Service Tax on Hotels & Restaurants Constitutionally Valid – Chhattisgarh HC

FACTS– M/s. Hotel East Park (the Petitioner) is a well known hotel of Bilaspur. It has normal facilities provided in a hotel including an air-conditioned, restaurant and a bar. They cater not only to the persons staying in the hotel but to the outsiders as well.  The Central Excise Department (the Department) charges service tax of 40% on the bill value of the food and drinks. This is done in view of section 66E(i) of the 1994-Act read with rule 2C of the Service Tax (Determination of Value) Rules, 2006 (the Rules). The Petitioner has filed this writ petition challenging the vires of section 66E(i) of 1994-Act.

POINTS FOR DETERMINATION

(i)     Whether any service tax can be charged on a sale of an item or vice versa;

(ii)   Whether in view of Article 366 (29A)(f) service is subsumed in sale of food and drinks;

(iii) Whether section 66E(i) of the 1994-Act is violative of Article 366 (29A)(f) of the Constitution.

Historical Background

It was thought that the court would give wider meaning to entry 92, 92-A of List-I and entry 54 of List-II. However, they were interpreted narrowly.

In the State of Himachal Pradesh Vs. M/s Associated Hotels of India Limited [A.I.R. 1972 S.C. 1131] (the Associated-Hotel case), the Supreme Court held that the supply of food to a person staying in the hotel is part of service. It was extended in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi [AIR 1980 SC 674: (1980) 2 SCC 163] (the Northern-Caterers case).

 In Northern-Caterers case, the supply of food in a high class restaurant was held to be a part of the service.

The result of the aforesaid decisions was that no sales tax could be charged on sale of food and drinks to the person staying in a hotel or in a high class restaurant as it was held to be a part of service.

A review petition was filed in the Northern-Caterers case but it was dismissed. This order is reported in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi AIR 1980 SC 674: (1980) 2 SCC 163.

The government referred the matter to the Law Commission of India, which considered it in its Sixty-First Report and recommended for certain amendments. Thereafter, sub-article 29A was inserted in the Article 366.

The entire idea of inserting of Article 366(29A)(f) was to bifurcate sale of the food or drinks from the service part as interpreted by the Supreme Court, that is to say that by amending the Constitution, the supply of food or drinks to a person in a hotel or in a restaurant has been bifurcated into

Two parts, namely, service part and sale of goods. This is also clear from the wordings of Article 366(29A)(f) of the Constitution.

The difficulties and the reasons for inserting Article366 (29A) have been succinctly pointed out in the statements of objects and reasons of the 46th Amendment. The relevant part of the same is mentioned in Appendix-I.

The objects and reasons as well as historical background of Article 366 (29A) (f) of the Constitution show that the intention behind substituting this sub-article was to separate the value of sale of food and drinks from the service part. It was neither the intention that the service part should be subsumed in the definition of sale nor interpretation of Article 366(29A) (f) leads to this conclusion.

The relevant part of Article 366(29A)(f) of the Constitution, is 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… of… food… for human consumption… where such supply or service, is for cash …’

This itself shows that the sales tax is on supply of food or on drinks only and not on the service part thereof.

The issue involved in the Damodarsamy case related to power of the State to levy tax on the food or drinks. The court after referring to insertion of article 366 (29A) held that by reason of that amendment, the States were entitled to levy tax on the supply of food and drinks. This case is not relevant on the question whether the Parliament can impose service tax on the service element of the sale or not.

The case of T.N.Kalyan Mandapan Assn. v. Union of India & Others {AIR 2004 SC 3757: (2004) 5 SCC 632} (the Kalyan-Mandapan case) is relevant to the case in hand. In this case, the validity of sections 6, 67(o) of the Finance Act, 1994 and Rule 2(1)(d)(ix) of the Service Tax Rules, 1994 have been upheld. The court says,

‘In regard to the submission made on Article 366 (29-A)(f), we are of the view that it does not provide to the contrary. 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.’

This is also clear from the 1994-Act.

Section 66E is titled as Declared Services. The relevant part of the same is as follows:

’66E. Declared services.―The following shall constitute declared services, namely:―

…

(i) Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.’

Section 65B(44) of the 1994-Act defines the word ‘service’. The relevant part of the same is as follows:

‘(44) “service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include ―

(a) an activity which constitutes merely, ―

…

(ii) such transfer, delivery or supply of goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution;’

Section 65B(44)(ii) of the 1994-Act shows that supply of goods that is deemed to be sale under Article 366(29A) is not included in service.

We are afraid, Article 366(29A)(f) of the Constitution does not indicate that the service part is subsumed in the sale of the food; it rather separates sale of food and drinks from service.

Section 65B (44) as well Section 66E(i) only charges service tax on the service part and not on the sale part. It indicates that the sale of the food has been taken out from the service part as was interpreted by the Supreme Court in the Associated-Hotel case and the Northern-Caterers case.

In our opinion, section 66E(i) of Chapter-5 of the relating to service tax of the Finance Act, 1994 [Statutory Provisions Relating to Service Tax] is intra vires the Constitution.

RECOMMENDATIONS

Article 366 (29A)(f) separates sale of food and drinks from service part but difficult part is how much is the service part and how much is the sale part. This is explained under rule 2C of the Rules, read with notification dated 20.06.2012 (the Notification).

Section 93 is titled as ‘Power to grant exemption from service’. It empowers the Central Government exempt whole or part of the service tax in public interest. The Notification has been issued in pursuance of the power conferred under this section.

The Notification exempt, the taxable services from whole of the service tax leviable upon them. Clause 1 9 of the Notification is as follows:

’19. Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having (I) the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and (ii) a licence to serve alcoholic beverages.’

Clause 1 9 of the Notification exempts the service tax in serving food or beverages by the restaurants other than the air-conditioned restaurant or having licence to serve alcoholic beverages ei service tax is levied only in those restaurants that have air-conditioning or licence to serve alcoholic beverages.

Rule 2C of the Rules clarifies that in case of a restaurant, service is presumed to be 40% of the bill value and in case of out door catering, it is presumed to be 60% of the bill value. It shows that the value of the food is taken to be 60% of the bill in the case of restaurant and 40% of the bill in case of catering service.

Difficulties

We have some reservations about the rule in quantifying fixed sum towards service and its functioning in the restaurant, and with the tax authorities under the VAT-Act.

Sale tax is being charged under the VAT-Act and is known as VAT. Generally, the hotel and restaurant owners charge service tax on 40% or 60% of the bill amount and charge VAT on the bill amount. The 40% or 60% over which service tax has been charged, cannot be subject to VAT. One does not know why they do it but it is possible that this might be resorted to, as the Commercial Tax authorities might be taking the value of the food and drinks to be the bill value. This is not proper.

As we have already held that no VAT can be charged over the amount meant for service. It will be open to the Petitioner to object the same before the VAT authorities. However, there should be coordination between the State and the Central Government authorities. The amount over which service tax has been charged should not be subject to VAT.

There is no provision in the VAT-Act to bifurcate the amount. The State Government will do well to frame such rules to this effect. These rules may be in conformity with the bifurcation as provided under the 1 994-Act or ensure that the Commercial Tax authorities do not charge VAT on that part of the value of the food and drink on which the service tax is being assessed.

The restaurant and caterer are also normally charging VAT on the bill value. This is not proper. They may charge service tax on 40% or 60% as the case may be of the bill value and charge VAT at the rate of 60% or 40% of the bill value, but not on the entire bill value.

The State Government will be well advised to issue a clarification/ direction in this regard and will ensure that the consumers are not unnecessarily doubly taxed over the same amount.

CONCLUSION

In our opinion, section 66E(i) of the Finance Act, 1994 [Statutory Provisions Relating to Service Tax] is valid.  The writ petition is dismissed.

OTHER HIGH COURT JUDGMENT ON THE SAME ISSUE

• Parliament can impose Service Tax on Restaurants & Hotels – Bombay HC
• Service tax on Restaurants & Hotels, States alone can impose Tax-Kerala HC