CA Manindar Kakarla
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.
o
A
tax on supply.
o
The
supply is by way of service or as a part of any service or in any other manner
whatsoever.
o
The
supply being food or any other article for human consumption or any drink for
cash, deferred payment or other valuable consideration.
o
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)
