Outdoor Catering Service
By CA. Madhukar N Hiregange
& CA.Srikantha Rao T
In this article we examine the taxable service category of Outdoor catering in terms of the definition, the activities liable and the issues which arise in seeking to tax this category. Specific exemptions and exclusion have been examined. Case laws relevant to this service category have also been discussed. The denial of credit for outdoor catering took centre stage in Tribunals last year. The final decision in this regard would also be touched on.
The levy of service tax on the category of Outdoor caterer had initially led to a lot of confusion and the levy was being challenged in the Courts. This was due to the fact that as per Article 366(29A) of the Constitution of India, 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), was deemed to be a sale of goods where such supply or service was for cash, deferred payment or other valuable consideration. Consequently, such supply was liable to sales tax under the local sales tax laws and a question arose as to whether the levy of service tax on a transaction which was deemed to be sale, was constitutionally valid at all. The matter was contested and the Supreme Court in Tamil Nadu Kalyana Mandapam Association Vs UOI (2006 (003) STR 0260 S.C.) held the levy to be constitutionally valid. The Court sought to draw a distinction between supply of food and the service elements involved in catering. It was not a mere sale of goods. Once the levy of service tax on outdoor catering service was upheld, the next question which arose was the nature of services which could be held liable considering the fact that supply of food could be anywhere – in hotels, in road side tea stalls, dhabas, in factories and hospitals etc.
As per Section 65(105)(zzt) of Chapter V of Finance Act 1994 as amended from time to time, taxable service means any service provided or to be provided to any person by an outdoor caterer.
The term “outdoor caterer” has been defined under Section 65(76a), to mean a caterer engaged in providing services in connection with catering at a place other than his own, but including a place provided by way of tenancy or otherwise by the person receiving such services. The last part of the definition was inserted to capture the industrial canteens.
The term “ caterer” has been defined u/s 65(24) to mean any person who supplies either directly or indirectly, any food, edible preparations, alcoholic or non-alcoholic beverages or crockery and similar articles or accoutrements for any purpose or occasion.
The term “accoutrements” has not been defined here and one would have to refer a standard English dictionary for the same. As per Random House Webster's Dictionary, the term “accoutrement” means personal clothing, accessories, or equipments.
What is liable? What is not liable? Who is liable? Who is not liable?
The taxable services should be provided by an outdoor caterer and may be provided to any person. The recipient could even be Indian Railways or an airline. In Saj Flight Services (P) Ltd Vs SCE (2006 (04) STR 429 (HC-Ker)), the High Court held that service any where outside the caterer's place would attract liability and held services provided to airline for supply of food and beverages to passengers on board the flight, as liable to service tax. Catering services should be provided from a place other than his own. If it is from his own place, the activity would not be liable and therefore excludes the traditional hotels.
Where the place is provided to the caterer on rent by the manufacturer or service provider, the same would be liable to service tax. But where the service is provided to the employees, students etc., and the lessor cannot be regarded as a service receiver, it could be possible to argue that the service is not liable under Outdoor catering service. Therefore the terms of occupancy as well as that for providing the taxable service would have to be reviewed before one can safely arrive at a conclusion regarding the taxability of the service involved. That is to say where an industrial canteen provides food to the general public and the employees the same may not be covered under this entry.
The outdoor caterer would have the option of going in for either one of Notifications 12/2003 ST or 1/2006 ST. As per Notification 12/2003 ST, the value of materials/food sold by the service provider would be available as a deduction from the gross amount charged for the service. The service provider would have to be in a position to indicate the value of food sold and the said value would have to be indicated separately on the bill. The advantage with this notification is that the service provider would be in a position to claim cenvat credit of service tax paid on input services like security, telephone, interior decorator, construction etc and of duty of excise incurred on capital goods including kitchen equipment, motor vehicles registered in the name of the caterer. This credit could at times be substantial.
Under Notification 1/2006 ST, the caterer would be entitled to a benefit of exemption of 50% of the gross amount charged for the service where the same includes charges towards supply of food. The invoice should highlight this fact. The caterer would not be entitled to any cenvat credit here. The benefit of notification 12/2003 ST would also not be available. One condition here is that food should be a satisfying and substantial meal and what is satisfying and substantial is something which would have to be ascertained on a case to case basis after analysing the facts of each case. The term “meal” has not been defined here and if one refers the Random House Webster's Dictionary, “meal” has been defined as “the food served and eaten at one time or occasion.” Thus, whether breakfast would be regarded as meal or not is something which would have to be seen in this context. In this regard, one may refer Aries Agro Vet Industries (P) Ltd Vs CCE Bombay (1984 (16) ELT 467 (Tri)) in which the concept of animal feed was discussed in terms of attributes. If the principles of this case are to be borrowed, a meal should have the potential to satisfy one’s hunger, ensure nutrition and should be complete in itself. If one follows this thought process, then a breakfast having these required attributes would qualify as a meal.
Where a mandap keeper provides catering service, the exemption under this notification would be 40% of the gross amount charged provided the gross amount charged includes the value of food supplied as aforesaid.
Input services credit- admissibility.
The revenue had in the initial stages been of the view that the factories / service providers who get the services of outdoor caterers are not eligible to the cenvat credit as the same in not in relation to the manufacture or used for providing any service. This matter was before the Tribunal and now the Larger bench has in GTC Industries Ltd Vs CCE Mumbai (2008 (12) STR 468 (Tri-LB)) settled the matter of admissibility by observing that the same is part of the cost of materials and at times is mandatory under factories act as is a business expenditure and therefore should be admissible.
The authors are of the opinion that considering the objective of the cenvat credit scheme, the outdoor caterers services are essential part of business and the denial would have been against the basic principle of being beneficent.
Whether food supplied by hotels, restaurants to customers is liable?
The Supreme Court in Tamil Nadu Kalyana Mandapam Association case had distinguished outdoor catering service from supply of food in hotels and restaurants. The CBEC had also clarified through its Circular 332/82/97 TRU dated 24.09.97 (when the outdoor catering service had been made liable the first time in 1997) that sale of food across the counter or serving of food in restaurants or fast food joints would not fall within the ambit of outdoor catering. The Chief Commissioner of Central Excise Coimbatore had also clarified that supply of food for home delivery would also not be liable under this category. In the views of the authors, this is specifically provided for in the definition of “outdoor caterer” as service should be provided from a place other than his own.
Whether a caterer would be liable where he gets the premises on rent/lease and then provides catering service to a person other than the lessor?
The catering service should be provided from a place other than his own, to be liable. One important factor here is that the concept of ownership has not been defined. One may even argue that going by the context in which the definition has been framed, the premises could be one from where he normally operates and has some degree of permanency attached to it. If this clause is satisfied, it should be possible to argue that the place obtained is his own and the service provided to third parties from such a place would not be liable. This would however be disputed.
Whether sub-contractor is liable?
Yes. Where an outdoor caterer sub-contracts part of the catering to another caterer, the sub-contractor would also be liable if one were to go by the Master Circular 96/07/2007 ST dated 23.08.07. However, it would also be worthwhile to go through the contract between the contractor and the sub-contractor to find out whether the agreement is for mere supply of food or goes beyond that involving certain services in relation to catering.
Whether pure supply of food would be taxable?
Service tax is a tax on services and not a tax on sale of goods. The recent decision of the Delhi High Court in Home Solution Retail India Ltd Vs UOI (2009-TIOL-196-HC-DEL-ST) has also highlighted the importance of the requirement of service element being present in order to levy service tax. In our view, caterers could examine their contracts in future to find out whether the same is one for supply of goods/food or one for providing service (which could be a composite contract). Where the contract is purely for supply of food, in our view the said contract would not be liable to service tax though the department may not agree with this view. The focus here should be on the presence or absence of services in connection with catering (as there is no concept of deemed service under service tax), and not on constitutional validity of the levy of service tax on services in connection with catering as the same has already been upheld by the Honorable Supreme Court in Tamil Nadu Kalyana Mandapam Association case. This would have to be evident on the catering contract. In the view of the authors if this interpretation were to hold for all services, the constitutional validity of ST on catering itself would be in doubt.
Whether composite contracts involving sale of food and service be vivisected and the service component taxed?
From the sales tax/VAT angle, the dominant nature test would not be applicable in case of contracts where the concept of deemed sale as covered by Article 366(29A) is applicable, unlike other contracts involving sale of goods and this has been clarified by the Supreme Court in Bharat Sanchar Nigam Ltd Vs UOI (2006 (002) STR 0161 SC). Therefore the State would be within its powers to tax the sale of food. There is a possible argument that outdoor catering is a works contracts where there is no separate consideration for supply or labour and it is classified under works contract under the local VAT laws. Further that the works contract entry in the service tax provisions covers only construction, erection and turnkey contracts and outdoor catering is not covered therein.
Where a service is involved, the service provider to be on the safer side of the law, would have to examine the option of following either of the Notifications 12/2003 ST or 1/2006 ST as the matter pertaining to possibility of vivisecting a composite contract involving supply of goods as well as providing a taxable service, requires further judicial clarity from a service tax angle as the opinion at the Tribunal/Courts seems to be divided on this issue.
The article provides a basic understanding of the category, the exemptions and valuation aspects as well as some of the common doubts in the category of outdoor caterer. For further doubts please post your queries on pdicai.org or caclubindia.com.