Charges received by the taxpayer for services at the Ayurveda Centre, Beauty Parlor, and Convention Centre within the hotel attract luxury tax

The Kerala High Court has ruled that hotels are liable for luxury tax on services provided by third parties within their premises, such as at an Ayurveda Centre or Beauty Parlour. The court determined that even if the hotel shares revenue with these third parties, it is considered rent for the space provided, and the services are not directly rendered by the hotel itself. Additionally, luxury tax on Convention Centre charges was only applicable after an amendment in July 2006.

The Hon'ble Kerala High Court, Ernakulam in the case of State of Kerala v. M/s M. Far Hotels Ltd. [O.P (Tax) No. 24 and 28 of 2016 dated June 04, 2024] held that charges received by the taxpayer for services at the Ayurveda Centre, Beauty Parlor, and Convention Centre within the hotel attract luxury tax under the Kerala Tax on Luxuries Act, 1976 ("the KLT Act") because the services were not being rendered directly by the taxpayer, a third party was providing services to the customers in the premises of the Taxpayer.

Facts

A Common Order dated August 4, 2015 ("the Impugned Order"), was passed by the Kerala Value Added Tax Appellate Tribunal ("KVATAT") which dealt with Assessment Year 2003-04. Further, it disposed of four appeals preferred by the Revenue in relation to Assessment Years 2004-05, 2005-06, 2006-07 and 2007-08 and were decided against the State of Kerala ("the Petitioner").

Hence, aggrieved by the circumstances, the Petitioner filed the present writ petition on the applicability of luxury tax on services provided to the customers at the hotel premises by the third party.

Issue

Whether charges received by the taxpayer for services at the Ayurveda Centre, Beauty Parlor, and Convention Centre within the hotel attract luxury tax under the Kerala Tax on Luxuries Act?

Held

The Hon'ble Kerala High Court, Ernakulam in O.P (Tax) No. 24 and 28 of 2016 held as under:

• Relied on, the judgment of Madhavaraja Club v. Commercial Tax Officer (Luxury Tax) [2023 (3) KLT 475] which discussed about the scheme of taxation under the KTL Act as follows:

1. The test that is often applied by courts to determine whether the tax in question is one that is backed by the authority of law viz., that for a levy to exist in point of law four components must exist-the nature of the tax which prescribes the taxable event, the person on whom the levy is to be imposed, the rate of the tax and the measure or value to which the rate will be applied as per Govind Saran Ganga Sarana v. CST (AIR 1985 SC 1041). The test, when applied, provides the answers to four cardinal questions viz. (i) what is taxable event or the event that attracts the tax? (ii) who has to pay the tax? (iii) how much tax has to be paid and (iv) how does one pay the tax?. The answers to the above questions must be found in the taxing statute that is concerned for, in the absence of a clear charge or machinery to levy and assess tax in the primary legislation, the imposition of tax cannot be done as per Commissioner, Central Excise and Customs, Kerala v. Larsen and Toubro Limited &Anr. ((2016) 1 SCC 170))
2. The KTL Act states that luxury tax is a tax on the enjoyment of a luxury, that is attracted at a point in time when such luxury is provided by a 'proprietor' to another person for the latter's enjoyment. The incidence and levy of the tax is on the 'proprietor" although the ultimate impact of the tax may be on the persons who enjoy the luxury that is provided.

• Opined that, the Ayurveda Centre and the Beauty Parlour, which are functioning in the premises of the Respondent, the documents clearly showed that the provision of the luxury was by the independent third persons and not directly by the Respondent. The invoices raised to the customers, for the services provided by the independent third persons, also show that the services were provided by them and not by the Respondent. No doubt, the Petitioner has a case that there was an agreement between the Respondent hotel and the independent third persons who were providing the service to customers, for sharing of the revenue earned by the latter. This would not affect the levy of tax under the KLT Act. As rightly found by the Appellate Tribunal, the revenue sharing arrangement, between the Respondent on the one hand, and the independent third persons on the other, had to be seen as an arrangement providing for the receipt of rent by the Respondent for letting out space within its hotel premises for the business activities of the independent third persons.
• Held that, the levy of luxury tax on the amounts received by the Respondent for the use of the Convention Centre, that prior to the amendment of Section 4(2)(c) of the KLT Act, there was no levy envisaged for charges collected in connection with the use of a Convention Centre. The levy was introduced through the amendment brought in through the Kerala Finance Act, 2006 with effect from July 01, 2006. Being an amendment to a substantive provision that introduced a new levy, the levy can operate only prospectively and not retrospectively.

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