CA Manoj Nahata 
There has been a long debate on levy of service tax on restaurant service since its introduction. The author draws attention of readers on his article published in the E-Newsletter for the month of July’2013 wherein this matter was discussed. It was the Kerala High Court which took the view that the Centre has no jurisdiction to levy Service Tax on sale of food in restaurant. It is only the State’s domain to levy tax on the sale of food. Thereafter the Bombay High Court in a different case rejected Kerala High Court’s single judge judgment & took the contrary view that Service Tax can be levied on sale of food in the restaurant. Now, in a more recent judgment this jurisdictional dispute between Centre & State was again raised. The Hon’ble Uttarakhand High Court tested the matter on the touchstone of VAT law in its judgment dated: 10.04.2014 .The Hon’ble High Court took the view that since service tax is levied on 40% of the billed value in restaurant, no VAT can be imposed on such portion. This has made the author to again give a fresh look to the whole matter in the light of various judicial pronouncements.
Constitutional Provisions:
The service tax was originally introduced by the Parliament in exercise of the residuary power under Entry 97 of List I. Though Entry 92 C has been introduced to List I of the 7th schedule which enables the Union to levy “Taxes on Services”, the said entry had not come into effect as it was not notified by the Government.
The relevant entries of List I and II of the seventh schedule reads as under:
List I — Union List
97. Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.
List II — State List
54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entry 92-A of List I.]
Article 246 and 366 (29A) of Constitution of India reads as under:
246. Subject-matter of laws made by Parliament and by the Legislatures of States. –(1) Notwithstanding anything in clauses (2) and (3), Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the ‘Union
List’;).
(2) Notwithstanding anything in clause (3), Parliament, and, subject to clause (1), the Legislature of any State [* * *] also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the ‘Concurrent List’).
(3) Subject to clauses (1) and (2), the Legislature of any State [* * *] has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the ‘State List’;).
(4) Parliament has power to make laws with respect to any matter for any part of the territory of India not included [in a State] notwithstanding that such matter is a matter enumerated in the State List.
366. Definitions.–In this Constitution, unless the context otherwise requires, the following expressions have the meanings hereby respectively assigned to them, that is to say –
(29-A) ‘tax on the sale or purchase of goods’ includes—
(a) a tax on transfer of …………………
(b)…………………
(c)…………………
(d)
(e)
(f) 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;
Provisions of Chapter V of the Finance Act, 1994:
W.e.f. 01.06.2012 the term “service” has been defined in section 65B (44) of the Finance Act 1994 which means any activity carried out by a person for another for consideration. “Service” includes “declared service” which is defined in section 65B (22) of the Act. However, “service” excludes a transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of article 366(29A) of the Constitution. Now the supply of food and drinks, by way of or as part of any service, is included in article 366(29A)(f) of the Constitution. Therefore, this should mean that no service tax can be levied on a hotel or restaurant which supplied food or drinks, by way or as part of service. But by virtue of insertion of section 66E (i) the service portion in activity wherein goods, being food or any other article for human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity has been treated as “declared service” for the purpose of levy of service tax.
Now let us have a look on the crux of the recent judgments:
Kerala High Court – KERALA CLASSIFIED HOTELS AND RESORTS ASSOCIATION:
It can be seen from Article 366(29-A) (f) that ‘service’ is also included in the sale of goods. If the constitution permits sale of goods during service as taxable necessarily Entry 54 has to be read giving the meaning of sale of goods as stated in the Constitution. If read in that fashion, necessarily service forms part of sale of goods and State Government alone will have the legislative competence to enact the law imposing a tax on the service element forming part of sale of goods as well, which they have apparently imposed. This view was taken in the light of the Constitution Bench judgment in K. Damodarasamy Naidu’s case.
Bombay High Court- INDIAN HOTELS AND RESTAURANT ASSOCIATION:
The Hon’ble Bombay High Court in Writ petition no.2159 of 2011 rejects Kerala HC’s single Judge ruling in Kerala Classified Hotels and Resorts Association for want of categorical finding that tax in question covered by State List .The Court accepts Revenue’s reliance on Supreme Court’s ruling in Tamil Nadu Kalyana Mandapam pertaining to catering services. The Honorable Supreme Court, with respect, held that the concept of catering admittedly includes a concept of rendering service. The fact that the tax on sale of goods involved in the said service can be levied does not mean that the service tax cannot be levied on the service aspect of catering. With respect, this means that when a restaurant renders to any person a service, the tax on sale of goods involved in the said service can be levied. That does not mean that service tax cannot be levied on the act of serving food at a restaurant. That is the tax in this case imposed by the Parliament. There could be a sale during the course of rendering of service at a restaurant and therefore, sales tax could be imposed by the State Legislature. So long as there is no prohibition against imposition of service tax on the services rendered, then it must be held that the Parliament is competent to impose a service tax in question. The Court further held that just because assessee is liable to pay Value Added Tax on sale involved in supply of goods at canteen, it cannot be held that it is not liable to payment of service tax.
Uttarakhand High Court – VALLEY HOTEL & RESORTS VS. COMMISSIONER COMMERCIAL TAX, DEHRADUN:
The Uttarakhand High Court in a revision petition filed by the party held that Value Added Tax can be imposed on sale of goods and not on service. Service can be taxed by Service Tax Laws. The authority competent to impose service tax has also assumed competence to declare what is service. The State has not challenged the same. Therefore, where element of service has been so declared and brought under the Service Tax vide Government of India notification dated 06.06.2012, i.e. 40% of bill amount to the customers having food or beverage in the restaurant was made liable to service tax , no Value Added Tax can be imposed thereon.
Authors Comments:
On going through the above three judgments, it appears that the views taken by Kerala High Court is fully overruled by the Bombay High Court and it is made clear that Centre can levy Service Tax in absence of any prohibition in the Constitution .The Uttarakhand High Court even went a step further and put a bar on the power of State to encroach into the area of Centre’s domain. It took the view that State has no power to levy VAT on the portion which is subjected to Service Tax by the Central Government. The issue of double taxation seems to addresses and now no VAT on that portion of restaurant bill, which has already suffered service tax.
The taxability of sale of food into restaurant was a bone of contention since very long. Prior to the 46th Constitutional amendments several Courts took the view that the transaction between a hotelier and a visitor to his hotel was essentially of service in the performance of which and as part of the amenities incidental to that service, the hotelier serves meals. The revenue was not entitled to spilt up the transaction into two parts, one of service and the order of sale of foodstuffs and to spilt up also the bill charges by the hotelier as consisting of charges for lodging and charges for food stuffs served to him with a view to bring the hotel for the purpose of levy of tax on the food supplied to guests. The Supreme Court in Northern India Caterers (India) Ltd Vs. Lt. Governor of Delhi 42 STC 386 held that the service of meals to visitors in the restaurant was not taxable under local taxation law.
After the 46th Constitutional amendments article 366(29A) was amended so that the tax on the sale or purchase of goods included “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”. The validity of the levy was upheld by the Apex Court in K. Damodarasamy Naidu & Bros. Vs. State of Tamil Nadu and another 117 STC 1. One of the contentions urged before the Court was that the tax on food served in restaurants could not be levied on the sum total of the price charged to the customer as the restaurant provided services in addition to food, and these had to be accounted for. It was therefore contended that the bill had to be split up between what was charged for such service and what was charged for the food. The court at para 9 of the report did not accept the contention. The court held that the tax was on the supply of food or drink and it was not relevant that the supply was by way of a service or as part of a service. The price that the customer pays for the supply of food in a restaurant cannot be split up as suggested by the petitioners.
In the case of Tamil Nadu Kalyana Mandapam Association Vs. Union of India 135 STC 480, it was contended that the Parliament cannot impose tax on sale of food items, drinks etc. in view of the 46th amendment to article 366(29A)(f) of the Constitution and the decision of the Court in K. Damodarasamy Naidu & Bros., was relied upon. The court held that Article 366 (29A)(f) only permitted the State to impose a tax on the supply of food and drink by whatever mode it may be made. It does not include the supply of services within the definition of sale and purchase of goods. It is only the supply of food and drinks and other articles for human consumption that is deemed to be a sale or purchase of goods. It was further held that the concept of catering included the concept of rendering service. The fact that tax on the sale of the goods involved in the same service can be levied does not mean that a service tax cannot be levied on the service aspect of catering. The Apex court has categorically held that the State legislatures can levy tax on the supply of food and drinks only.
In Tamil Nadu Kalyana Mandapam Association case, the apex Court did not specifically refer to para 9 of the decision in K. Damodarasamy Naidu & Bros. case before coming to the conclusion that service tax can be levied on the service aspect of catering. In para 9 the Court had categorically held, after giving an example, that the tax had to be paid on the entire invoice value. But unfortunately in Tamil Nadu Kalyan Mandapam Association’s case the Apex court did not lay down any guideline for ascertaining the turnover/value on which sales tax and/or service tax can be levied. Does it mean that VAT and service tax can be levied for one and the same transaction and for the same value?
In Indian Railways Catering and Tourism Corporation limited Vs. Government of NCT of Delhi 32 VST 162 held that if the transaction between the parties was covered under article 366(29A) of the Constitution, it is permissible for the states to levy and collect sales tax/value added tax on the value of the goods involved in the execution of the transaction. It was not permissible to levy sales tax/value added tax in respect of service component of such composite transactions. This principle was also stated by the Karnataka High Court in Sky Gourmet Catering Private limited Vs. Assistant Commissioner of Commercial taxes, Bangalore 46 VST 35. The court in para 26 of the report held that the entire consideration cannot be the subject matter of service tax nor can it be the subject matter of sales tax. Otherwise, it will amount to double taxation.
In the light of above discussion, it is clear that there cannot be an overlapping inasmuch as same value should not suffer dual levy. But presently all the assesses are paying VAT on full value. It will be really interesting to watch the move of the VAT assesses in other States in the light of Uttarakhand High Court judgment.
*The author is a practicing chartered accountant at Guwahati and can be reached at: manoj_nahata2003@yahoo.co.in
