Service tax was made applicable to restaurant having facility of air-conditioning in any part of the establishment and which has license to serve alcoholic beverages by The Finance Act, 2011. An abatement of 70% from the gross amount charged was available by Notification No. 34/2011-S.T., dated 25-4-2011.
After introduction of Negative List regime w.e.f. 01.07.2012, it was covered as ‘Declared Service’ under section 66E. The condition of license to serve alcoholic beverages was removed w.e.f from 01.04.2013 and rate of abatement was further reduced from 70% to 60%. Thus Service Tax became leviable on all restaurants which are air conditioned. Ever since the introduction of service tax on restaurant service, it remained under dispute. The primary reason of dispute was whether service tax can be imposed on sale of food which is a deemed sale under sales tax laws and liable to VAT/Sales Tax at full rate.
Whether the Activity is Primarily of ‘Sale of Food’ or ‘Provision of Service’?
As per Section 66E of the Finance Act, 1994 declared service includes “Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicated) is supplied in any manner as a part of the activity.
As per Article 366)(29A)(f), 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 intoxicated), where such supply or service, is for cash, deferred payment or other valuable consideration, is ‘deemed sale of goods’.
Thus even service portion has been specifically included as part of ‘deemed sale of goods’ and is entirely covered under power of State Government under List II i.e. State List. And again, as per section 66B(44)(a)(ii) of the Finance Act, an activity which merely constitute transfer, delivery, or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution has been excluded from the definition of service itself.
The single bench of the Hon’ble Kerala High Court in the case of M/s Kerala Classified Hotels and Resorts Association Vs Union of India placing reliance on the Constitution Bench of the Supreme Court in the case of K. Damodarasamy Naidu held that service tax on the restaurant service is ultra-vires the constitution and the subject matter of taxation falls under the jurisdiction of States only. The Hon’ble High Court observed that the very purpose of incorporating the definition of tax on sale or purchase of goods in Article 366 was to empower the State Governments to impose tax on the supply, whether it is by way of or as a part of any service of goods either being food or any other article for human consumption or any drink either intoxicating or not intoxicating whether such supply or service is for cash, deferred payment or other valuable consideration.
The words “and such transfer delivery or supply of goods” is deemed to be a sale of those goods by the person making the transfer. Therefore the incidence of tax is on the supply of any goods by way of or as part of any service. When food is supplied or alcoholic beverages are supplied as part of any service, such transfer is deemed to be a sale. Apparently, the transfer is during the course of a service and when the deeming provision permits the State Government to impose a tax on such transfer, there cannot be a different component of service which could be imposed with any Service Tax in exercise of the residuary power of the Central Government under Entry 97 of List I of the Constitution of India.
Again, this view of the single bench was also upheld by the Hon’ble Division Bench in the writ appeal filed by revenue against the single bench order.
In the meantime, in the case of M/s Indian Hotels And Restaurant Association Vs Union Of India [2014 (34) S.T.R. 522 (Bom.)], the Hon’ble Bombay High Court took a different view and held that it cannot be said that Service Tax was component of tax on sale or purchase of goods envisaged by Entry 54 of List II (State List). Service Tax on restaurants under Section 65(105)(zzzzv) ibid is distinct tax, which cannot be equated with tax on sale or purchase of goods – Hence, Parliament is fully competent to impose a tax on service, under Article 248 of Constitution of India read with Entry 97 of List I of Seventh Schedule, and it cannot be said to have encroached on power of State Legislature to impose tax on sale or purchase of goods under Entry 54 of List II.
The decision of Kerala High Court appears to be in line with spirit of law and with due respect to the judiciary the decision of Bombay High Court needs a review. To the extent of service tax, there is double taxation on same activity as VAT is charged at full rate by the restaurants. The primary intention of the person going to a restaurant is having food and not buying incidental services. Hence, service tax on AC restaurants, needs to be withdrawn immediately by the Central Government.