CA Shilpi Jain, Vinay Kumar J
GST is a tax levied on supply of goods or services or both. The definition of ‘goods’ in the CGST Act, 2017 means every kind of movable property other than money and securities. So, from a small pencil to a huge bulldozer, everything is included in the category of goods. However, in case of food it cannot be considered as goods always. Why is it so?
Before directly getting to the conclusion, we would have to see the history regarding the taxability of food i.e. how food was taxed in India, during the Sale Tax and Service tax regime. Earlier, the supply of food was sought to be taxed by the Sales Tax Department as supply of goods. The scenario turned around with the landmark judgement in the case of M/s. Northern India Caterers (India) Limited V. Lt. Governor of Delhi (1978) 4 SCC 36.
Judgement in the case of Northern India Caterers:
1. The essence of the transaction is not to transfer the property of such food or drink, but to satisfy his appetite or thirst.
2. The customer does not become owner of food. He is just privileged to eat.
3. The true essence of the transaction is service in the satisfaction of a human need or desire, ministry to a bodily want.
4. Before consumption title does not pass; after consumption there remains nothing to become the subject of title.
5. What the customer pays for is a right to satisfy his appetite by the process of destruction.
6. The consideration he pays is more than for the food. It includes the factor of other personal services provided to him.
7. The Court has declined the Revenue the proposition to spilt up the transaction into service portion and food portion.
The Hon’ble Supreme Court held “We hold that the service of meals to visitors in the restaurant of the appellant is not taxable under the Bengal Finance (Sales Tax) Act, 1941, as extended to the Union Territory of Delhi, and this is so whether a charge is imposed for the meal as a whole or according to the dishes separately ordered”.
Review petition against Judgement of Northern India Caterers case:
In 1979 a review petition was filed against the above judgement (1980 AIR 674) but the Apex Court dismissed the same and had further clarified as “Indeed, we have no hesitation in saying that where food is supplied in an eating-house or restaurant, and it is established upon the facts that the substance of the transaction, evidenced by its dominant object, is a sale of food and the rendering of services is merely incidental, the transaction would undoubtedly be exigible to sales-tax. In every case it will be for the taxing authority to ascertain the facts when making an assessment under the relevant sales tax law and to determine upon those facts whether a sale of the food supplied is intended.”
Thus, supply of food can either be a supply of goods or services which is completely dependent on the facts, and the dominant factor would decide the nature of the transaction.
Post Judgement Situation:
The above judgment created a lot of confusion amongst taxpayers all over the India and there was a chaos on what needs to be treated as sale of goods and what to be treated as supply of service. In this regard the Andhra High Court in the case of “Durga Bhavan And Others vs The Deputy Commercial Tax 1981 47 STC 104 AP” in para 13 summarized the decisions of the Supreme Court in the case of Norther Caterers supra and Associated hotels supra as :
“1.If there is no right to carry away the food there would be no sale in favour of the customer.
2. Even if there is a right to carry away if in essence the transaction is a transaction of service and not a transaction of sale it would not be exigible to tax.
3. If, however, where the customer has a right to take away the food if the dominant object is the sale of food and the rendering of service is merely incidental, then the transaction would be a transaction of sale and not a service contract.
4. The question whether the dominant object was the sale of food or rendering of service would depend upon the facts and circumstances of each case which has to be decided by the assessing authority in the light of the evidence before it.
Thereby, the taxation would depend on the dominant intent. However, it concluded that “We are holding that the sale across the counter are liable to sales tax”
This judgement makes it clear that if there is a supply of food i.e. sale across the counter like sale of sweets, packed food etc., which does not involve service at all or involves very minimal service, it would be treated as sale of goods and not rendering of service.
Amendment to the Constitution:
In order to overcome the above judgments and to enable the levy of sale tax on the sale of food in restaurants and the like, clause 29A was inserted in Article 366 by way of 46th Constitutional Amendment Act (CAA), of which clause (f) is of relevance to us.
As per the said clause “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”. With this amendment the scope of levy of sales tax was expanded to include the power to tax the supply of food, whether by way of or as a part of any service.
Further, in the Statement of Reasons of the said Amendment Act, it has been stated that “In the case of food or drink supplied by Restaurants the relief will be available only in respect of the period after the date of judgment in the Northern India Caterers (India) Limited case and the commencement of the present Amendment Act”.
It can be seen from section 6 of The Constitution (Forty-Sixth Amendment) Act, 1982 that a retrospective operation is given to the expansion of the expression “tax on the sale or purchase of goods” in Entry 54 of List II, to include a tax on the supply of food or drink and thus validating retrospectively State Sales Tax Acts that had made provision for the levy of sales tax on the supply of food and drink. However, the said section 6 does not equate a provision for sales tax on food and drink in States Sales Tax Acts as Parliament, when exercising the powers to amend the Constitution under Article 366, cannot and does not amend State Acts. Thereby, even though there was a retrospective operation of the expansion of the definition of sale of goods in the Constitution, the State Sales Tax Acts could not levy tax retrospectively unless there were express provisions in this regard, contained therein. This has been upheld in the case of K. Damodarasamy Naidu and Bros. v. State of Tamil Nadu and another (2000 (117) STC 1 “Levy of sales tax on the supply of food and drink prior to 2nd February 1983 in the State of Maharashtra is bad in law”
Situation in VAT and Service Tax:
The levy of tax on services was introduced in 1994 vide the Finance Act, 1994. VAT was introduced in 2005 and the supply of food was made taxable under VAT. The activity of supply of food at Air-Conditioned restaurant was liable to service tax from 01st May 2011 at a rate of 15% on 40% of the value, without any change in levy of VAT on the same.
Therefore, from 01.05.2011, the situation for restaurants was as follows:
This created ambiguity and controversy because VAT is to be levied on goods and service tax on services. The Apex Court earlier held that supply of food is a service, which was then undone by the 46th CAA by bringing it under the scope of sale of goods. However, from 2011, VAT and service tax was being charged and many restaurants challenged such levy as it increased their tax burden.
Situation in GST:
In Schedule II of the CGST Act, 2017, in entry 6(b) it can be seen that the same words as in the Article 366(29A)(f) is appearing, which reads as: “The following composite supplies shall be treated as a supply of services, namely:
2. 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 (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration”
However, the difference being that under GST the said transaction is considered as supply of services. Without getting into the conflict between Article 366(29A)(f) and the said entry under Schedule II, we would analyse to find out what are the supplies that would be covered under it. In this regard, since it is worded similar to Article 36(29A)(f) we can rely on the judgments prior to the 46th CAA. Further, having understood the history of this entry, we should be able to conclude on the taxability under GST for the below scenarios assuming that the GST law has intended to take its historical meaning as it has not added, deleted or modified any words from those introduced by the 46th CAA:
1. Pure sale of food
2. Supply of food by way of service
3. Supply of food as a part of service
4. Home delivery of food
Pure Sale of Food
Sale of food at counters like namkeens, sweets etc., where no or minimal service element could exist, is considered as sale of goods. Even if there is a service in the form of packing, it could be considered as very minimal and the supply would be treated as sale of goods and not a service as was held by the Andhra High Court in the case of Durga Bhavan And Others ibid. Further, in the Advance Ruling of ‘M/s Kundan Mishthan Bhandar 2019 (24) GSTL 94 (App. AAR – GST)’ the AAAR held that “sale of sweets, namkeens, cold drinks and other edible items from sweetshop counter will be treated as supply of goods with applicable GST rates of the items being sold ……..”
Supply of food by way of service:
It covers the services provided by the restaurants where the food is being served to the customers who sit in the restaurants and consume food. The Collins Dictionary defines the term “by way of” as “If you do something by way of a particular method, you use that method to do it.” Therefore, if you are supplying food by way of service, you are actually supplying the service. The service could be providing the good furniture, crockery or an airconditioned hall. Furthermore, the supply of food in restaurants itself can be considered as a service as held in Northern India Caterers’ case.
As the dominant factor in this case is supply of service, the entire supply could be treated as supply of service and made taxable accordingly.
Supply of food as a part of service:
It covers the supply of food, not being provided separately, but provided along with a service. For example, if a hotel is providing accommodation service along with the breakfast, it can be said that food is being provided as a part of accommodation service. In this case also, the supply will be considered as supply of service. Similar was held by the Supreme Court under the erstwhile law in the case of “State of Punjab v. M/s Associated Hotels of India Ltd., ( 2 S. C. R. 937”
Home delivery of food
In some cases, the customer will not consume any food at the restaurant but would take delivery of the food either by himself or would get it delivered by the restaurant or by a third party. Whether this case would also be covered under Schedule II? As per the decision rendered by the Supreme Court in the review petition of Northern India Caterers supra it can be said that, in such a case the dominant factor is supply of food and the service provided (packing or delivery) is merely incidental to the said supply. Hence it will be treated as supply of goods and not services.
However, when we refer to the definition of “restaurant service” given in Notification 11/2017 – CTR, which reads as “Restaurant service means supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied”.
Does the above mean that carrying the food from the restaurant without any consumption there, is also covered under the ambit of supply of service? In this regard it is important to note one aspect mentioned in the Northern India Caterers’ judgements, where it was stated that the customer comes to the restaurant to appease his appetite and thirst and he has no right over the left over food either to give it to anyone else or to take it away. Further, in the case of “East India Hotels Ltd vs Commissioner of Sales Tax  48 STC 179” the Delhi High Court has been held that “If, in any case, the customers purchased the food and took it away, then only would it be chargeable to sales tax and would be included in the taxable turnover”. The same view has been upheld by Punjab High Court in the case of “Gopinath and Sons vs Shri HB Gandhi, Excise and Taxation Officer 1983 RLR 226”.
These judgements make it clear that the carrying away the food from the restaurants is rightly classified under goods and including it in the definition of restaurant services is nothing but leaving the doors open for litigation. Further also that in todays’ times it is known that generally people do get their left-over food at the restaurants packed and carry it considering it to be owned by them. Thereby, the phrase ‘consumption on or away from the premises’ used in the rate entry could be to cover these situations also which the Northern Caterer’s case and others have considered as not being part of the restaurant service. Though, how far this can be held valid since the said phrase is not part of the Schedule II entry and is only part of the rate notification, can be questioned. However, this cannot seem to cover the cases of home delivery of food, which would be in the nature of supply of goods as the element of service is either minimal or only incidental. Hence, the rate entry mentioned above will not be applicable to the home delivery situations.
Considering the present COVID times where the economy is slowly trying to open-up and later when majorly all sectors open-up including the food vendors, restaurants, etc., our way of life could be, in the need of continuing to maintain social distance, delivery of food rather than consumption at the restaurant. In such scenarios, as per the above discussion it would be relevant to note that the classification of such supplies would be that of supply of goods and not of service.
Understanding the history of the taxation of supply of food over the past 40 years has led to a certain conclusion regarding its taxability under GST until a different interpretation emerges under GST from the Courts. Though GST was supposed to have reduced the litigation relating to the classification of the supplies into goods or services, the place of supply, rate of tax, input credit provisions including its restrictions and conditions; have made the classification of a supply into goods or services all the more important. Hence it is important to keep in mind the above discussed principles while identifying whether a supply involving food is a supply of goods or services.