are concerned, the service tax cannot be imposed, levied, assessed and recovered. 32 The foundation for this argument is that Entry54 in List II (State List) of the Seventh Schedule to the Constitution of India empowers the States to impose taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92A of List I (Union List). The further foundation is that such an Entry has not been inserted in List I (Union List). Therefore and by virtue of clause (29A) of Article 366 of the Constitution of India which is definition of the term tax on the sale or purchase of goods and particularly by subclause (f) thereof, a tax as imposed in the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e customer got certain other amenities also such as service, linen, etc.. The bill, therefore, takes into account the food items which are consumed and the services and other related amenities. The Respondent before the Honourable Supreme Court had been registered as a Dealer under the Punjab General Sales Tax Act, XLVI of 1948. The RespondentCompany, therefore, applied for a declaration that it was not liable to pay sales tax in respect of meals served in the said Cecil Hotel to the guests coming there for stay. The argument was that the hotel received guests primarily for the purpose of lodging and that when so received, the Management provided them with a number of amenities incidental to such lodging and with a view render his stay in the hotel comfortable. The Honourable Supreme Court referred to all such amenities in paragraph 3 and thereafter, analyzes the challenge of the Respondents before it, the judgment of the High Court impugned before it and the contentions of the State of Punjab. In dealing with them, the Honourable Supreme Court has observed as under: 6. The High Court, on a consideration of the arguments urged before it and relying mainly upon the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff, there is no sale of the button or the thread. A number of such cases involving incidental uses of materials can be cited, none of which can be said to involve a sale as part of the main transaction. 14. The transaction in question is essentially one and indivisible, namely, one of receiving a customer in the hotel to stay. Even if the transaction is to be disintegrated, there is no question of the supply of meals during such stay constituting a separate contract of sale, since no intention on the part of the parties to sell and purchase food stuff supplied during meal times can be realistically spelt out. No doubt, the customer, during his stay, consumes a number of food stuffs. It may be possible to say that the property in those food stuffs passes from the hotelier to the customer at least to the extent of the food stuffs consumed by him. Even if that be so, mere transfer of property, as aforesaid, is not conclusive and does not render the event of such supply and consumption a sale, since there is no intention to sell and purchase. The transaction essentially is one of service by the hotelier in the performance of which meals are served as part of and incidental to that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual relationship, a relationship of such a nature that an implied warranty of wholesomeness reflects the reality of the transaction involved and an express obligation understood by the parties in the sense that the customer does, in fact, rely upon such dispenser of food for more than the use of due care. (see Cushing v Rodman). A representative case propounding the opposite view in the case of F. W. Woolworth Co. v. Wilson, citing Nisky v. Childs Co., wherein the principle accepted was that such cases involved no sales but only service and that the dispenser of food, such as a restaurant or a drug store keeper serving food for consumption at the premises did not sell and warrant food but uttered and served it and was liable in negligence, the rule in such cases being caveat emptor. 16. In England, a hotel under the Hotel Proprietors Act, 1956 is an establishment held out by the proprietor as offering food, drink, and if so required, sleeping accommodation, without special contract, to any traveller presenting himself and who appears able and willing to pay a reasonable sum for the services and facilities provided. This definition, which is also the definition of an inn, still e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ularly subclauses (a) to (f) under Article 366(29A) clarified the position, then, the basis of the Supreme Court's judgments itself was altered or taken away. By introduction of this Constitutional amendment, the Parliament clarified that the tax on sale or purchase of goods would include a tax on the supply of goods being food or any other article for human consumption or any drink (whether or not intoxicating), by way of or as part of any service or in any other manner whatsoever. Thus, the element of service in the supply of goods, whether by way of or as part of or in any other manner whatsoever, is included in the tax on sale or purchase of goods, contends Mr.Sridharan by relying on this definition. 38 Mr.Sridharan has taken us through all clauses of Article 366(29A) of the Constitution of India to submit that each of the aspects which go into sale or purchase of goods has thus been included so that the State can impose a tax envisaged by Entry 54 of List II. Therefore, a separate tax on service cannot be imposed, levied, assessed or recovered by the Parliament. 39 We are unable to agree as stated above simply because each of these judgments of the Honourable Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a tax on the supply of goods which may be food or any other article for human consumption or any drink (whether or not intoxicating), by way of or as part of any service or in any other manner whatsoever. It is for that limited purpose and to put an end to the controversy, which was dealt with by the Honourable Supreme Court and to get over the basis of its judgments or to alter them that the Parliament stepped in. Beyond that we do not see as to how a service tax can be said to be a component of tax on sale or purchase of goods envisaged by Entry 54 of List II (State List). To say that the Parliament was denuded of its competence to legislate and impose a tax on service provided by an airconditioned restaurant serving food and drink, under its taxing power, is to do violence to the plain language of the Constitutional provisions, Articles and Entries. 41 In elaborating our reasons for the aforesaid conclusions, we may rely on the settled principles of interpretation which have to be applied for construing and interpreting the Entries in the Seventh Schedule to the Constitution of India. In the judgment in Criminal Writ Petition No.4049/2012 (Pragyasingh Thakur v/s State of Mah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e any duty to exercise that legislative power in any particular manner. The language of these Entries should be given the widest scope of which their meaning is fairly capable because they set up a machinery of Government and each general word should be accordingly held to extend to all ancillary or subsidiary matters which can fairly and reasonably be comprehended in it. 90. ........ 91. It is also well settled that there is no prohibition against the Legislature enacting a single statute in exercise of powers conferred by several entries in the list which is within its competence. [see AIR 1966 SC 619 (Hari Krishna Bargav v/s Union of India) and AIR 1972 SC 1061 (Union of India v/s Harbhajan Singh Dhillon)]. 92. Further, in case of apparent overlapping between two entries, the doctrine of Pith Substance has to be applied to find out the true nature and character of the legislation and the entry within which it would fall. The NIA Act does not create any offence by itself. It only provides for creation of a machinery for investigation and prosecution of certain offences and which are carved out in the laws made by the Parliament. Pertinently the Acts in the schedule to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recovering such tax, the State Government does not tax the services. That entry enables the State to impose a tax on sale or purchase of goods and in doing so, the State is enabled to tax the above aspect or matter in the course of sale or purchase of goods. In order to enable the State to levy, assess and recover the sales tax that the Parliament inserted the inclusive definition of a tax on sale or purchase of goods, as above. When the State imposes or levies the sales tax on goods, it is not charging or taxing the services, but sale thereof. The service tax does not charge or tax the sale of goods. It charges or taxes the services and which may or may not be provided in sale of goods. It was argued and prior to the Constitution (FortySixth Amendment) Act, 1982 that the State cannot impose the sales tax on the establishments like restaurants or hotels because they do not sell goods. They only provide services and while rendering and providing such services, they may be incidentally selling the goods. However, their predominant activity is rendering services and not selling the goods. It is that argument or stand which is taken care of vide the above Constitutional definition. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f cheese sandwiches whose price is shown to be Rs. 50 on the bill of fare knows very well that the innate cost of the bread, butter, mustard and cheese in the plate is very much less, but he orders it all the same. He pays Rs. 50 for its supply and it is on Rs. 50 that the restaurant owner must be taxed. 10. ....... 11. Learned Counsel for the owners of residential hotels in the State of Maharashtra (Writ Petition No. 9901 of 1983) raised much the same contention, but in the context of residential hotels. He pointed out that residential hotel provided only lodging or lodging and boarding. The boarding could comprise full board, i.e., breakfast, lunch and dinner or breakfast and one meal or breakfast alone. In Mr. Salve's submission, the composite charge that the hotel owner levied for lodging and such boarding had to be split up and only the element thereof that related to the supply of meals could be subjected to the tax. The tax could not be levied on the composite charge for boarding and lodging unless the State made Rules which set down formulae for determining that component of the composite charge which was exigible to the tax on food and drink. 12. It was not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile 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 a tax on sale of articles of food and drink which have been termed as goods . Once the observations of the Honourable Supreme Court and the Constitutional definition is understood in this context, then, we do not feel that any assistance can be derived by the Petitioners from the judgment in K.Damodarasamy Naidu (supra). This judgment of the Honourable Supreme Court in no way decides the controversy before us far from holding that the Parliament is incompetent to impose and levy a tax on services provided in an airconditioned Restaurant. 46 In this context if one refers to amendment to the Finance Act and ChapterV of the Finance Act, 1994, it would be clear that what is imposed is a service tax. To enable imposition thereof, a taxable service has been defined to mean any service provided or to be provided to any person, by a restaurant, by whatever name called, having the facility of airconditioning in any part of the establishment, at any time during the financial year, which has licence to serve alcoh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Act, 1986, the Honourable Supreme Court held as under: 4. ....... The answer to all this shall depend on understanding of the word service . The term has variety of meanings. It may mean any benefit or any act resulting in promoting interest or happiness. It may be contractual, professional, public, domestic, legal, statutory etc.. The concept of service thus is very wide. How it should be understood and what it means depends in the context in which it has been used in an enactment. ....... 49 By no stretch of imagination, therefore, a service tax can be the same as a tax on sale and purchase of goods. By the nature of the tax, which has been imposed, so also, bearing in mind the wording of the entries in the Seventh Schedule to the Constitution of India, it would be evident that a service tax is not a tax on supply of goods. It is not a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating). By the Finance Act, 1994, the Constitutional provisions and entries in the Seventh Schedule, a service tax is understood as a tax on varied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration. Such supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply of such goods is made. Thus, by a deeming fiction, the supply of goods is sale thereof by the person making the supply and purchase of those goods by the person to whom the supply is made. By a deeming fiction, a tax on the supply thus, includes a tax on sale or purchase of goods. That is a component or concomitant of sales tax or tax on sale or purchase of goods. However, what is contemplated by Article 366(29A)(f) is the supply, by way of or as part of any service or in any other manner whatsoever of goods. Thus, the goods which may be food or any other article for human consumption or any drink (whether or not intoxicating), being supplied in the course of their sale, does not mean that the tax imposed on them is a service tax. The tax is on the sale or purchase of goods. That includes the supply of goods. The service during such course is not taxed. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, cannot be upheld. The Parliament by the Finance Act, 2011 specified or expanded the scope of the taxable services by amending Chapter V of the then prevailing Finance Act, 1994. (see clause 71 of the Bill to amend the Finance Act published on 28th February, 2011). Thus, the Entry 92C of List I being not brought into force cannot be of any consequence. 53 Reliance placed by Mr.Sridharan on the judgments which we have noted above is totally misplaced. We have elaborately discussed the judgments rendered prior to insertion of Article 366(29A)(f) and thereafter. The only other judgment and stated to be dealing with this controversy is that of the learned Single Judge of Kerala High Court in the case of Kerala Classified Hotels and Resorts Association v/s Union of India reported in 2013TIOL533HCKeralaST. The learned Single Judge of Kerala High Court beyond referring to three Supreme Court judgments, namely, Associated Hotels of India Ltd. (supra), Northern India Caterers Limited (supra) and K.Damodarasamy Naidu (supra), neither observes or holds that the tax in question is covered by the State List (Entry 54). A categoric finding in that regard is necessary. The analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law. The following judgments and the principles laid down therein can be very well applied to the case on hand. 1. M/s. J.K. Jute Mills Co. Ltd. vs. The State of U.P. Anr. [1962] 2 SCR 1; 2. M/s Gannon Dunkerley Co. and Ors. vs. State of Rajasthan Ors. (1993) 1 SCC 364; 3. The State of Madras vs. Ganon Dunkerley Co. (Madras) Ltd. [1959] SCR 379; 4. The Sales Tax Officer, Pilibhit vs. M/s. Budh Prakash Jai Prakash, [1955] 1 SCR 243; 5. M/s George Oakes (P) Ltd. vs. State of Madras, [1962] 2 SCR 570. 44. In regard to the submission made on Article 366(29A)(f), we are of the view that it does not provide to the contrary. It only permits the State to impose a tax on the supply of food and drink by whatever mode it may be made. It does not conceptually or otherwise includes the supply to services within the definition of sale and purchase of goods. This is particularly apparent from the following phrase contained in the said subarticle such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods. In other words, the operative words of the said subarticle is supply of goods and it is only supply of food and drinks and other artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a tax cannot be struck down on the ground of lack of legislative competence by enquiring whether the definition accords what the layman's view of service. It is well settled that in matters of taxation laws, the court permits greater latitude to pick and chose objects and rates for taxation and has a wide discretion with regard there to. We may in this context refer to the decision of Mafatlal Industries Ltd. and Others vs. Union of India and Others (1997) 5 SCC 536 para 343 at page 740. ..In the matter of taxation laws, the court permits a great latitude to the discretion of the legislature. The State is allowed to pick and choose districts, objects, persons, methods and even rates for taxation, if it does so reasonably. The courts view the laws relating to economic activities with greater latitude than other matters. 54. Therefore, a levy of service tax on a particular kind of service could not be struck down on the ground that it does not conform to a common understanding of the word service so long as it does not transgress any specific restriction contained in the Constitution. 55 There is no substance in the contentions of Shri Sridharan that Kalyana M ..... X X X X Extracts X X X X X X X X Extracts X X X X
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