Introduction:
Ever since the introduction of the service tax levy on Restaurant services (effective from 01.05.2011), its constitutional validity turned out as contentious issues. The reason being that State Governments are imposing VAT on entire consideration received towards food supply over the last two decades by placing reliance on Article 366(29A)(f). All of a sudden Centre has brought service tax levy on a portion of this consideration on the contemplation that this represents service during food supply. In this background, lets have a detailed look into this issue.
Legislative Background that Lead to Article 366(29A)(f):
Prior to insertion of Article 366(29A)(f), there was an attempt in the case of State of Punjab vs. Associated Hotels of India Ltd, 1972 AIR 1131 to levy VAT on a portion of accommodation charges treating it as consideration towards supply of food wherein it was held that the transaction is one essentially of service in the performance of which and as a part of the amenities incidental to that service, the hotelier serves meals at stated hours. Therefore the revenue was not entitled to split up the transaction into two parts as one of service and the other of sale of food stuffs so as to bring the later part under the VAT laws.
Subsequently, another attempt was made by State Governments to levy VAT on supply of food involved in restaurant sales in the case of Northern India Caterers (India) Ltd vs. Lt. Governor of Delhi C 1989 SC1371 (18) on the confrontation that decision of Supreme Court in State of Punjab vs. Association Hotels case (Supra) is applicable only for supply of food in a residential hotel which also provides accommodation but not applicable for the supplies made in restaurants. But the Supreme Court had held that the true essence of transaction involving supply of food in a restaurant is a service to the satisfaction of human need or desire, ministry to a bodily want. A necessary incident of this service or ministry is the consumption of the food required. This consumption involves destruction, and nothing remains of what is consumed to which the right of property can be said to attach. Before consumption title does not pass; after consumption there remains nothing to become the subject of title.
Scope of Article 366(29A)(f):
Consequent to these judgments of Supreme Court, with a view to extend to State Governments the power to levy/sales tax on transactions involving supply of food along with other similar potential sale transactions, the definition of ‘Sale’ as appearing in Article 366(29A) has been amended to include these transactions as deemed sales. Accordingly, Article 366(29A)(f) is introduced which is reproduced as follows;
“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), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer,
delivery or 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 is made”
Subsequently, the issue of requirement of valuation rules in order to exclude the value attributable towards service portion involved in supply of food in restaurants and hotels from the gross amount charged for the purpose of levy of VAT was considered by Supreme Court in the case of K. Damodarasamy Naidu vs. State of Tamil Nadu & Others AIR 1999 SC 3909 wherein with respect to supplies at restaurants it was held vide para 9 as follows;
“The provisions of Sub-clause (f) of Clause (29A) of Article 366 need to be analysed. Sub-clause (f) permits the States to impose a tax on the supply of food and drink. The supply can be by way of a service or as part of a service or it can be in any other manner whatsoever. The supply or service can be for cash or deferred payment or other valuable consideration. The words of Sub-clause (i) ha ve 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.” (Para 9)
Thus the Supreme Court had interpreted the language of Article 366(29A)(f) and held that supply of food in a restaurant is part of a service and States can impose tax on the entire transaction value of restaurant sales. Further quoted an example that 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. The said example is very even in today’s business environment also, as there is no difference or negligible difference in restaurant charges for take aways and in-house consumptions.
With respect to food supplies in residential hotel accommodations, it was vehemently pleaded by petitioners that residential hotels may provide only lodging or lodging and boarding involving breakfast alone, breakfast, lunch and dinner or breakfast and one meal. Tax could not be levied on these composite transactions involving boarding and lodging unless the State make Rules which set down formulae for determining that component of the composite charge which was exigible to the tax on food and drink.
The important point to notice here is that the Learned Counsel for the States had not put forward any argument that entire value of composite charge would be subject to VAT. It was only argued that no rules were necessary for assessment as the officers would undertake assessments depending upon the facts of each individual case. But the Supreme Court ordered the State Governments for Rules to be prescribed for separation of the value of services from food supply in composite charge made by residential hotels with the reasoning that it is impossible to carry out assessments of several thousands of assessees by considering facts of each case and further it would lead to arbitrariness.
Thus Supreme Court had made a clear distinction between supply of food at restaurants and that supplied by residential hotels. After 46th amendment, It appears to have laid out or at least agreed to the principle that State Governments can levy Sales Tax on the entire transaction value in case of restaurants though services are also involved in such supply in view of the clear provisions of Article 366(29A)(f) i.e. a tax on the supply, by way of or as part of any service or in any other manner whatsoever. Wherever separate discernable services (which can be provided independently also without food supply) are involved along with food supply like lodging/accommodation services, Sales Tax is restricted to the value of food supply involved in such transaction.
Constitutional Validity of Service Tax Levy on Outdoor Catering Services:
The other service which involves food supply is ‘Outdoor Catering Services’. When Service Tax levy was brought into effect in the year 2004 on these services, the issue of Constitutional Validity had arisen in the case of Tamil Nadu Kalyana Mandapam Owners’ Association vs. Union of India & Others, 2004-TIOL-36-SC-ST, wherein it was held that Article 366(29A)(f) only permits the State to impose a tax on supply of food and drinks by whatever mode it may be made which does not conceptually include the supply to services within sale or purchase of goods.
Upheld Constitutional Validity by stating the fact that tax on the sale of 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. In the process, circumvent the K. Damodarasamy Naidu case by distinguishing catering services from restaurant services stating that in the case of outdoor catering service, the food/ eatables / drinks are the choice of the person who partakes the services. He is free to choose the kind, quantum and manner in which the food is to be served. But in the case of restaurant, the customer's choice of foods is limited to the menu card. Again in the case of outdoor catering, customer is at liberty to choose the time and place where the food is to be served. Outdoor catering has an element of personalized service provided to the customer. Clearly the service elements are more weighty, visible and predominant in the case of outdoor catering. It cannot be considered as a case of sale of food and drink as in restaurant.”
Kerala High Court Decision on Constitutional Validity:
After introduction of levy of service tax on service portion involved in restaurant supplies, the issue Constitutional validity was initially considered by the single member bench of the Kerala High Court in the case of Kerala Classified Hotels and Resorts Association vs. UOI, 2013-TIOL-533-HC-Kerala-ST wherein the above discussed Supreme Court judgments of K. Damodarasamy Naidu case(Supra) & Tamil Nadu Kalyana Mandapam(Supra) are considered. The Court relied on K. Damodarasamy Naidu case (Supra) as it is more appropriate to restaurant services and held that levy of service tax on services involved in restaurants is constitutionally invalid.
Bombay High Court Decision on Constitutional Validity:
Recently, this issue is again considered by the Bombay High Court in the case of Indian Hotels& Restaurant Association vs. UOI, 2014-TIOL-498-HC-MUM-ST wherein the Constitutional validity of levy of Service Tax on restaurant services is upheld mainly on three findingswhich are summarizedas follows;
- Stated that the Supreme Court decision in K. Damodarasamy Naidu case(Supra) cannot be relied upon because 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 the goods is taxed but the tax is and remains on the 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” (Para 45).
- Distinguished the Kerala High Court decision stating that after referring the various judgments of Supreme Court, there was no categorical finding that the tax in question is covered by entry 54 of State List. (Para 53).
- Relied on the reasoning adopted by Supreme Court in Tamil Nadu KalyanaMandapam case(Supra) while upholding the levy of Service Tax on Catering services.(Para 44 & 45)
However, on a careful study of these judgments, it can be said that the conclusions of Mumbai High Court are not on sound reasoning and are dubious. As discussed above, there is a clear finding by Supreme Court in K. Damodarasamy Naidu case(Supra) that the entire value in restaurant sales is subject to VAT and it cannot be splitup. Further, the distinguishing view adopted by the Supreme Court with respect to residential hotels providing lodging and boarding when compared to restaurants is totally ignored.
The Mumbai High Court refusal to place any reliance in the single member bench decision of Kerala High Court in the case of Kerala Classified Hotels and Resorts Association (Supra) stating that there was no categorical finding that Service Tax on restaurants is covered by entry 54 of State List is devoid of any merit as the Kerala High Court vide para 19 has expressly stated that When food is supplied or alcoholic beverages are supplied as part of any service, such transfer is deemed to be a sale permitting the State Government to impose a tax on such transfer and there cannot be a different component of service on which service tax is payable under the residuary power of the Central Government vide Entry 97 of List I of the Constitution of India.Thus once there is a clear finding that levy is not covered by residuary entry of List I, there is a clear indirect finding by Kerala High Court that the question of levy is covered by Entry 54 of State List.
Further, there is a complete reliance on the reasoning adopted by Supreme Court in the Tamil Nadu KalyanaMandapam case(Supra) in upholding the levy of Service Tax on Catering services by totally ignoring the distinction adopted by the Supreme Court between Restaurant services and Catering services in the said case.
Two Member Bench of Kerala High Court Upheld the view of Single Member:
Keeping aside the legal soundness of the judgment, this decision of Bombay High Court made the industry to lose hope on the issue of service tax levy being unconstitutional.But recently the two member bench of Kerala High Court has considered the Revenue Appeal against the Single Member decision in the case of UOI vs. Kerala Bar Hotels & Otrs,2014-TIOL-1913-HC-Kerala-ST. It has upheld the view of the single member judgment and struck down the levy. Held that after Constitution (Forty Sixth Amendment) Act, as far as supply of food and beverages at a restaurant is concerned, tax could imposed and levied by the State for the whole of the amount of consideration. So it cannot be treated as service for levy of service tax.
In doing so, the two member bench of Kerala High Court has distinguished the judgment of Bombay High Court (supra) vide para 15 and held that no service element exists.
Conclusion:
Thus there are two conflicting views taken by two high courts. However, in the opinion of paper writer, the reasoning adopted by Mumbai High Court is not convincing and is some way or the other conflicts with the propositions laid down in several judgments of Supreme Court. It is for those reasons, the Divisional bench of Kerala High Court has distinguished this judgment and held that levy of service tax is unconstitutional. However, the industry is short sighted of these developments and is continuing to charge service tax to save their skin. It requires one last punch (Supreme Court’s decision) to put an end to this issue of double taxation.
This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
