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TMI Blog2014 (11) TMI 1021X X X X Extracts X X X X X X X X Extracts X X X X ..... wn called Moodabidri and "Ballal Residency" at Nazarath Road in Bangalore. W.P. No. 52327/2013 is filed by Bruhat Bengaluru Hotels Association, which is a registered Association, through its Secretary. 3. According the petitioners they are engaged in the business of running hotels and restaurants. During the course of their business they supply food and articles of human consumption and drink in a restaurant or by way of outdoor catering. In respect of sale of aforesaid articles (goods) prepared by them or purchased from elsewhere, petitioners have been registered as dealers under the provisions of the Karnataka Sales Tax Act, now substituted by the Karnataka Value Added Tax, 2003, and that they are not amenable to pay any Service tax in respect of the very same transactions made by them in their respective hotels and restaurants. More specifically, it is contended that their transactions being in the nature of sale of goods in terms of Article 366(29A)(f), they are not liable to pay Service tax. It is in this context, that petitioners have raised their principal contention that the levy of Service tax on their business and more particularly on their sale transactions is beyo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... human consumption and that when such an amendment has been made to make it a deemed sale of goods, taxation would have to be only on the basis that there is a sale of goods which is as part of any service and therefore, there cannot be an independent levy of service tax on such transactions. 8. Elaborating on the said contention, it was submitted that under Article 366(29A)(f), tax can be levied 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), where such supply or service, is for cash, deferred payment or other valuable consideration, that such a tax is a part of sales tax or value added tax, which is levied by the State Government and therefore, on that aspect of the matter, Parliament is not competent to levy Service tax. More specifically, it was contended, having regard to the nature of transaction of selling food and drink in a hotel, there is a composite transaction of sale-cum-service and that the two aspects cannot be bifurcated or made divisible and therefore, on the very same transaction, both sales tax or value added tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e establishment, at any time during the financial year, which has licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises; (zzzzw) to any person, by a hotel, inn, guest house, club or campsite, by whatever name called, for providing of accommodation for a continuous period of less than three months;" 14. The aforesaid amendments have been made pursuant to Article 246 of the Constitution, which relates to the subject-matter of laws, which could be made by the Parliament and by the Legislatures of State. The said article refers to the distribution of legislative powers between the Parliament and the Legislatures of the State, which are in the form of three lists i.e. List I or the Union List empowering the Parliament to make laws on subjects enumerated in that list. List II or the State list which empowers the Legislature of any State to make Laws on any matter enumerated in List I and List III or the concurrent list which empowers both the Parliament as well as Legislatures of every State to make laws in matters enumerated in that list. In the instant case, the point of controversy relates to spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to make a law imposing a tax, not mentioned in either of two other lists namely List II and III and therefore Service Tax is leviable by the part. 17. In the context of those entries, the contention of the learned counsel for the petitioners is that in view of insertion of Clause (29A) to Article 366 of the Constitution, it is only the State Government which is empowered to levy tax on a transaction as stipulated in Clause (f) thereof end therefore, on such a transaction, the Parliament does not have legislative competence to levy Service tax. Therefore, the bone of contention between the parties is with regard to the legislative competence of the parliament to levy Service tax as is defined in sub-clause (zzzzv) and (zzzzw) of Clause (105) of Section 65 of the Act. 18. In order to consider end answer the aforesaid contentions, it is necessary to give a historical background of levy of sales tax pursuant to insertion of Clause (29A) to Article 366 of the Constitution as well as Service tax in India. 19. As learned counsel for the petitioners has relied upon sub-clause (f) of Article 366(29A), to contend that the transaction entered into by the petitioners are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing as the legislative subject matter." 21. In Bharat Sanchar Nigam Ltd. and Another v. Union of India - [(2006) 3 SCC 1 (BSNL) = 2006 (34) S.T.R. 161 (S.C.)], the controversy that came up for decision before the Hon'ble Supreme Court was with regard to the nature of transaction, by which a phone connection was taken, as to whether it was a sale or service or both. In that decision, after reiterating the legal history of Article 366(29A) of the Constitution, the Hon'ble Court held as under :- "41. Sub clause (a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale. Sub-clause (b) covers cases relating to works contracts. This was the particular fact situation which the Court was faced with in Gannon Dunkerley and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley was directly overcome. Sub-clause (c) deals with hire purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proprietor of an eating place does not sell but "utters" provisions, and that it is the service that is predominant, the passing of title being merely incidental. The two conflicting views present a choice between liability arising from a contract of implied warranty and for negligence in tort, a choice indicative of a conflict, in the words of Dean Pound, between social interest in the safety of an individual and the individual interest of the supplier of food. The principle accepted in cases where warranty has been spelt out was that even though the transaction is not a sale, the basis for an implied warranty is the justifiable reliance on the judgment or skill of the warrant or and that a sale is not the only transaction in which such a warranty can be implied. The relationship between the dispenser of food and one who consumes it on the premises is one of contractual 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 Gushing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor or lawyer for the documents in both cases. 45. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley's case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366(29A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is 'the substance of the contract.' We will, for the want of a better phrase, call this the dominant nature test." 24. While referring to various clauses of Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that there may be more than one taxable events in a single transaction. When these taxable events involves different kinds of taxes and different aspects of taxation, there could not be any confusion regarding powers of taxation. Also, tax may be levied on an object or on an event of taxation. (b) In Imagic Creative (P) Ltd. v. Commissioner of Commercial Taxes and Others reported in (2008) 2 SCC 614 = 2008 (9) S.T.R. 337 (S.C.) the Hon'ble Supreme Court has pointed out that the payment of Service Tax and VAT are mutually exclusive. A transaction or activity may consist of different elements providing for or attracting different nature of levy. (c) In Escotel Mobile Communications Ltd. v. Union of Indian and Others reported in (2002) Vol.126 STC 475 (Kerala) = 2006 (2) S.T.R. 567 (Ker.), it has been held that : "while the State Legislature is competent to impose tax on "sale" by a legislation relatable to entry 54 of List II of Seventh Schedule, the tax on the aspect of "services" rendered not being relatable to any entry in the State List, would be within the legislative competence of Parliament under Article 248 read with en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned as follows :- "42. On article 366(29A)(f), we are of the view that "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 include the supply of services within the definition of sale and purchase of goods. This is particularly apparent from the following phrase contained in the said sub-article "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 sub-article are supply of goods and it is only supply of food and drinks and other articles for human consumption that is deemed to be a sale or purchase of goods." "43. The concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a service tax cannot be levied on the service aspect of catering. Mr. Mohan Parasaran, learned Senior Counsel for the appellant, submitted that the High Court before applying the aspect theory laid down by this Court in the case of Federation of Hotel & Restaurant Association of India v. Union of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words of Sub-clause (i) have found place in the Sales Tax Acts of most States and, as we have seen, they have been used in the said Tamil Nadu Act. The tax, therefore, is on the supply of food or drink and it is not of relevance that the supply is by way of a service or as part of a service. In our view, therefore, the price that the customer pays for the supply of food in a restaurant cannot be split up as suggested by learned Counsel. 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, furnishing and fixtures, linen, crockery and cutlery, music, a dance floor and a floor show, is what is the subject of the levy. The patron of a fancy restaurant who orders a plate of 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." &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s tax would be payable on the value of the entire contract, irrespective of the element of service provided. Thus, in the said decision, it was held that the entire consideration paid under the agreement cannot be the subject matter of Service tax nor could it be the subject matter of sales tax. Otherwise, it would amount to double taxation. Since catering contract involves supply of goods and services, the consideration received under such contract has to be apportioned between that part of the contract involving supply of goods and the part involving supply of service and appropriate tax be levied separately. 30. The latest in the list of Cases arising under the works contract is Larsen and Toubro Limited and Another v. State of Karnataka and Another reported in (2014) 1 see page 708, which has relevance to the case at hand. In that decision, the Hon'ble Supreme Court has opined at para 60 as under : "Whether the contract involved a dominant intention to transfer the property in goods, in our view, is not at all material. It is not necessary to ascertain what is the dominant intention of the contract. Even if the dominant intention of the contract is not to transfer the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary. The Bombay High Court has relied upon T.N. Kalyana Mandapam Association and has rejected the contention of the petitioner therein that Kalyana Mandapams cannot be equated -with Restaurants. It has further opined that tax on sale of goods involved in the said service levied, does not mean that the Service tax cannot be levied on the service aspect of catering. That means that when a restaurant renders to any person a service, tax on sale of goods involved in the said service can be levied separately. That does not mean that Service tax cannot be levied on the aspect of serving food at a restaurant. That is precisely the tax imposed by the Parliament by virtue of impugned amendments. There could be a sale during the course of rendering of service at a restaurant and therefore, a sales tax could be imposed by the State Legislature on the sale/supply of food. So long as there is no prohibition against imposition of service tax on the services rendered, it must be held that the Parliament is competent to impose a Service tax also on the service aspect of the very same transaction. In other words, if a transaction is relatable purely to Entry 54 of State List of the Constitution, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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