Latest Blogs from SBS and Company LLP

    Chapter IX of the Finance Bill, 2016 introduced the Income Declaration Scheme, 2016(“scheme”). It shall come into force from 1stday June, 2016.


    Salient Features of the Scheme:-


    • All persons who have not declared income correctly up to Financial Year 2015-16can come forward and declare such undisclosed income(s);
    • Where income chargeable to tax is in the form of investment in any asset, the cost of acquisition of such asset shall be deemed to be Fair Market Value (FMV) taken into account for the purpose of this scheme1


    • No deduction in respect of expenditure or allowance shall be allowed against the income in respect of which declaration under the scheme is made;


    • The Scheme will remain in force from 1st June, 2016 to 30th September, 2016 for filing of declarations. The payment of taxes, surcharge and penalty must be made by 30th November, 2016;
    • Declaration can be filed online or with the Jurisdictional Principal Commissioner of the Income-tax;


    • Assets specified in the declaration shall be exempt from Wealth Tax;
    • No scrutiny and enquiry under the Income Tax Act or Wealth Tax in respect of such declarations;
    • Immunity from prosecution under the Income Tax Act ,Wealth Tax Act and Benami Transactions (Prohibition) Act,1988 subject to transfer of asset to actual owner;


    • Only one declaration can be made under the scheme by a person. The application may be made of his own or as a representative assessee in respect of income of any other person;


    • Income declared under the scheme is subject to tax @ 45% (30% tax+7.5% surcharge(Krishi Kalyan Cess)+7.5% Penalty);


    • Amount of tax paid (i.e. 45%) shall not be refundable;


    In the following cases the benefit of this scheme is not available:-


    • Where notice have been issued under section 142(1)/143(2)/148/153A/153C;


    • Where a search or survey has been conducted and the time for issuance of notice under the relevant provisions of the Act has not expired;


    • Where the information is received under an agreement with the foreign countries regarding such income;


    • Cases covered under the Black Money Act, 2015;
    • Persons notified under Special Court Act, 1992;
    • Cases covered under Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967,the Prevention of Corruption Act, 1988.






    1The Finance Bill 2016 originally introduced provides that the FMV on the date of commencement of the scheme shall be deemed to be undisclosed income. However, the bill passed by the LokSabha provides the cost of acquisition as FMV for the purpose of the scheme.



    Other Points:


    Where a declaration under the scheme has been made by misrepresentation or suppression of facts, such declaration shall be treated as void.


    In case where any declaration has been made but no tax and penalty referred to the scheme has been paid within in the time specified (on or before 30th November, 2016) the undisclosed income shall be chargeable to tax under the Income-tax Act in the previous year in which such declaration is made.


    Consequences of non-declaration:-


    Where income has accrued or arisen or any asset has been acquired out of such income prior to commencement of the scheme and no declaration in respect of such income is made under the scheme such income shall be deemed to have accrued or arisen or received or the value of asset acquired out of such income shall be deemed to have made in the year in which notice under section 142/143(2)/148/153A/153C of the Act is issued by the Assessing Officer and the provisions of the Act shall apply.


    Undisclosed Income:-


    Income which is chargeable to tax under the Income Tax Act for the Financial Year (s)up to 2015-16 but not charged due to the fact that-


    • No return has furnished under section 139(1);


    • Income has not been disclosed in the return of income;
    • Such income escaped assessment by reason of omission or failure on the part of the person to furnish the return or disclose fully and truly all the material facts necessary for the assessment or otherwise;


    Where undisclosed income is represented by cash (including bank deposits), bullion, investment in shares or any other assets but –


    • In respect of which no return under Wealth Tax Act ,1957 has furnished;


    • Which have not been shown in the return of net wealth furnished by him for relevant assessment year or years;


    • Value of the above has been undervalued in the return furnished for relevant assessment year or years.


    Corporate Governance And Internal Audit

    What is corporate governance?


    The IIA definition of corporate governance, included within the International Standards is Governance is the combination of processes and structures implemented by the board in order to inform, direct, manage and monitor the activities of the organisation towards the achievement of its objectives.


    Although there is no universally accepted definition, the first version of the UK Corporate Governance Code was produced in 1992 by the Cadbury Committee. Sir Adrian Cadbury defines corporate governance as “corporate governance is the system by which companies are directed and controlled”.The proper corporate governance structure specifies the distribution of rights and responsibilities among the different parties in the organization; this includes the board, managers, shareholders and other stakeholders. It will also lay down the rules and procedures for decision-making within the organization.


    Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.


    Corporate governance is therefore about what the board of a company does and how it sets the values of the company, hence the process of managing corporate governance is usually handled by a board of directors.


    Need for Corporate governance for the following reasons:


    ØChanging Ownership structures ØWidespread of shareholders ØHigherexpectations of society from the corporates ØCorporates scams or scandals ØHostile take overs


    ØSignificant increase in the compensation of Top management ØGlobalisation















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    SBS Wiki                                                                                                                                     


    Corporate Governance from India’s perspective


    Objectives of Corporate governance



    The Indian Companies Act of 2013 introduced some progressive and transparent processes which benefit stakeholders, directors as well as the management of companies. Investment advisory services and proxy firms provide concise information to the shareholders about these newly introduced processes and regulations, which aim to improve the corporate governance in India. Corporate advisory services are offered by advisory firms to efficiently manage the activities of companies to ensure stability and growth of the business, maintain the reputation and reliability for customers and clients.


    Corporate governance was guided by Clause 49 of the Listing Agreement before introduction of the Companies Act of 2013. As per the revised Clause 49, SEBI has also approved certain amendments in the Listing Agreement so as to improve the transparency in transactions of listed companies and giving a bigger say to minority stakeholders in influencing the decisions of management. These amendments have become effective from 1st October 2014.


    Importance of Corporate governance in India


    The Indian Companies Act of 2013 introduced innovative measures to appropriately balance legislative and regulatory reforms for the growth of the enterprise and to increase foreign investment, keeping in mind international practices. A company that has good corporate governance has a much higher level of confidence amongst the shareholders associated with that company. Active and independent directors contribute towards a positive outlook of the company in the financial market, positively influencing share prices. Corporate Governance is one of the important criteria for foreign institutional investors to decide on which company to invest in.


    Principles of Corporate Governance:


    Transparency: It is the foundation of corporate governance; which helps to develop a high level of public confidence in the corporate sector. In the context of corporate governance; it implies an accurate, adequate and timely disclosure of relevant information about the operating results etc. of the corporate enterprise to the stakeholders.


    Accountability: It implies the responsibility of the Chairman, the Board of Directors and the chief executive for the use of company’s resources (over which they have authority) in the best interest of company and its stakeholders.


    Independence: Good corporate governance requires independence on the part of the top management of the corporation so that it can take all corporate decisions based on business prudence.










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    Corporate Governance and Internal Audit



    SBS Wiki                                                                                                                                     


    Stakeholder expectations of internal audit


    Recent events have highlighted the critical role of directors in promoting good corporate governance. In particular, boards are charged with ultimate responsibility for the effectiveness of their organisations’ internal control systems. These events have highlighted the key role that internal audit can play in supporting the board in ensuring adequate oversight of internal controls and the effectiveness of corporate governance.


    How an organisation designs and practices the principles of effective governance vary depending on the size, complexity, and life cycle maturity of the organisation, its stakeholder structure or legal and cultural requirements.


    The head of internal audit should work with the board and the executive management team, as appropriate; to determine how governance should be defined for internal audit purposes and the extent and expectations of internal audit assurance and consultancy needed to satisfy the internal audit charter.


    Role of Audit Committee


    The Internal audit is an independent and objective source of advice and assurance, separate from the management of a company, when outlining the role of the audit committee in respect to internal audit, the key is to establish the principle that the committee should monitor the independence and objectivity of the internal audit function in order to enable it to provide the support needed by the board.


    The main role and responsibilities of the audit committee should be set out in written terms of reference and should include:


    • to monitor and review the effectiveness of the company’s internal audit function; to review and monitor the internal audit function’s independence and objectivity and the effectiveness of the internal audit process, taking into consideration relevant professional standards;


    • to review and monitor the external auditor’s independence and objectivity and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements.


    • Overseeing of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.


    • To investigate any activity within its terms of reference
    • To seek information from any employee
    • To obtain outside legal or other professional advice


    Role of Internal Audit


    The definition of internal auditing and International Standards identifies that internal audit has a role to play in evaluating and helping to improve governance processes. The internal auditor should, atleast annually, carry out an assessment of the overall effectiveness of the governance, risk and control frameworks of the organisation.


    The International Standards make specific reference to assessing and making recommendations for:


    • promoting appropriate ethics and values within the organisation


    • ensuring effective performance management and accountability
    • communicating risk and control information
    • coordinating the activities of the board, external and internal auditors and management, and communicating what they do


    The internal audit charter should make reference to the scope of the work of internal audit and this should include corporate governance activities and processes.




    The ultimate responsibility for corporate governance in most organizations lies directly with the board of directors. Internal auditors are charged with ensuring that corporate processes and associated controls are functioning as intended. They also can determine if a process of the corporation could be improved and could save the corporation money or could become more efficient. Ensuring that resources of the corporation are used effectively is a major role of internal auditors.




    One of the most important tasks of the internal auditor is the detection of fraud. Left alone, fraud can cause a corporation millions of dollars in lost revenue, and also can affect a corporation’s public image. The boards of directors of many corporations depend solely on the internal audit team to reveal instances of fraud and abuse.


    Type of Internal Audits


    Different types of internal audits can be performed throughout the year. They may focus on financial controls, operating controls or and information technology controls. A board of directors may decide to test in all of these areas, or it may focus on only one.


    Time Frame


    The internal audit function in most corporations is a year-round process conducted by employees. Typically, an audit manager drafts an annual audit plan, and the board of directors approves the plan. Most corporate audits are focused and scheduled according the level of risk. Higher-level risk areas often receive the most attention from the internal audit function in order to ensure that corporate governance objectives are being met.



    The internal audit activity must assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives:


    • Promoting appropriate ethics and values within the organisation.


    • Ensuring effective organizational performance management and accountability.
    • Communicating risk and control information to appropriate areas of the organisation
    • Coordinating the activities ofand communicating the information among the board, external and internal auditors and management.


    Auditing governance – recommended approach


    1. Develop framework for oversight and accountability by defining roles and responsibilities of the of the Board and executive officers.


    1. Value addition by organizing the Board, board shall consists of Directors who will contribute to its effectiveness with attention to competencies, independent, objective and sound judgment.


    • Mechanism shall be developed by the Board to assess its members to ensure that directors, individually and collectively have the necessary competencies and other attributes.


    1. IV) Efforts shall be made to improve board’s performance continuously for which board shall have the processes to improve its performance and that of its committees.


    1. The board shall actively promote ethical and responsible behavior and decision making which includes laws, regulation and ethical standards.


    1. VI) A sound mechanism shall be developed by the Company to determine any potential conflict of interest.


    VII) The board shall supervise the strategy development process, resulting strategy and plan for its implementation.


    VIII)Evaluate the Organization performance by the Board in the best interest of the Company and its shareholders.


    1. IX) The board should approve the significant transactions ensuring that they are supportive of the organisations strategic direction.


    1. X) The board shall oversee and evaluate the activities of the Internal and External auditors.


    The key factor for internal audit is to determine how it has factored in the governance in its audit plans, the priority it assigns to the various governance elements, and the appropriate framework, methodology and measures to auditing governance elements. In a well regulated Organization the more focused approach is expected on governance.

    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.

    An Overview Of India - DTTA - Protocol


    Ever since the Entry into force of Indo-Mauritius treaty in 1983, there has been a lot of hue and cry on the Capital gains exemption and the treaty shopping being planned around it. The government has been proposing several initiatives including Circular No. 789, dated 13-4-2000 and Circular No. 1/2003, dated 10-2-2003 (specifying the mode of proof of residence of an entity in Mauritius -TRC). However, the government has finally come up with a Press Note referring to the Protocol amending the prevailing residence based tax regime under the India-Mauritius DTAA and gives India a source based right to tax capital gains which arise from alienation of shares of an Indian resident company acquired by a Mauritian tax resident.


    The Central Board of Direct Taxes (CBDT), the apex administrative body of direct taxes in India, has issued a press release dated 10 May 2016, on signing of the protocol amending the tax treaty between India and Mauritius. In the past there had been media reports, of talk between the two governments to revise the tax treaty. The protocol was signed by both countries on 10 May 2016 at Port Louis, Mauritius. The key features of the protocol are as under 

    Capital gains taxation:

    With effect from Financial Year (FY) 2017-18 (tax year 1 April 2017 to 31 March 2018), India shall have taxation rights on capital gains arising from alienation of shares of an Indian resident company, acquired on or after 1 April 2017.For shares acquired prior to 1 April 2017, the exemption from tax in India as currently available would continue to apply.

    Transition Period:

    For a transition period of 1 April 2017 to 31 March 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfilment of the Limitation of Benefits (LOB) article as introduced by the Protocol.Taxation in India at full domestic tax rate will take place from FY 2019-20 onwards.

    Limitation of benefits:

    A Mauritius resident (including a shell/ conduit company) will not be eligible for the benefit of 50% reduction in tax rate during the transitory period if it fails to fulfil the main purpose test and the bonafide business test.

    A resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than INR 2.7 million (Mauritian Rupees 1.5 million) in the immediately preceding 12 months 

    Interest taxation :

    The Protocol revises the tax rate on interest arising in India to Mauritius resident banks to state that such streams of income shall be subject to withholding tax in India at the rate of 7.5% in respect of debt claims and loans made after March 31, 2017. At present such streams of income are exempt from tax in India under the India-Mauritius DTAA

    Exchange of Information:

    The Protocol also provides for updation of Exchange of Information Article as per international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes.

    Impact of this protocol on the India-Singapore DTAA:

    Article 6 of the protocol to the India-Singapore DTAA states that the benefits in respect of capital gains arising to Singapore residents from sale of shares of an Indian Company shall only remain in force so long as the analogous provisions under the India-Mauritius DTAA continue to provide the benefit.

    Now that these provisions under the India-Mauritius DTAA have been ammended, a concern that arises is that while the Protocol in the Mauritius DTAA contains a grandfathering provision which protects investments made before April 01, 2017, it may not be possible to extend such protection to investments made under the India-Singapore DTAA.

    Consequently, alienation of shares of an Indian Company (that were acquired before April 01, 2017) by a Singapore Resident after April 01, 2017, may not necessarily be able to obtain the benefits of the existing provision on capital gains as the beneficial provisions under the India-Mauritius DTAA would have terminated on such date.

    Fees for Technical Services: 

    The Protocol has introduced a provision relating to taxation of fees for technical services, largely on similar lines as in various other treaties entered into by India. Fees for technical services arising in India and paid to a resident of Mauritius may be taxed in India, but the tax cannot exceed 10% of the gross amount of fees for technical services if the beneficial owner of the fees for technical services is a resident of Mauritius

    Other Income:

    As per the treaty, income not expressly dealt with by any other provision of the treaty is taxable in the country of residence of the recipient of income. The Protocol has amended the treaty to provide that such income may also be taxed in the country in which the income arises. In other words, any income arising in India to a Mauritius resident would be subject to tax in India, unless it is expressly dealt with by a specific provision of the treaty.


    The Protocol has widened the scope of the term permanent establishment (PE) to include the activity of furnishing of services, including consultancy services. Such activities would constitute a permanent establishment if the activities continue for a project (or two or more related projects) for a period aggregating to more than 90 days within any 12-month period.

    Exchange of Information:

    The Protocol modifies the existing provisions in the treaty relating to Exchange of Information and assistance in tax collection.

    Concluding Remarks:

    Future Impact on Investments:

    As mentioned above, while investments in shares of an Indian Company made before April 01, 2017 shall receive the benefit of the erstwhile provisions of the India-Mauritius DTAA, such benefits shall be curtailed for investments made during the Transition Period. Such investments shall be subject to tax in India at the rate of 50% of the tax rate prevailing in India provided the investments are realized before March 31, 2019. All investments made after April 01, 2017 which are also realized after March 31, 2019 shall be subject to full taxation as per the domestic tax rate in India.

    However, investments that are made through hybrid instruments such as compulsory convertible debentures may still be eligible to claim residence-based taxation as the Press Release only refers to allocation of taxation rights in respect of shares and the Protocol restricts the shift to source based taxation only to such transactions.

    Thus though this should be looked at as a positive initiative by the government there might be a lot of dent to the future investments to India.

    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.



    SA530 deals with Audit sampling. It came into effect from 1st April 2009. It deals with the Auditor’s use of statistical and non-statistical Sampling when designing and selecting the audit sample and evaluating results from the sample. 

    The application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the Auditor with a reasonable basis on which to draw conclusions about the entire population. 

    The objective of the Auditor, when using audit sampling, is to provide a reasonable basis for the Auditor to draw conclusions about the population from which the sample is selected.




    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.




    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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    SBS Interns' Digest                                                                                                                


    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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    VAT vs. Service Tax on Food Supply in a Restaurant/Hotel



    SBS Interns' Digest                                                                                                                


    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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    VAT vs. Service Tax on Food Supply in a Restaurant/Hotel



    SBS Interns' Digest                                                                                                                


    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.”




    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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    VAT vs. Service Tax on Food Supply in a Restaurant/Hotel



    SBS Interns' Digest                                                                                                                


    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.




    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.”





    18 | P a g e

    VAT vs. Service Tax on Food Supply in a Restaurant/Hotel



    SBS Interns' Digest                                                                                                                


    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.




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