Introduction: Constitutional validity of service tax levy on restaurant services has turned out to be one of the contentious issues. This issue has its origin somewhere in early 1980's, when States proceeded to levy VAT on supply of food in hotels/restaurants treating it as sale. Supreme Court has considered the issue of VAT levy on food supply in hotels and restaurants in separate judgments respectively, struck down the levy saying that the supply in these cases is part of service and there is no separate sale.
Subsequently, with an objective to empower States to levy VAT on supply of food involved in these transactions, the definition of "Sale" under Article 366(29A) of Constitution has been amended to insert the following sub-clause (f) vide The Constitution (Forty-Sixth Amendment)Act, 1982.
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.
Post insertion of this clause(f), Supreme Court has considered the issue whether VAT is payable on entire consideration for supplies in restaurant or on part excluding service component which was ruled against the assessees. Since then, trade has accustomed to the practice of paying VAT on entire consideration. It is for this reason, trade felt service tax levy as a bolt from the blue. Hence trade repudiating the Service Tax levy by challenging its constitutional validity. Kerala High Court and Mumbai High Court has considered this issue and expressed divergent views while Mumbai High Court upheld the levy and not so by Kerala High Court. In this backdrop, this article aims to highlight the collision between the views of these two Courts.
Divergent views of Kerala High Court & Mumbai High Court:
Initially, the Single Member bench of Kerala High Court in the case of Kerala Classified Hotels & Resorts Association vs. UOI, 2013-TIOL-533-HC-Kerala-ST has considered this issue and struck down the levy. Subsequently, the Revenue preferred appeal against this before two member bench in the case of CCE vs. Kerala Bar Hotels Association & Otrs, 2014-TIOL-1913-HC-Kerala-ST wherein the view of single member bench is upheld. Clause (f) of Article 366(29A) has been interpreted by Supreme Court on two occasions in different contexts.
Once in the case of K.Damodarasamy Naidu Vs. State of Tamil Nadu & Othrs AIR 1999 SC 3909 in the context of examining whether VAT is chargeable on entire consideration or not for restaurant sales which is ruled against the assessee. The second occasion is in the case of Tamil Nadu Kalyana Mandapam Association vs. UOI, 2004-TIOL-36-SC-ST in the context of examining Constitutional validity of levy of service tax on Mandap Keeper and Restaurant services which also went against assessee.
The Kerala High Court has examined the views expressed by Supreme Court in both the cases and relied upon K. Damodarsamy Naidu case(Supra).The reasoning given by the Kerala High Court for such reliance is that the Supreme Court in K.Damodarasamy Naidu (supra) has subsequent to insertion of Article 366(29A)(f) for the purpose of charging VAT, has considered the question, whether consideration received by the owner of restaurant from the Customer for supply of food can be split up between what was charged for the food and for other services or not. In this case, the Supreme Court has interpreted the sub-clause (f) of Article 366(29A) wherein it was held that this clause permits States to impose tax on supply of food and drink. It is not of relevance whether the supply is by way of service or as part of service or it can be in any other manner whatsoever. Accordingly the Supreme Court has upheld the act of imposing VAT on entire consideration in restaurant sales. Based on such reliance, the Kerala High Court has held that after the insertion of Article 366(29A)(f), the whole activity of supply of food and beverages in a restaurant is deemed to be sale of goods and it cannot be treated as service, thus making levy unconstitutional.
On the other hand the Mumbai High Court, has placed reliance on Tamil Nadu Kalyana Mandapam Association case. In this case, Supreme Court has considered the question of Constitutional Validity of service tax levy on Mandap Keeper and Catering services wherein it was held that Article 366(29A)(f) only permits the States to impose tax on the supply of food and drink by whatever mode it may be made. It does not conceptually or otherwise includes the supply to services within the definition of sale and purchase of goods.
Held that this is particularly evident from the phrase "such transfer, delivery, or supply of any goods shall be deemed to be a sale of those goods." Accordingly, the Supreme Court has upheld the Constitutional validity of service tax levy on mandap keeper and catering services. The Mumbai High Court refused to play reliance in the case of K. Damodarsamy Naidu (Supra) stating that while selling, supply thereof is contemplated and covered by Article 366(29A)(f) of the Constitution of India. It does not mean that the service during the course of or while supplying the goods is taxed, but the tax is and remains on sale of goods.
This judgment no way decides the controversy of holding that the Parliament is incompetent to impose and levy a tax on services provided in an air conditioned Restaurant. Snapshot of the Conflict between two High Court Decisions: S.No Kerala High Court Bombay High Court
1. Relied upon the view of K.Damodarasamy Naidu (supra) case that by virtue of Article 366(29A)(f), tax is on supply, therefore the entire consideration for such supply is chargeable to VAT Refused to take such reliance stating that K.Damodarsamy Naidu (supra) case no way decides that Parliament is incompetent to levy service tax on services involved in supply at restaurants.
2. Refused to rely on Tamil Nadu Kalyana Mandapm case for the reason that Para 56 of it was dealing with variety of services extended by mandap keeper and caterer. The said judgment does not deal with supply of food in restaurant. Relied on Tamil Nadu Kalyana Mandapam case to view that 366(29A)(f) only permits the States to impose tax on the supply of food and drink by whatever mode it may be made.
It does not conceptually or otherwise includes the supply to services within the definition of sale and purchase of goods. Unconsidered Vital Observations of Supreme Court in both these cases:
With due respect to the view of the Mumbai High Court on this issue, vital observations of Supreme Court in each of the above two cases were not considered. In the case of K.Damodarasamy Naidu (Supra), the Supreme Court has considered the chargeability of VAT on both supplies made at restaurant and hotels. With respect to supplies of food/beverages along with hotel accommodation, it was held that only supply part is alone taxable, the services by way of accommodation are not chargeable to VAT. The Court has directed the States to frame rules for determining the supply component from the total composite charge for carrying out assessments.
On the other hand the Supreme Court itself in Tamil Nadu Kalayana Mandapam case (Supra) has made a categorical distinction between restaurants and outdoor catering services while upholding the levy of service tax on outdoor catering services, stating that in the case of outdoor catering service, the food/ eatables / drinks are the choice of the person who partakes the services. He is free to choose the kind, quantum and manner in which the food is to be served. But in the case of restaurant, the customer's choice of foods is limited to the menu card. Again in the case of outdoor catering, customer is at liberty to choose the time and place where the food is to be served.
Outdoor catering has an element of personalized service provided to the customer. Clearly the service elements are more weighty, visible and predominant in the case of outdoor catering. It cannot be considered as a case of sale of food and drink as in restaurant. Thus the above distinction adopted by Supreme Court between outdoor catering services and restaurant services clearly spells out the view that what is liable for sales tax is the supply of food and beverages at restaurant. The possible literal interpretation: Further upon plain reading of this Article 366(29A)(f), the following is the possible literal interpretation.
- A tax on supply.
- The supply is by way of service or as a part of any service or in any other manner whatsoever.
- The supply being food or any other article for human consumption or any drink for cash, deferred payment or other valuable consideration.
- Such transfer, delivery or supply of goods shall be deemed to be a sale of those goods. Thus essentially, levy of sale tax is on the supply of food/beverages. This supply is something different and is not akin to normal transfer of property in goods. Supply connotes making "available for use" and is inherently involves some sort of service.
The expressions "Tax on supply by way of or as part of any service" and "such supply or service is for cash, deferred payment or other valuable consideration" clearly suggest that though the tax is on supply, but the transaction may either be only supply involving incidental services (sales at restaurant) or supply being one element apart from service (food supply in hotel apart accommodation). Interpretation based on the doctrine of "Contemporaneous Exposition": The doctrine of ‘contemporanea expositio’ is that the words of a statute must be construed as they would have been the day after the statute was passed.
This is well established in our law especially when the wordings of a Statute lead to different interpretations, because construction of law made shortly after its enactment when the reasons for its passage is fresh in the minds of judges is considered as of great weight. Infact immediately after the 46th Constitutional Amendment, the Madras High Court has considered the Constitutional Validity of levy of Sales Tax on supply of food/beverages in hotels/restaurants in the case of K.Damodarsamy Naidu & Bros vs. State of Tamil Nadu & Another(WP Nos. 8516, 12718,12719 of 1989) dt. 08.02.2010. This case was not referred before the Mumbai High Court and Madras High Court. The court has upheld the Constitutional Validity of levy of Sales Tax on Supply of food/beverages post 46th Constitutional Amendment. In this case, the Court has considered the contention of petitioners that supply of food/beverages consists of two elements namely supply of material and service. The Court held that if due regard is given to the deeming clause found in sub-clause (f) of clause (29A) of article 366 of the Constitution which is to the effect that "such transfer, delivery or supply of any goods shall be deemed to be a sale of goods .........". No distinction is made between the supply part and the service part in the supply of food and drinks in a hotel.
On the basis of the above wordings of Madras High Court, it has been clearly held that there is no distinction between supply part and the service part in the activity of supply of food and drinks in a hotel. Thus entire activity of supply of food/beverages in a hotel and restaurant is deemed to be a sale. Of course, in case of hotel, the supply may be as part of composite transaction i.e. room accommodation. Similarly in case of Outdoor Catering services also, the services elements are weightier and are not merely restricted to supply of food at a fixed establishment like a restaurant as opined by Supreme Court in Tamil Nadu Kalayana Mandapam case (Supra).
While in case of restaurants, it is very difficult to contemplate any other services apart from those that form part of supply. It is this supply which is deemed to be a sale under Article 366(29A)(f). Conclusion: In view of the above discussion, the two high courts have considered the issue in light of the Supreme Court Judgments but none of them are comprehensive and emphatic enough to form a conclusive opinion on the Constitutional validity of Service Tax levy on restaurants. But with the latest Kerala High Court decision, disagreeing with the views of Mumbai High Court has definitely given a new hope to the trade. Pendulum seems to be swinging in favor of assessee. Let's us all hope this row may sooner or later relieves the poor consumer from the clutches of double taxation.
(The author is a Hyderabad based Indirect Tax Practitioner and he can be reached at camanindar@icai.org)
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