Introduction:
Till the levy of service tax on restaurant service (w.e.f. 01.05.2011) by the central government, the entire transaction of food supply at a restaurant was subjected to VAT only by the state governments. However, with Central Government’s decision to tax certain portion of the total bill (presently 40% of total bill) as service portion involved in supply of food or beverages, there has been overlapping of service tax and VAT levied on total bill value.
In this article, an attempt is made to understand the series of events which has led to the charge of service tax and VAT on the supply of food in a restaurant/hotel.
Background:
Initial attempts to levy Sales Tax on Services involving food supply – Prior to Article 366(29A):
An attempt to levy sales tax on food supply has been first made by Punjab Government which has been challenged by Associated Hotels of India Ltd. In the case of State of Punjab vs. Associated Hotels of India Ltd, 1972 AIR 1131, the hotelier served meals at stated hours to those who stay at the hotel and a consolidated bill was given to him. There was no break up of amounts pertaining to sale of food and service in such bill.
Here, sales tax was proposed on certain portion of accommodation charges treating it as consideration for supply of food. The issue has gone to the High Court, wherein the High Court after relying on various judgments has concluded that there is no sale involved in such transaction since the parties had never intended to purchase and sale of goods. The revenue has approached the Supreme Court against the High Court order.
The Supreme Court held that the transaction is essentially of service in the performance of which or as a part of the amenities incidental to that, the hotelier served meals at stated hours. Thus, held that 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 ambit of sales tax.
However, the state governments have been levying sales tax on food supply in restaurants on the basis that the Associated Hotels of India case (supra) was applicable only for composite transactions (to supply of food or drink by a hotelier to a person lodged in the hotel) and that tax was leviable on the direct, isolated sale of foodstuffs by a restaurant.
Later, the Supreme Court in the case of Northern India Caterers (India) Ltd. Vs. Lt. Governor of Delhi (A.I.R. 1978 S.C.1591) has held that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a
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service in the satisfaction of a human need or ministering to the bodily want of human beings. It would not make any difference whether the visitor to the restaurant is charged for the meal as a whole or according to each dish separately. Accordingly the supreme court has quashed the levy of sales tax on sale of food.
Step taken by central government to enable state governments to tax food supply sales in hotels/ restaurants- Insertion of 366(29A):
Consequent to these judgements of Supreme Court, the Central Government, with an intention to enable the State Governments to levy tax on transactions involving supply of food, has amended vide THE CONSTITUTION (Forty-sixth Amendment) Act, 1982, the definition of ‘Sale’ as appearing in Article 366(29) to include these transactions as deemed sales.
Clause 29A reads as follows- "tax on the sale or purchase of goods" includes-
- 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
Note that there is no levy of service tax at the time of insertion of clause 29A, as levy of tax on services first began in 1994.
Post insertion of clause (29A) of Article 366 of the Constitution:
Post insertion of clause 29A of article 366, most state governments amended their respective state sales tax act to include the deemed sales as part of definition of the term ‘sale’ enabling them to levy sales tax on the same.
Now, the question has arisen as to whether sales tax has to be levied on entire consideration received for restaurant service involving supply of food or on part of consideration after excluding value of service component in the transaction.
In the case of K. Damodarasamy Naidu vs. State of Tamil Nadu & Others in February 1990, the levy of sales tax on entire consideration was challenged by the assesses contending that when the transaction has both supply of goods and service portion, it is illegal to tax on the consideration without proper guideline to separate the value for service portion.
However, the Supreme Court ruled that with the insertion of clause (29A) of Article 366 of Constitution, the parliament has given an inclusive definition of 'tax on the sale or purchase of goods' intended to undo the effect of the Supreme Court decisions and it will now be permissible for the State Legislature to levy sales tax where there is supply of goods, being food or any other article for human consumption or any drink, even though it is by way of or as part of any supply or in any other manner whatsoever.
In view of this specific expansion of the meaning by the constitutional amendment, the court do not see how any objection can be raised that the supply of foods which were a part of service and which were originally found to be not taxable under the Sales Tax Act by the Supreme Court, cannot even now be taxed by proper legislative enactment.
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Thus, the Supreme Court ruled that no distinction is to be made between the supply part and the service part in the supply of food and drinks in a hotel. Also, the argument of assesses that attempt to levy sales tax on entire transaction including service without proper rules to separate service portion from the total value of transaction, has been quashed by the Supreme court, taking stand that, with amendment in definition of ‘sale’ thereby inserting ‘deemed sales’ in the definition, the States have got the authority to tax entire transaction including service portion.
Since then, the trade has been accustomed to pay sales tax (or VAT) on the entire consideration, coming to the general conclusion that transactions involving supply of food or beverages are prima facie ‘sales’ thus subject to Sales tax on entire value.
Subsequently, appeals have been filed for the case (K. DamodarasamyNaidu 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) 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.” (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 by way of a service and States can impose tax on the entire transaction value of restaurant sales.
With respect to food supplies in residential hotel accommodations where the supply of food is as part of hotel accommodation service, 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.
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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.
Levy of service tax on Restaurant services w.e.f. 01.05.2011:
For around a decade after the judgement given by Supreme court in case of K. Damodarasamy Naidu vs. State of Tamil Nadu & Others AIR 1999 SC 3909, the trade was of opinion that the issue of taxing on food supply in restaurant service and sales tax was paid on entire consideration. It is for this reason that the decision of central government to levy service tax on service portion involved in food supply came as a jolt to the trade.
The Central government brought restaurant service (with certain conditions), under the ambit of service tax levy vide sub clause (zzzzv) of clause 105 of Section 65 of the Finance Act, 1994, which reads as follows:
“Services provided or to be provided to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the 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.”
and
on hotel accommodation vide sub clause (zzzzw) of clause 105 of Section 65 of the Finance Act, 1994, which reads as follows:
“Services provided or to be provided to any person, by a hotel, inn, guest house, club or camp-site, by whatever name called, for providing of accommodation for a continuous period of less than three months”
Central Government, through amendment of Service Tax (Determination of Value) Rules, 2006 in 2012, stated that value of service portion in case of restaurant service shall be 40% of total amount charged and in case of outdoor catering to be 60% of total consideration.
Taking stand that serving of food or beverage including alcoholic beverages represents only sale of goods which squarely falls under Entry 54 of List II (State List) of the 7th schedule to the Constitution of India and therefore within the exclusive competence of the State Legislature, the trade challenged in courts as to the legislative competence of the Parliament to impose a tax on sale of goods which is absolutely the domain of the state legislation.
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Thus, the constitutional validity of Service tax on restaurant services has been a subject matter of consideration before several High Courts. Kerala High Court and Maharashtra High court took divergent views on this issue placing reliance on different cases.
In the case of Kerala Classified Hotels and Resorts Association vs. UOI, 2013-TIOL-533-HC-Kerala-ST, initially, the single Judge held that the matters covered in the sub clauses (zzzv) and (zzzw) of Section 65(105) were enumerated in Entries 54 and 62 of the State List , whereby the State government has the exclusive right to tax on the same and hence, the Parliament did not have the legislative competence to levy tax thereon. Thus, the Kerala High Court held that levy of service tax on restaurant services is unconstitutional.
Later on, In the case of Indian Hotels & Restaurant Association vs. UOI, 2014-TIOL-498-HC-MUM-ST, the Mumbai High Court refused to place any reliance in the single member bench decision of Kerala High Court in the case of Kerala Classified Hotels and Resorts Association and thereby upheld the levy of Service tax on the services rendered by restaurants under clause (zzzzv) of section 65(105) of the Finance Act, 1994. The court placed reliance on the case of Tamil Nadu KalyanaMandapam Owners’ Association vs. Union of India & Others, 2004, 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.
The revenue, thus, after Mumbai High Court’s judgement upholding levy of Service tax on restaurant service, went into appeal against the decision of the single Judge in case of Kerala Classified Hotels and Resorts Association vs. UOI, 2013. However, the Division bench upheld the decision of the single Judge and confirmed that levy of Service tax on supply of food and beverages in an air-conditioned restaurant and on accommodation in hotels, inns etc. under sub-clauses (zzzzv) and (zzzzw) of Section 65(105) respectively is unconstitutional. The Court held that even the service part involved in the supply of food and beverages is deemed as a sale to enable the States to impose tax thereon. Hence, having characterised constitutionally the subject matter of supply of food in a restaurant, including the service part of it, as a sale, the Parliament cannot characterise the same transaction as a service for imposition and levy of Service tax.
As of now, there is no clarity as to constitutional validity of levy of Service tax on Restaurant services and Hotel accommodation services. However, the revenue authorities have been collecting service tax on these services and also, restaurant services now fall under major revenue generating category (service). Thus, the Supreme Court has to put an end to this ambiguity for the benefit of industry.
Conclusion:
In the view of the paper writer, the reason for which courts are rejecting constitutional validity of levy of service tax on service portion of transactions involving food supply is, for all the years till 2011, Sales Tax was collected, stating that the transaction is entirely sale. Now, if the courts upheld the levy of service tax on restaurant services, it has the meaning that the Government has been collecting sales tax on entire value including service portion, which is ultra vires the constitution. Article 265 of Constitution of India reads "No tax shall be levied or collected except by the authority of law.”
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Thus, the only concrete solution for the Indian government to address this issue is introduction of GST, wherein all goods and services are taxed on the same line and both state and central governments have power to collect tax on the same.
Also, though the issue is before several High Courts, the Central Revenue is still reaping the service tax collection on restaurant services and State Revenue is charging VAT on entire bill value including service tax ( which is yet another litigated issue), which ultimately has to be borne by consumers.
“If a plan doesn’t work change the plan but never the goal.”
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